Ethereum is the pioneer of smart contracts. Data from DappRadar shows thousands of decentralized applications (DApps) created on Ethereum. At the center of these DApps are Ethereum gas fees needed to execute an action on the blockchain.
Ethereum gas fees are like a fee you must pay for the computational effort that allows you to create a DApp on Ethereum. Anyone who wants to interact with the Ethereum blockchain has to understand gas fees. Whether you are a trader or developer, you need to know how gas fees can impact your interaction with Ethereum.
In this article, we go into detail to understand the intricacies of Ethereum gas fees. We will explain Ethereum gas fees, why people pay gas fees on Ethereum, how much people pay, and the efforts of Ethereum developers to make interacting with the blockchain more cost-effective.
An Introduction To Ethereum Gas Fees
Gas is a term used in crypto to describe a fee people pay to use a blockchain network. When you pay gas fees on Ethereum, you pay for the computations done to complete transactions.
On the Ethereum blockchain, gas fees are paid in Ether (ETH), the native token for the Ethereum blockchain. The ETH goes towards those who stake Ethereum on the blockchain and participate in network validation.
Staking is like saving money in a bank. If you stake Ethereum, you can choose to become a network validator. A validator verifies and processes transactions on the Ethereum blockchain—the more ETH you stake, the higher the rewards.
Ethereum gas fees rise and fall depending on the level of activity on the Ethereum network. The gas fees will skyrocket when the Ethereum network is congested due to increased transactions. Conversely, gas fees will drop when there is reduced transaction activity on Ethereum.
Gas fees play multiple roles on the blockchain. First, they prevent malicious actors from spamming the network with fraudulent transactions. It becomes too expensive for a malicious actor to spam the network with costly transactions.
How Are Ethereum Gas Fees Calculated?
Now that we have a basic understanding of Ethereum gas fees let us look into how they are calculated. Ethereum uses a metric denomination known as “gwei” to calculate the gas fees.
When you go to the Etherscan gas tracker, you will find that the Ethereum gas fees are noted in the gwei unit. At the time of publication, the average Ethereum gas fee was ten gwei, equivalent to around $0.74 worth of ETH.
The total gas fee you will pay for activities on the Ethereum blockchain comprises several parts: base fee, priority fee, and the units of gas used. The network sets the base fee, which must be paid for a transaction, while the priority fee is like a tip to incentivize node operators to feature your transaction.
The gas fee will also depend on the gas units (validator effort) used. For instance, if you complete a complex action, such as interacting with a smart contract, you will use more gas than when you complete a simple transaction.
The gas fee paid on the Ethereum blockchain is calculated with the formula:
Units of gas used * (base fee + priority fee).
For instance, suppose you want to send 100 ETH to a friend, and the transaction costs five units of gas. The base fee for the transaction is 200 gwei, and you tip 30 gwei. Your gas fee, in this case, will be:
5*(200 gwei + 30 gwei) = 1150 gwei
While this seems like a lot in gas terms, it is not. 1 gwei is equivalent to a billionth of 1 ETH. In our example above, your gas fee will be 0.00000115ETH. This is equivalent to just $0.003335 at the current price of Ether.
You do not have to calculate the gas fee yourself. Wallets will calculate your gas usage and display the amount you will pay to enable seamless transactions.
It is also important to note that when the price of ETH is high, you will pay more in gas fees in terms of dollar value. Ethereum gas fees are always calculated in ETH; you will pay according to the price.
Controversy Around High Ethereum Gas Fees
In our example above, we have highlighted an instance where gas fees are a tiny fraction of the value of the transaction you are completing on the blockchain. However, this is only sometimes the case. Sometimes, Ethereum gas fees can be so high that it becomes economically impossible for users to complete small transactions.
Ethereum gas fees increase depending on the demand for the network. For instance, in 2020, following the launch of the DeFi platform SushiSwap on Ethereum, gas fees skyrocketed to record highs.
At the time, Ethereum was running on a PoW consensus, with miners earning over $500,000 within an hour.
The same case with high gas fees has also been seen after The Merge. In February this year, Ethereum gas fees reached an 8-month high of 377 gwei per standard transaction.
The peak was associated with the buzz around an experimental token standard known as ERC-404.
As seen from these examples, Ethereum gas fees are constantly fluctuating. As more people use the network and demand rises, you will have to pay more for a transaction. This volatility has often caused concerns over the inability to predict how much it will cost to transact on Ethereum.
During periods of low demand, the gas fees drop to significantly low levels. Even then, you will witness some fluctuations. Below is a seven-day chart showing changes in Ethereum gas fees.
The data above shows that Ethereum gas fees are at the lowest in years. This decline comes amid several upgrades done on the Ethereum blockchain to improve efficiency.
However, significantly low fees also concern the profitability of validators that have staked Ethereum. Some have also noted that meager fees could cause potential congestion on the network as more people flock to Ethereum for cost-effective transactions.
These discussions shed light on the key role that gas fees play in the Ethereum ecosystem. While gas fees disincentivize malicious actors from spamming the network with bad transactions, they also affect those using and building on the network.
How To Spend Less On Ethereum Gas Fees
Some users and developers on Ethereum have devised ways of spending less on the network and making their transactions more efficient. If you want to avoid high gas fees on Ethereum, consider the following:
Time Your Transactions
The first thing to do when you want to pay less on Ethereum gas fees is to time your transactions to minimize gas fees.
Consider making transactions when fewer people use the blockchain to lower the total gas fee payable to a network. The base fee will increase when demand is high as more work is needed to interact with the blockchain.
If you find periods when the base fee is low, you will find that you will spend less on gas. Some of the best periods to transact on Ethereum are weekends.
Reduce The Priority Fee
The priority fee is a tip that you give to incentivize validators to include a transaction in the block. Validators need tips to sustain their activities. If you want your transaction to be given preferential treatment and executed before other transactions within the same block, you must pay a higher tip.
If you want to reduce Ethereum gas fees, consider paying a lesser priority fee. However, a smaller tip will give a validator little incentive to include a transaction. As such, your transaction might be outbid by competing transactions.
Set A Maximum Fee Limit
The Ethereum network allows you to set a maximum fee you will pay per transaction. The maximum fee has to be higher than the total base fee and tip. Once the transaction is executed at your preferred fee, you will get a refund of the difference between the maximum fee and the total of the base fee and the tip.
Having a maximum fee will help you spend less on gas. You will also have peace of mind when executing transactions, knowing you will not pay more than necessary.
Use Layer 2 Scaling Solutions
The other way of spending less gas fees on Ethereum is by using layer two scaling solutions. Scaling tools are networks created on top of Ethereum to increase speed and reduce costs. Some of the most popular layer two networks are Arbitrum, Optimism, and Loopring.
Layer 2 scaling solutions process transactions off-chain. The transactions are then verified on Ethereum before being recorded on-chain. The growing popularity of these platforms has seen them amass massive value, as seen on L2Beat.
Layer 2 scaling solutions give you a way of saving on gas by reducing the number of gas units needed to complete a transaction. These networks also ease congestion on the Ethereum mainnet, resulting in a lower base fee for all network users.
The Future Of Ethereum Gas Fees
The Ethereum blockchain has undergone several processes to reduce gas fees on Ethereum. One of these steps happened after the Ethereum Merge, which saw the blockchain shift from a proof-of-work to a proof-of-stake consensus.
The process to lower gas fees in Ethereum started with the 2022 Merge, which saw Ethereum switch from PoW to PoS. The Merge did not lower gas fees. However, it set the stage for implementing Ethereum Improvement Proposals (EIPs) to reduce costs.
Switching to PoS was the first step to enabling “sharding” on the blockchain. Sharding is a process allowing the network to be divided into “shard chains” to share the load of Ethereum. Through sharding, Ethereum reduced network congestion and increased the transaction throughput.
In March 2024, Ethereum took another big step to trim gas fees. The network activated the highly-anticipated “Dencun” upgrade. This upgrade sought to support growth on layer two networks such as Arbitrum and Polygon by lowering their data fees.
The Dencun upgrade creates a new place to store data on the blockchain known as “blobs.” This dedicated space operates differently from regular transactions at reduced costs—the upgrade aimed to allow Ethereum users to take advantage of the scaling solutions on the blockchain.
The Dencun upgrade is not the last, as the Ethereum network continues to develop to address issues with scalability. More upgrades will gradually make the network more competitive against other networks such as Arbitrum, Polygon, and Optimism.
In Summary
Ethereum gas fees are essential to the entire Ethereum ecosystem. Gas is a fee that you will have to pay to use the Ethereum blockchain. Whether you are using the network for transactions or creating a DApp on the network, you will need to pay fees in ETH.
The fees you will pay to use the Ethereum blockchain will vary. For instance, when the Ethereum network is witnessing a surge in demand, costs will increase significantly, with the reverse happening when the activity is low.
The Ethereum blockchain has often found itself under criticism over high gas fees. However, there are ways for users to lower Ethereum gas fees, including using layer-2 networks, timing their transactions when network demand is low, and setting a maximum fee limit.
FAQs
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What are Ethereum gas fees?
Ethereum gas fees are the amount you pay to use the Ethereum blockchain. The fee is paid in Ether (ETH) and goes towards the network validators.
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When are Ethereum gas fees lowest?
Ethereum gas fees are at the lowest level during times when activity on the network is low. When there is a buzz around a project on Ethereum, gas fees rise to peak records. However, you will pay less for computation power when network activity is low.
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How can I save money on Ethereum gas fees?
You can save money on Ethereum gas fees by using the network when demand is low. You can also set a maximum fee limit that you are willing to pay. Using layer two scaling solutions can also trim gas fees significantly.
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How are gas fees calculated?
You can calculate Ethereum gas fees using the formula units of gas*(base fee + priority fee). You do not have to calculate the gas fee alone; your wallet will show you the amount to pay.
