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Understanding how Crypto Gas Fees work?

by Jagdish Kumar
February 25, 2022
in Global
Reading Time: 4 mins read
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Whenever you make a transaction on a blockchain network, you will be charged a fee. These fees are called gas fees. While some call them just fees, they are becoming more popular as gas fees.

This is just the same as buying a car and you want to travel from point A to point B. Your vehicle will require fuel that will make it possible for you to complete this journey. 

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So gas is fuel for a user to make any transactions on Ethereum (ETH) or any blockchain network.

To explain crypto gas fees, I’ll explain the Ethereum network, which is one of the world’s largest networks for blockchain transactions today.

For making any transaction on Ethereum, the user makes a request that passes through Ethereum Virtual Machine (EVM) which has a gas cost associated with it.


What is gwei?

Let me break down the gas price. It is mentioned in gwei (where g stands for giga and wei is the smallest fraction of ether. One ether is equal to 1,000,000,000,000,000,000 wei, so 1 gwei is equal to 1,000,000,000 (1 billion) wei or 0.000000001 ETH.

Ethereum wallets always show the user’s gas price they will have to pay before they finalize a transaction. The transactions are divided into three categories: fast, standard, and slow. The gas fees vary depending on the speed at which a user makes a transaction.

After the London Upgrade that was introduced in an effort to make Ethereum’s fees more predictable for users, the Ethereum network has introduced a burning mechanism, which is intended to offset the issuance of new ETH (there is no limit to how many ETH can be minted).

In this network, the sender can also add a tip for the miner, as the basic fees get burnt once the transaction is completed. The tip goes to the miner for verifying the transactions and this feature has already been included in many Ethereum wallets providers.

Let us see how this works after the London Upgrade.

Assume Marshal wants to send Mona 1 ETH. The Gas limit is 21,000 units, the base fee is 100 gwei, and Marshal has included a tip of 10 gwei.

The new formula is: Gas units (limit) x (Base fee + Tip). This can be calculated as 21,000 x (100 + 10) = 2,310,000 gwei or 0.00231 ETH.

When Marshal sends the ETH, 1.00231 ETH will be subtracted from her wallet. Mona will receive 1.0000 ETH. A miner will receive the tip of 0.00021 ETH and the same amount of ETH will be burned.


How does it start?

Any transaction on the Ethereum network first goes to Mempool. This is the place where all transactions are waiting for the miners to be pulled. The miner on their part tries to select the transactions that have the highest incentives. Once the transactions are verified, it is added to the ETH block. 

Miners have a limit of 595 transactions and if there are 2000 transactions pending in the mempool, the miner selects the profitable ones that are later added to the block.

The gas prices on the Ethereum network are very dynamic in nature, if there are more people on the network waiting to make a transaction, gwei or gas prices are higher, if there are fewer people, the gas price goes down.


Why do we need gas?

Gas fees make Ethereum’s network more powerful, otherwise, a user could execute a program that never stops. A user can also create malicious code that can harm all the computers that verify the code.

By charging gas fees, such programs that could have never stopped running and could harm the network can be stopped. 

Besides gas fees, each transaction also has gas limits that are equal to or higher than the amount of computation needed to execute a transaction successfully.

Without gas fees, no transactions can be made on the Ethereum network. However, gas fees are usually very high on Ethereum Network and this is a major drawback, as sometimes fees are more than the value that needs to be sent.

Other networks charge gas fees, which are called fees or transaction charges, where even $1 can be sent and only a fraction is charged.

Although gas fees might represent a hindrance to investment and a headache for investors, some research and diligence are paramount to achieving great outcomes. Always be Klever with your crypto finances!

Tags: ethethereum
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Jagdish Kumar

Jagdish Kumar

Reporting & writing on crypto & blockchain for the past few years. A content eagle, journalist & writer with a passion to explore new technologies that can change human lives. Joined Klever to make Crypto simple. Follow me on Twitter @TokenBharat or email me at jagdish@klever.io

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