Did you know that carrying out crypto transactions doesn’t just involve your coins and tokens, but also an additional fee for the service? C’mon, lets go into the details together 🔍
‘Gas Fee’ defined
/ɡas fiː/
a transaction fee paid on a blockchain network.
Why are gas fees even required ☹?
Think of it this way. A 🚗 requires fuel to run, workers need incentives to function, and similarly crypto transactions need gas fees to serve as rewards to miners who work for blockchain networks, and who verify and secure transactions.
According to developers of the Ethereum blockchain network, ‘gas’ in the context of crypto is like fuel required to run the blockchain network. They are paid for successful transactions or execution of contracts 💁🏻♀️. Terms like ‘transaction fees’, ‘miner fees’, etc. are used interchangeably here.
Examples of gas fees on different blockchains
As you all might know, cryptocurrencies operate on blockchain networks. Different networks have varying gas/transaction fees that depend on the number of transactions particular network allows per second (on the frequency of transactions), demand and supply, and network capacity. Let’s look at the transaction fees charged by different blockchain networks. ⬇️
Ethereum
📈📉 Ethereum is known to charge relatively higher gas fees and it usually fluctuates, as it allows only 20 transactions per second, regulated by gas price and limit.
(native currency of Ethereum is called ‘gwei’ or ‘ETH’) [1 gwei= 0.0000000001 ETH]
On Ethereum, some blocks require a ‘base fee’ serving as a reserve price. It is calculated based on a previous block and is ‘burned’ after mining the current block. This fee increases by 12.5% with every increase in the target block’s size.
After the base fee is burned, a ‘priority fee’ comes in, which is a ‘tip’ for miners to incentivize the block mining process. Then we have the ‘max fee’ that users can set a limit to during transactions, provided it is more than the base and priority fee.
How are you supposed to calculate the final transaction fee then 🧐? While using a wallet, users are shown the final amount they are required to pay.
Bitcoin
Another example can be Bitcoin. In this case, i.e., for Bitcoin transactions, the miners avail of two benefits- transaction fees from the validation of a block and incentives for freshly minted coins in the process. What’s interesting to note is that, Bitcoin allows only 7 transactions per second.
According to Bitpanda, the prevailing block reward is 6.25 bitcoins.
The fee is measured in ‘satoshis’ (one hundred millionth part of 1 BTC). This amount guarantees security and getting rid of spam transactions. To calculate the fees for Bitcoin, the difference between the amount spent and the amount received is taken into consideration.
If the difference amounts to nothing, it might become difficult for the miners to pick it up and send a confirmation. So, keep in mind that you should at least set a difference of a minimum of 1 sat to avoid any problems.
You already know that the amount of fees you are required to pay for a transaction depends on the cryptocurrency and blockchain network 💰. For Bitcoin, the fee amounts to 0.0003 BTC (as of 2022).
Most of the wallets facilitate you in setting a gas fee, so you don’t have to worry about that. Just take note of the fact that the higher you set the fee, the higher will be the ease with which the transaction is carried out.
Case Study: Solana
😶 Most of the cryptocurrencies are characterized by high gas fees owing to the demand and supply, and less number of transactions per second. However, in the case of Solana, the gas fees are very less. The same steps are followed and the same outcomes are achieved through a comparatively reasonable amount here.
The working is no different here in the sense that as a transaction is initiated, it is sent further for validation, after which the fee is paid to the Solana network. The purpose behind this fee is to maintain the economic stability of the network and prevent spam.
In the protocol-based rewards and transaction fees on Solana, at least 50% of the fee is burned 🔥 and the remainder goes to the leader of the transaction to ensure sustainable economy. But why would some of the fees be ‘burned’?
This is to ensure incentives to the leader to allow as many transactions as possible within a stipulated time.
Moving on to the calculation of Solana transaction fees, it is based on computational resources and measured in ‘compute units’ which are allotted through a ‘compute budget’ per transaction. After the maximum number of compute units are exhausted, further transactions will be stopped.
Just like Ethereum, Solana also has a ‘prioritization fee’ to prioritize a transaction over others by speeding up the process.
The main question here is why the gas fees on Solana is less compared to other networks? Since the fee depends on the number of transactions that can be handled by a single block, it appears that Solana has a block time of approx. 0.4 seconds and block size of 20,000 as against Ethereum (70 transactions in 13 seconds). The frequency of Solana transactions reduces the gas fees to just 0.00025 USD (in market rates), while Ethereum charges around 3-10 USD.
With time, Solana is making attempts at improving its scalability which will keep its gas fees stable or even bring it lower.
Tips to pay less gas fees on Ethereum
Everyone wants to pay as less as possible in any aspect - be it shopping for clothes or crypto transactions 😩. As mentioned above, even for minor transactions Ethereum’s gas fees are very high and users would not stop complaining about it. 🔎 But there must be some solution to it, right?
Layer-2 solution
In line with Bitcoin’s ‘lightning network’, in Ethereum too networks can be built on top of blockchains to reduce network congestion, workload, and failures that might otherwise contribute to higher fees.
Planning the time of transactions 🕐
The prices do not remain stable all throughout. There are certain points where the gas fees may become really cheap and vice-versa.
For this, you should check some graphs that give an idea of gas prices throughout a week. You can also avoid making transactions during working hours on weekdays and wait for less chaotic times like midnight or weekends which may have chances of lower fees due to less congestion.
Apt calculation of gas fees📱
At times your Ethereum wallet may fail to calculate the gas fees accurately due to not taking into consideration the network congestion.
To avoid this, you might want to use tools and applications that evaluate pending network transactions to calculate gas fees, making them more reliable.
Almost there 😎
So by now you must have understood that gas/transaction fees are required for the world of crypto transactions to function smoothly. It makes the network validators feel incentivized to carry out their work of verifications and security.
Up till now, Solana charges relatively lower fees, but hopefully other currencies make it their goal to work on their price surges very soon.
With this, we might as well think of moving on to our next topic - blockchain chains (L1S and L2s).