What Are Gas Fees?
If you have ever carried out a transaction with any financial institution, then you have probably experienced a semblance of gas fees. Traditional financial institutions charge their customers fees for transactions like fund transfers. These charges are used by financial institutions to keep their services running and for profit.
In the same vein, blockchain networks charge fees for transactions done on the blockchain. These fees vary across blockchains and are usually determined by the volume of transactions being done on the blockchain at a given time. On the Ethereum blockchain, these transaction fees are called gas fees.
I know you’re probably wondering why I’m making you read this article at six hundred blockchains per minute, but stay with me.
What Is Gas?
Gas — not to be mistaken for gasoline or the third state of matter — is the cost required to execute a transaction on Ethereum. Gas is obtained by the blockchain and distributed to miners on the network as a reward for helping to keep the blockchain secure and functional.
Miners are the authenticators on a blockchain. Think of them as quality control officials who ensure that every transaction that tries to enter the blockchain meets the base requirements for validation before being accepted into the blockchain.
When miners accept a transaction into the blockchain, they get rewarded with the Ether (ETH) paid by the users as gas fees. Because gas fees are usually only a fraction of an ETH, they are paid in gwei. A gwei is equal to 0.000000001 ETH, i.e. 1 ETH = 1 billion gwei.
How Are Gas Fees Priced
The price of gas fees fluctuates according to demand and supply. Miners on Ethereum determine the gas fee limits based on how many transactions need to be processed on the blockchain at a given time. So the more the transactions, the higher the fee.
Miners may choose to ignore transactions that come with lesser gas fees in favor of transactions that offer higher fees. When this happens, transactions that do not meet the gas threshold will be left pending until gas prices fall, i.e. until fewer transactions need to be processed on the blockchain.
With this setup, transactions that come with higher gas fees get accepted into the blockchain faster and are processed quicker. As a user, you usually can determine how much you want to pay as gas fees. If you want to ensure that your transaction gets processed faster, you can offer to pay a higher fee to the blockchain in a sort of bid against other Ethereum users.
Wrapping Up
Gas fees on Ethereum usually cost significantly more than transaction fees on other blockchains. Considering the popularity of Ethereum and its plethora of use cases (NFTs and blockchain gaming come to mind), this comes as no surprise. Fortunately, Ethereum 2.0 is on the way and the hope is that it will solve the issues underlying Ethereum’s high gas fees. Until then, don’t forget to put aside some money for gas.
