A Primer on Gas Fees
Gas fees are fees that users will pay in order to make transactions on the blockchain
Gas fee prices can be volatile, determined by the time it takes to generate new blocks, the amount of transactions that a single block can process, and the overall demand for transactions to be made at a given time.
Gas Fees Are Charged by Miners to Complete Transactions on the Blockchain
Gas fees, rather than referring to oil prices, are the fees required from users in order to complete a transaction on a blockchain. These transactions can include a simple transfer of funds from one account to another or creating an NFT. These fees are used to compensate blockchain miners for the computing power they have to use to verify blockchain transactions and are paid in the blockchain’s native currency. Gas fees also help keep the blockchain network secure. By requiring a fee for every computation executed on the network, the network is able to prevent bad actors from spamming it without paying the fees.
Higher Gas Fees Can Incentivize Miners to Prioritize Certain Transactions over Others
How transaction fees work varies across blockchains. For example, in Bitcoin all transactions go to a memory pool, waiting to be picked by miners and included in the following block, incentivizing users to pay higher fees for urgent transactions. On Ethereum, the transaction fee is measured in gas, which are small fractions of ETH. Ethereum splits its transaction fee into a base and tip. The base fee is calculated independently of the current block and instead depends on the block before it. If the previous block’s size was less than Ethereum’s target block size, the base fee for the next block would be decreased, and vice versa, as a way to control demand. As the base fee is burned once the block is mined, meaning the tokens will be removed out of circulation, users are expected to compensate miners using tips, with a higher tip necessary in order for miners to prioritize certain transactions over others.
Block Time, Transaction Throughput and Overall Demand Play a Key Role in Determining Gas Fees
While gas fees can be volatile and affected by various factors, three main factors that affect fees are block time, transaction throughput, and overall demand for block space. Block time is the time required for the respective blockchain to generate new blocks, where the faster the blocks are generated, the cheaper the gas fees charged. Transaction throughput is how many transactions a single block can process, with blockchains with larger blocks seeing less block-space competition, also resulting in cheaper gas fees. Lastly, overall higher demand for block space, such as the case of many users sending crypto funds simultaneously, leaves more transactions waiting for confirmation and can result in higher gas fees in order to incentivize miners to focus on certain transactions over others.
For example, Bitcoin’s block time is around 10 minutes with a maximum block size of 1 MB, and each block can process anywhere from 500 to 4,000+ transactions depending on the transaction size. Ethereum, on the other hand, has a block time of 13 seconds and a block size of around 70 transactions, resulting in Ethereum’s comparatively higher gas fee prices. For example, the average Ethereum gas fee on August 1 was $17.45, compared to Bitcoin’s $1.308 for the same day.
Ethereum 2.0 Should Make the Blockchain More Efficient and Drive Down Gas Fees for Users
To combat the issue of higher gas fees, Ethereum is looking to upgrade its blockchain. This upgrade, called Ethereum 2.0, is meant to improve scalability, security, and efficiency as the blockchain will be changing from a proof-of-work consensus to a proof-of-stake model. This upgrade will improve transaction throughput through the introduction of Ethereum sharding, which will improve the network’s throughput by breaking down data into more manageable sections. This is expected to allow the blockchain to go from processing around 30 transactions per second up to 100,000 transactions per second by 2023, when the upgrade is expected to be completed. It will reduce gas fees by decreasing the amount of computing power needed for each transaction.