Crypto Gas Fees
A primer on blockchain gas fees and transaction costs.
Whether you are a seasoned crypto veteran, a recent entrant, or a degen meme-coin specialist, it is crucial to understand what gas fees are and how they work for safe and cost-efficient navigation of the on-chain crypto world.
Not all blockchains are the same. As the vast majority of chains are EVM (Ethereum Virtual Machine) compatible, we will stick with gas fees as they pertain to Ethereum (and most EVM chains) for the purposes of this discussion.
Gas as a Blockspace Commodity:
Blockchains operate by combining blocks together to create a chain of blocks (ergo blockchains), each of which contains a group of transactions that alter the state of the blockchain. In other words, each block updates the blockchain ledger with the most recent transactions.
In layman’s terms, blocks themselves are a limited resource and require miners (now validators) to process and append to the blockchain. In the case of Ethereum, each block has a certain amount of blockspace to fit new transactions (In fact, this is now dynamic after EIP-1559). The more the demand for blockspace, the higher the cost of including a transaction in the block. Each transaction takes a certain amount of gas, the more complex the transaction the more gas it consumes.
When you initiate a transaction, your wallet communicates with the dApp (decentralized app) to estimate how much block space you will need (gas), and how much you will offer to pay for each unit of blockspace you use (GWei). The validators then create a pool of transactions prioritized primarily by gas fee and include it in a new block.
What is “Gas”, and what is a “Gas Fee”?
Gas is the measure of the computational power (space) required to be used for a given transaction. Gas fees are the cost paid to the validators to process each unit of gas for your transaction, measured in GWei (gigaWei). The net gas fee is therefore the Gas multiplied by the cost per unit of gas (GWei).
If your transaction were a road trip, your gas would be the volume of gas needed to fill your car for the specific trip, and the gas fee would be the cost per Litre of gas. The transaction fee would be the volume of gas multiplied by the cost per Litre. Just as it is important to ensure you have enough gas in the tank for your road trip, it is also crucial to ensure you have a high enough gas limit for your transaction to complete, otherwise you will spend the gas and end up with a failed transaction AND spent gas.
On Ethereum, transaction costs are now made up of three main components:
- Gas Limit: maximum amount of gas you are willing to use on this transaction.
- Max Base Fee: the maximum fee you are willing to pay per unit of gas actually used (inclusive of the priority fee).
- Priority Fee: (“tip”): the fee per unit of gas you are willing to pay to the validator directly as a tip for including your transaction in the block
Gas Fees in Practice:
Practically speaking, much of the heavy lifting in calculating gas fees for on-chain transactions is done by your wallets and dApps, and those calculations are getting more and more accurate. Most wallets provide pre-set options for gas settings, such as Fast, Medium and Slow.
If you are new to the on-chain world of crypto, it is often safer and simpler to use the preset gas settings to get started. However, if your goal is to continue using and advancing in crypto, it is essential to learn how to use the advanced gas settings, and how to leverage those settings to your advantage to get an edge over the competition. For a detailed advanced lesson with tips and tricks, see our previous article “Crypto Wallet Best Practices: Tips, Tricks and Alpha — Part 2: Crypto Wallet Advanced”
Conclusion:
As crypto adoption continues to grow and the next bull run approaches, gas fees and transaction costs will continue to become increasingly expensive. Ethereum will likely continue to retain the lion’s share of the liquidity, and its blockspace demand will follow suit. Knowing the inner workings of the gas fee mechanism on EVM chains will prove to be a very valuable resource for reducing costs and getting an edge on transaction execution.
Stay tuned as XBorg continues to release educational crypto content in furtherance of its mission to foster Esports and GameFi mass adoption in the cryptosphere. Feel free to drop a comment on any topics you would like us to dive into, and any feedback or recommendations.
Good luck out there and see you on the next one!
Sovereign Crypto (aka Rickky Bobby on Discord)
XBorg Content Council
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