Gas fees are a problem for almost everybody trading in the crypto and blockchain space. In this article, we will talk about what it means and share with you some secrets to help you avoid exorbitant gas fees.
You pay ‘gas fees’ whenever you make transactions on the blockchain. This is paid whenever you make a cryptocurrency transfer or buy non-fungible tokens (NFTs), for example. But, on some platforms, there are times when they can be a tad bit expensive.
Applications built on top of the Ethereum ($ETH) blockchain suffer from skyrocketing gas fees which can jump from $5 to $50 within seconds. Such problems usually happen when there are a lot of transactions on the network.
So, what are gas fees? How do they work and why is it important to understand the concept behind it? We’ll break it all down in this article.
What exactly are ‘gas fees’?
Before we get into what ‘gas fees’ are, it is best to start with a brief refresher into what the blockchain does and who participates in it.
You might already be aware of the existing blockchains in the market because you also invest in their native tokens. Examples of these blockchains are Bitcoin ($BTC), Ethereum, Binance Smart Chain ($BSC), Solana ($SOL), Cardano ($ADA), and more. They are also often called ‘networks’ because they are maintained by a network of nodes.
Illustration of the blockchain model by Euromoney Learning 2020
The blockchain is a distributed ledger of transactions. It has a historical record of every transaction within the network.
When you send crypto to someone, the transaction is recorded on the blockchain. Every other activity that happens on top of the blockchain, such as publishing smart contracts or executing a function on an already uploaded smart contract, requires gas fees.
The Double-Spend Problem
Now, the digital assets which function as a medium of exchange within blockchain networks only exist virtually. Because of this, there are concerns that the blockchain could be cheated with, such as the possibility of using the same token in multiple transactions, also called the “double-spend” problem.
To secure the blockchain from malicious actors who would try to game the system, consensus models were developed. Commonly-seen amongst blockchain projects are proof-of-work (PoW) and proof-of-stake (PoW) models.
In both mechanisms, there are ‘nodes’ assigned to ensure that any new transaction is confirmed to be consistent with the existing record of the blockchain before they are finalized.
These nodes are called “miners.” They solve complex mathematical problems in order to confirm transactions. They earn token rewards or a portion of the transaction fees in return. This process is called “mining.”
Comparison of PoW vs PoS Models by Blockgeeks
In other words, before your transaction is confirmed on the blockchain, a miner will first have to work on it. This is where gas fees come in.
Gas fees refer to the payment you provide miners for the computational power required to verify your transaction. The more complex your transaction is, the higher the minimum gas fees become.
You might have encountered Gwei by now. It simply refers to the denomination of payment you give for gas fees on Ethereum. Similar to satoshis in Bitcoin, Gwei is short for “giga-Wei”, or a small unit of Ethereum. Other blockchains require their own, native tokens for gas fee payments.
Gas fees in Ethereum and other blockchains work similarly with Bitcoin’s miner fee. You are allowed to set how much you wish to pay for gas. The gas fees have a limit, however. If the limit is high, it means that the work required to execute your transaction is also higher.
Now, imagine a queue of transactions in the network. The higher you pay for gas fees, the faster your transaction gets confirmed. On the other hand, if you set your gas fees too low, miners could choose to ignore your transaction and not process it altogether.
This is why gas fees are affected by the supply and demand for computing power as well. The more transactions there are in the network, the more expensive gas fees become for everybody.
Ethereum’s Gas Fee Dilemma
If you’ve been making transactions on Ethereum, you might have already experienced paying high gas fees at some point. Average gas prices in the network even went up to as high as 709.81 gwei back in 11 June 2020. The price has constantly fluctuated ever since.
To resolve these issues, along with some other network problems, Layer-2 (L2) solutions were introduced on the Ethereum network, such as Polygon ($MATIC), Loopring ($LRC), Immutable X ($IMX), and Arbitrum, among others.
Other blockchain networks also emerged in recent years, aiming to compete with Ethereum as a blockchain that supports smart contracts. These include SOL, ADA, and DOT, which all boast fast transaction speeds and low gas fees.
Ethereum 2.0 is underway
Ethereum is already working on shifting to a PoS consensus model through Ethereum 2.0 (ETH2). The upgrade to the network aims to solve its issues on security while increasing scalability. When the network is faster and more scalable, we can expect that it would have a considerable impact in how gas fees are priced.
Why is all this important?
First of all, let’s talk about some of the notable situations when gas prices became part of the crypto headlines.
Bored Ape Yacht Club pushes ETH gas fees
Back in April 2022, we saw the soaring hype around the NFT collection Bored Ape Yacht Club (BAYC). The volume of activity on the NFT marketplace OpenSea spiked, sending gas prices per transaction upwards to as high as 1.25 ETH on average.
The problem there was that only those who can afford such costs can have their transactions confirmed. If you have not deposited enough in gas fees for your transactions and miners ignore your call, you lose the gas fees you locked as well.
What does all of this mean for any investor?
The BAYC hype was not the only time when we saw ETH gas prices soar astronomically high. Everytime the network experiences a huge spike in traffic, gas prices are likely to go up.
While you may go to other blockchains, a lot of projects are still on Ethereum. That is why it is important to know that there are some things you can do to avoid extreme gas fees. We’ll share how you can do this in the next section.
The secret to avoiding high gas fees
Fortunately, there are ways to save money when performing ETH-based transactions, or some other blockchain network.
Utilize L2 Networks
L2 networks function as a way to help ease congestion in the Ethereum network by creating another layer where specific types of transactions can happen. When transacting NFTs, it is best that you consider platforms that support L2 solutions like MATIC or IMX.
Find the Best Timing
Gas fees depend on the volume of transactions in the network. If you can figure out the time when most transactions happen, you can also mark those as times when you should avoid trading. Some tools you can take advantage of are Ethereum gas charts which you can easily find online.
Calculate the Gas Fees Accurately
Easily, the best way to spend your money on gas fees is not to lose it. If you know how much the gas fees really are, the better your chances are in getting your transaction confirmed.
Use tools like the Gas Tracker from Etherscan to determine how much the gas fees are at any point in time before you trade. This is also helpful because you cannot always completely rely on the estimate of ETH wallets on gas fees, especially since they can change every time.
Find Rebates and Discounts from DApps
There are some decentralized applications (DApps) that offer discounts and rebates for your Ethereum transactions. Some examples here are Balancer, which lets you get rebates on gas fees for up to 90 percent.
Almost everything you do on Ethereum, or similar blockchains, costs gas fees. This includes minting new NFTs and tokens, transferring digital assets, and more. That is why it is best to identify how you can save more in every way you can.
Always look for the platforms that are either based on different blockchain networks, like SOL or DOT. You can also try marketplaces that support L2 solutions for Ethereum. This way, you are assured that the likelihood for gas price fluctuations are less.