What is Gas Fees?
Contrary to what many believe, blockchain technology is way beyond the single-use case of cryptocurrencies. As we move forward, it is becoming the foundation of decentralized development and Ethereum is at the forefront of this massive shift. The ever-increasing number of DApps are flourishing in the development ecosystem of the Ethereum mainnet.
However, anything that offers a great value comes at a cost and Ethereum is no different. All Ethereum users are bound to pay a specific amount of the transaction as a fee for running the decentralized network. This cost of the transaction has increased substantially as the number of users has become part of the blockchain.
In the article ahead, we will discuss what gas fees are, how it functions, and what things you can do to reduce them for yourself. We will also learn about the impacts of the upcoming Ethereum merge on the cost of transactions on Ethereum.
What is Ethereum Gas Fee?
Ethereum is a blockchain that validates its transactions using a proof-of-work consensus mechanism. Ethereum transactions are validated by the miners who are computing the complex arbitrary puzzles to add the next block on the Ethereum blockchain.
This process of validating transactions not only requires high computational power but also consumes a sizeable amount of electricity. Nodes validating these transactions are called miners and they are compensated for the cost involved in the process.
Users utilizing the Ethereum blockchain bear the transaction cost in the form of a fee, popularly known as ‘Gas’. Ethereum gas fees vary for users depending upon the traffic present on the blockchain at a particular time.
How Do Ethereum Gas Fees Function?
Ethereum has over 500 thousand daily active addresses, making it one of the busiest blockchain networks one of the busiest blockchain network in the world. As newer decentralized applications are built on Ethereum, the network is only getting busier with each passing day. This increase in the blockchain traffic directly determines the Gas fees on the Ethereum network.
There is no upper limit on the requested number of transactions on Ethereum but the number of miners, validating the transactions are limited. This creates a gap between the demand and supply of the miners as they can choose only a certain number of transactions. Due to this, transactions offering higher gas fees are prioritized by the Ethereum minor. The gas fee increases if there is a higher number of transaction requests and reduces as the blockchain traffic goes down.
How to Calculate Ethereum Gas Fees?
Transacting on Ethereum is getting costlier as the traffic on the blockchain is increasing with time. However, the gas fees for all the transactions on Ethereum are not the same and can vary depending upon the current blockchain traffic.
There are different methods using which you can reduce your gas fees but before learning those methods you should know how gas fees are being calculated. Understanding how the gas fees are calculated can save hundreds of dollars for you in the long run.
Ethereum gas fees are calculated in terms of ‘Gwei’, a smaller unit for ETH. One Gwei can be equated with 0.000000001 ETH, making it perfectly small for calculating the gas fee. London upgrade in the Ethereum network changed the formula for calculating the gas fee and the new formula is mentioned below:
Total Gas Fee = Gas Unit Limits * (Base Fee + Tip)
Gas limits are a cost that the users are willing to pay for a particular transaction. Depending upon the nature of the transaction gas limits can differ. The base fee is that part of the gas that depends on the congestion on the network. The lower the traffic on the network, the lower is base fees for your transaction. And lastly, the tip is the amount that users add to the transaction to ensure that their transactions are being picked up by the miners on a preference.
The price rise in the ETH can also be held accountable for the rise in the overall transaction cost as the price of the Gwei has increased as well.
Methods to Reduce the Gas Fees
Once you know how to calculate your gas fees we can proceed towards learning the methods to reduce them. You can substantially reduce your Ethereum gas fee once you know the proper techniques to do so. Here is a list of some things you can do to ensure you are not paying a fortune for transacting over the Ethereum blockchain.
Time Your Transactions
The massive number of applications running on the Ethereum blockchain has millions of users. This flourishing ecosystem causes high congestion on the network as the transactions do not process at the same speed as the new transactions entering the queue. This causes the miners to prioritize transactions with higher tips and this eventually increases the gas fees.
Timing your transaction at the times when Ethereum’s network traffic is at its lowest can reduce the gas fees drastically. All you need to do is to calculate the actual gas fee and use an Ethereum network congestion graph to know which timings in the day have the lowest network traffic.
The least congested times on the Ethereum mainnet are post-mid-night and weekends as the work pressures are the least during these hours. You can time your transactions for these times to ensure that you do not have to pay a higher gas fee due to network traffic.
Use Layer-2 Solutions
The Dapps built on the foundations of the Ethereum mainnet face severe throttling in transactions during the network’s rush hours. This severely affects the applications' usability and overall user experience. To deal with these challenges and assist the scaling, layer-2 solutions for the Ethereum network were developed. These layer-2 solutions use network roll-ups and move the mainnet transactions to the sidechains.
These layer-2 solutions do not cost as much as Ethereum without compromising the security and speed of the transaction. Some most popular layer-2 solutions for Ethereum include Arbitrum and Polygon.
DApps and Treasury Managers
In the Ethereum ecosystem, many decentralized applications and treasury managers offer services for bundling up multiple transactions and collectively transacting them. This not only increases the treasury operation's efficiency but also reduces the transaction cost-drastically.
Dapps such as Blocknative and Gnosis Safe, an open source treasury manager are available in the market to ensure that all the transactions are bound together and then proceeded at a reduced cost. These solutions are ideal for those who have to conduct multiple transactions at the same time.
Utilizing the gas tokens
Once you remove your storage variables on the Ethereum network, you are rewarded with some ETH, known as gas tokens. These gas tokens can be redeemed while paying for your future transactions on Ethereum. There are different methods to earn gas tokens from market fluctuations; those tokens can be saved for future use.
Projects such as GasToken.io can assist you to earn more gas tokens and decrease your gas fees by up to 50%. This reduction in per contract transaction can make a huge difference as the gas fees on the Ethereum network can be ridiculously high at times.
How Ethereum 2.0 Will Change the Gas Fees?
The most awaited Ethereum merge is around the corner and everyone is expecting something positive about the gas fees. However, as per the sources, Ethereum merge is focused on moving from a Proof-of-Work validation mechanism to a Proof-of-Stake protocol. This will increase the scalability within the network by speeding up the transactions by 10,000 times.
Accurate impacts of the merge on the transaction cost cannot be determined beforehand, however, with increased efficiency in the Ethereum network, transaction cost should go down. Contrary to this, some blockchain experts are of the opinion that the merger will not reduce gas prices on the network as gas prices are subjected to the blockspace demand and not the consensus mechanism.
Final Thoughts
Ethereum has become the home of new blockchain innovation but its congested network and costly gas fees are making it unaffordable for many. To unleash the true potential of Ethereum development, the network has to find a way to deal with its higher gas in the upcoming updates. For those who are willing to put in some extra effort, layer-2 solutions provide great value without the need to move to a different blockchain network.
Industry experts are also testing multiple technologies to tackle the great Ethereum gas challenge and make it accommodating for all. Meanwhile, you can try out the different methods, mentioned above to reduce the transaction cost to a payable limit.
