Tranactions Cost How Much!?
All About Transaction Fees
If you’ve even heard about Ethereum in passing, you’ve also probably heard about its high transaction fees. So infamous has this problem become that entire blockchains (dubbed “Eth killers”) have been sprouted valuing low fees above all else, even decentralization. The narrative surrounding blockchains recently has been about minimizing these fees and fairly so: if Defi is to be an open, equitable financial system, it has to be affordable to everyone.
Why are Ethereum transaction fees so expensive? Why is it called gas? And what are the potential solutions to this problem? We’ll explore all of this in the rest of the article.
In its most basic form, a blockchain is a database that’s collectively managed by multiple independent parties, or nodes. Each node will have a copy of all the data and can propose new data to be added to everyone’s copy of the blockchain. For example, let’s say you, Mark, and Kate each had a blockchain node, and you wanted to make a transaction. All three of you would have to record the new data on each copy of the chain. The transaction only becomes “valid” and part of the blockchain once the majority of the nodes, in this case two, copies the data.
To take this analogy a little further, let’s think about the resources required to add this data to each copy of the chain. in terms of physical resources, you, Mark, and Kate will all need storage space for the data as well as the energy required to write said data to storage. While each of you may have an abundance of these first two resources, there is an additional factor that’s the most important: Time. There are two ways saving a blockchain transaction takes time: It takes time to inform Mark and Kate about the transaction you want to add, and it takes time for each of them to write it to their storage.
Let’s say that you’re good at saving data, and it takes 30 seconds to save your own transaction. This is fine, but it takes Mark and Kate each a minute and 30 seconds to do the same. That means it takes at least one minute and 30 seconds for one other person to add the new data and make your transaction valid! What a long wait…
This principle also carries over to more widely used blockchains. The rate at which new data is added to Ethereum is limited by its slower nodes. This is because we want to ensure that anyone on the planet, regardless of the power of their computer, can run an Ethereum node. This helps the decentralization of the network, but it makes it more difficult to scale because those with more compute power are artificially limited in their speed.
As a result, the Ethereum network has a limited rate at which transactions can be processed. This is often referred to as transactions per second, or TPS. Ethereum has a TPS of about 12. While this may seem like a lot, about a million transactions per day, it’s actually a pretty significant bottleneck. When dealing with financial markets, seconds can mean the difference between thousands of dollars in profit or thousands of dollars in losses.
In practice, there are hundreds, if not thousands, of transaction requests given to the Ethereum network every second. Not all of them can be added. How do we determine what transactions to include and what transactions to ignore? The solution, like with many things, has to do with money.
On Ethereum, we’ve decided to create a market for this limited transaction space. Essentially, users must “bid” on having their transaction go through and nodes pick the ones that pay them the most to be included in a block.
What does this mean for you, the Eth end user? It means that the amount that you pay for transactions will be expensive, yes, But it also means that you can save yourself tons of money on gas, if you go into things with a little strategy.
The first thing to keep in mind is that there are tools that you can use to determine the price of gas at any given moment. The best one for Ethereum is Etherscan’s gas tracker. Gas costs here are denoted in fractions of an Eth, or ‘Gwei’. Generally, a gas price below 100 is good, and a gas price below 50 is great (and rare!).
The other thing to consider is the general usage cycle of the network throughout the day. Gas is more expensive during the peak trading hours on Wall Street, between 8:00 am and 12:00 pm EST. Gas prices are lowest at night, usually between 12:00 am and 7:00 am EST. This doesn’t mean that gas will necessarily be affordable at these times, but employing both of the aforementioned strategies with a little patience will save you hundreds of dollars on your investing journey.
We can certainly take special action to limit our spending on Ethereum, But what are more permanent solutions to high gas fees? The most promising candidates are Layer 2s. L2s behave like their own blockchains from your perspective, but in reality use Ethereum for security and decentralization. The result is a fater, cheaper blockchain than Ethereum that doesn’t compromise on some of the other core values of crypto. If you already have a web3 wallet, you can get started with the L2 zkSync here.
Oh, and to answer that second question from earlier, gas is just a colloquialism. One syllable words are quick and easy to say, after all
Thanks for reading! If you found my writing helpful, check out some of my other articles on my profile. If you’re interested in my other work in the crypto space, check out my company, Drem Labs!
Rock on ✌
