Cryptocurrencies and blockchain technology seek to revolutionize the traditional financial system, transforming money, finance, and business operations. Their decentralized nature and lower transaction costs could enhance global efficiency. However, lower costs don’t equate to zero fees. Whenever transactions occur and money is transferred, compensation is required. This is where gas fees come into play.
This post sheds light on all you need to know about blockchain gas fees and their impacts on cryptocurrency technology.
What are Blockchain Gas Fees?
Blockchain gas fees are the transaction fees that users pay for each transaction. Usually, these fees compensate for the computational resources required to process and validate transactions on a blockchain network.
The term “gas” is commonly associated with the Ethereum network. In this case, gas is a unit that measures the amount of computational effort put into performing certain operations. These operations may include executing smart contracts or processing transactions. The actual cost of gas depends on the gas price, which users can set, and the gas limit. The gas limit caps the total amount of gas users can use per transaction.
How do Gas Fees Work?
Cryptos such as Ethereum run on a blockchain, a digital ledger of transactions distributed across a decentralized network of computers. This contrasts with cloud computing, which is centrally managed, typically through a company’s data center. Users pay gas fees to this decentralized network for the computing power required to execute and record operations on Ethereum. Crypto miners, whose computers validate blocks of transactions on the Ethereum blockchain, receive these gas fees. Gas fees are paid in Ethereum’s native currency, Ether, which investors trade on crypto exchange apps.
Why are Gas Fees Necessary?
A basic concept in economics is that all work requires compensation. In a blockchain network like Ethereum, computers use electricity to compute and verify transactions. Since electricity and the computers that use it cost money, the people who pay to keep the system running deserve compensation. This ensures the Ethereum network functions properly and prevents unauthorized tampering or theft.
Essentially, gas fees serve purposes, some of which are highlighted below:
Compensation for Miners
Users pay gas fees to miners or validators who use their computational power to confirm and record transactions on the blockchain. This incentivizes them to maintain the network’s security and functionality.
Network Security
Requiring a transaction fee allows blockchain networks to discourage spam and malicious activity. This makes the cost of executing an attack or flooding the network with transactions prohibitively high.
Resource Management
Gas fees manage the finite computational resources of the network. The system can prioritize transactions with higher fees, ensuring that more critical transactions are processed faster. This is especially important during times of high network congestion.
Why is the Ethereum Gas Fee Expensive?
Ethereum gas fees are notoriously expensive. This is especially true for complex tasks such as minting an NFT or validating transactions on a decentralized application (dApp). This is partly due to Ethereum’s energy-intensive proof-of-work model. However, other factors also contribute and they include:
- Like all computing processes, Ethereum has a limit to the number of transactions it can handle per second. During busy network times, gas fees can rise as Ethereum users offer higher “tips” to miners to prioritize their transactions.
- Ethereum’s popularity has soared due to its flexibility. As more developers use it, gas fees may also increase.
- The complexity of a transaction can also raise the fee amount. A small transfer of Ether involves minimal data and is generally cheap. In contrast, executing a smart contract as part of a business operation can require recording, storing, and managing large amounts of data. This will require using more gas and incur a much higher fee.
Ethereum Gas Fees Versus Bitcoin Fees
Bitcoin operates as a proof-of-work blockchain, where the majority decision (consensus) follows the “longest-chain wins” rule. Participants in the blockchain network accept the longest chain of blocks as the only valid one. Network participants (miners) compete to solve complex cryptographic puzzles and be the first to validate each new block successfully. This competition requires significant computing power and resources to maintain. Users of the Bitcoin network pay transaction fees to miners, incentivizing them to continue validating the network. However, problems arise when there is a shortage of miners and a high demand for block space. This occurred in April 2021 when miners in China experienced an outage due to coal mine accidents. The resulting hashrate led to slower block times, a backlog of transactions, and increased fees per block. Consequently, Bitcoin’s average transaction fees surged significantly.
Creating More Sustainable Ethereum With Lower Gas Fees
Developers are putting a lot of effort into reducing gas fees to keep Ethereum network usage competitive and fair for all users. The upcoming “merge” and the adoption of proof of stake could drastically reduce network gas fees. Another solution is “Layer 2,” a secondary framework for processing transactions built on top of an existing blockchain. The goal of a Layer 2 solution is to increase transaction speed and reduce costs by “rolling up” work. This is done before recording it on the primary blockchain. Examples of Layer 2 projects include Bitcoin’s “Lightning Network” and Polygon (MATIC) and Uniswap (UNI) on Ethereum. Additionally, Ethereum recommends taking basic steps to save on gas costs. This includes monitoring the network for lower activity levels before submitting a transaction.
Bitmama offers a secure marketplace for crypto enthusiasts. Perform activities like crypto trading and creating virtual dollar cards for online payment. Download the Bitmama app today to begin.
