Monolith is built on top of Ethereum. It acts as a portal to a new token economy that could change our society’s understanding of value forever. But while Ethereum might be the most disruptive technological innovation the world has seen since the Internet, using it in its early stages takes some getting used to. One of the most important things to understand about Ethereum is how transaction fees work. Ethereum processes transactions using smart contracts, and every transaction requires a fee called gas. In this guide, we’ll detail how gas works, and everything you need to know about paying transaction fees with Monolith.
- Making transactions on Ethereum required paying a fee known as gas.
- Gas is paid for using ETH. You need ETH in the Monolith wallet to process transactions.
- The Gas Fee varies depending on the activity and level of congestion. It’s calculated by multiplying the Gas Limit and the Gas Price.
- Topping up the Monolith Card requires more gas than transferring tokens to another wallet. For legacy users, the Main account is less gas intensive than the Contract Wallet.
- Ethereum is often criticised for its high gas fees, but fees are expected to become more affordable once the network achieves scalability.
- The recently launched EIP-1559 update has introduced a gas fee burn on every Ethereum transaction, which has made the ETH supply more scarce.
What is gas?
Gas can be thought of as the fuel required to power smart contracts on Ethereum. To process any transaction on the network, you need some gas first. Gas is paid for using Ethereum’s native currency, ETH. It’s the only asset that can be used to pay gas fees, which is why you need some in your Monolith wallet to make a transaction.
How does gas work?
Ethereum is a smart contract platform. Transactions are executed using a contract that’s been deployed to the network, and every transaction requires a gas fee. Every Ethereum transaction uses computational resources. The gas fee refers to the amount of computational power required to execute the transaction.
Gas fee variance
Gas fees vary depending on the level of congestion (i.e. how many users are active on the network) and the type of transaction.
Sending ETH to another address, for instance, costs less than sending an ERC-20 token. More complex DeFi activities such as depositing funds to a liquidity pool or a yield optimiser like Yearn.Finance can cost significantly more than a simple transaction because they use more computational power.
In the Monolith wallet, topping up the Visa® Debit Card requires more gas than sending tokens to another wallet. Similarly, transactions with the Contract Wallet (available to legacy users) use more gas than the Main account. We’ll go into more detail on paying gas fees with Monolith later in the article.
Gas fees can experience spikes when the network is busy. For example, on days when ETH has suffered from dramatic price drops, gas fees have soared to record highs. This is because many Ethereum users are affected by sudden changes in price; some rush to buy or sell ETH when prices plummet, while others often need to readjust their collateral positions in DeFi to avoid getting liquidated. Such situations create a network jam, and the high gas fees can temporarily price many people out from the network.
The growing interest in NFTs has also been a major contributor to rising gas fees; highly anticipated drops can cause fee spikes as demand for the pieces often outstrips the supply.
Whenever the Ethereum network starts to get congested, we’ll notify you in the Monolith app so that you’re aware that gas fees may also surge. To avoid paying high gas fees, we recommend using the network during quieter periods and making larger transactions rather than smaller ones to avoid paying excessive fees.
How are gas fees calculated?
Gas fees are denoted in gwei, which is a small denomination of ETH. 1 gwei is equal to 0.000000001 ETH. Ethereum Unit Converter is a useful tool for calculating fees in gwei and ETH.
Gas fees are calculated based on the Gas Limit and the Gas Price.
The Gas Limit refers to the amount of gas used for the transaction. The minimum Gas Limit is 21,000 units. In web browser wallets such as MetaMask, you can increase the Gas Limit to help make the transaction process faster.
The Gas Price refers to the amount of gwei required for the transaction, and varies depending on how many users are active on the network. Gas prices typically range from 10 gwei to 200 gwei, though they can experience spikes during peak periods of congestion.
The Gas Fee refers to the Gas Limit multiplied by the Gas Price. The minimum fee for a transaction set to 100 gwei, for example, would be calculated as follows:
21,000 units x 100 gwei = 0.0021 ETH
Gas fees on Ethereum can be thought of in the same way as petrol in cars. The price of petrol is set per gallon, and the cost of filling the tank depends on how many units are added.
Several useful tools can be used to get live price feeds of gas prices and estimate the cost of transactions. We recommend checking sites such as Gas Now, ETH Gas Station or Etherscan to get an estimate on the current Gas Price — Monolith uses Etherscan to calculate gas fees (our transactions are priced according to the “fast” option).
Paying gas fees with Monolith
As Monolith is built on Ethereum, you need gas to pay for transactions including sending tokens and topping up the Monolith Card.
You can send ETH to your wallet or buy it with any Visa or Mastercard through our Money In feature — we charge a 2.95% surcharge to subsidize the gas fee.
If you joined us after May 2021, you just need to add ETH to your Main account to pay gas fees.
If you are a legacy user with a Contract Wallet, you need to make sure that ETH is in your Main account to pay the gas fee (the Main account was previously added to the home screen to replace our old Gas Tank feature). When you buy ETH through our Money In feature, you’ll receive the assets to your Main account.
On average, transactions through the Main account are roughly 33% cheaper than the Contract Wallet. This is because the Main account is a regular Ethereum address rather than a smart contract.
As gas fees vary depending on the activity, some activities in Monolith can cost more than others. Topping up the card typically costs more than sending tokens to another address, for example, as interacting with the smart contract for the transaction requires more computational power. That’s why we recommend topping up larger amounts where possible.
Please note that during periods of peak congestion, gas fees can be very high — particularly for Contract Wallet users. We therefore recommend following Gas Now closely to find out whether it’s a good time to top up based on the current fees.
Ethereum’s gas issues
Ethereum’s gas fees have become a common source of frustration for many users on the network. As Ethereum has grown in popularity, the demand for block space has soared, which has helped gas fees rise. Ethereum currently processes over 1 million transactions daily, while network utility has frequently exceeded 98% throughout 2021.
Moreover, as the price of ETH has risen, the cost per transaction in fiat terms has also soared. As gas fees are measured in gwei, which is a denomination of ETH, they increase in fiat price as ETH does.
For reference, let’s calculate two gas fees in fiat prices for a transaction costing 100 gwei.
21,000 units x 100 gwei = 0.0021 ETH
When ETH was priced at $300, a gas fee of 0.0021 ETH would cost around $0.63 in USD terms.
When ETH is priced at $3,000, the same transaction would cost $6.30 in USD terms.
Solutions to Ethereum’s gas issues
Ethereum is working on a number of solutions to mitigate its gas issues. The most notable of these solutions is scaling the network through Ethereum 2.0. When complete, Ethereum 2.0 will introduce 64 shard chains onto the network, which should reduce congestion and increase throughput. Sharding is expected to launch sometime after the network merges to Proof-of-Stake.
The Ethereum ecosystem is also home to several Layer 2 solutions designed to help the network scale. Layer 2 solutions build on top of the Layer 1 base chain to offer transactions to users at a higher speed and lower cost than Ethereum mainnet. Two of the most promising Layer 2 solutions in development today are the Optimistic Rollup solutions Arbitrum and Optimism, which are set to host some of DeFi’s top protocols. We’ve looked into building our own product on Layer 2, but we found that topping up the Monolith Card would involve moving funds from Layer 2 to Layer 1 to convert to fiat money. This would require Ethereum mainnet, where transactions are most expensive. Nevertheless, we believe that the implementation of Layer 2 solutions is a benefit for the whole ecosystem as it will help reduce traffic on the base chain.
Gas fees and EIP-1559
To fully understand how Ethereum’s gas fees work today, it’s worth covering the blockchain’s EIP-1559 update.
EIP-1559 introduces a base fee to include transactions in a block and allows the block size to double to 25 million during peak periods of congestion. Where the miners previously received the full gas fee, EIP-1559 burns the base fee (users can also add a tip to miners to get their transaction added to a block faster).
EIP-1559 makes the cost of transactions more predictable, though it doesn’t significantly reduce the gas fees.
As EIP-1559 burns ETH, it also impacts the monetary policy of the network’s reserve asset. The supply becomes more scarce as ETH gets burned, which benefits all holders. Many researchers have estimated that EIP-1559 could make ETH become deflationary once Proof-of-Stake ships.
While EIP-1559 has not reduced gas fees, Ethereum’s network utilization rate has dropped from 98% to just over 50% since it launched. Meanwhile, over 500,000 ETH has been burned at a rate of around 5 ETH per minute.
We hope that this guide is useful for understanding Ethereum’s gas fees. We know that Ethereum has often faced criticism over the cost of using the network, but we’re confident that updates such as Layer 2 and sharding will help make transactions more affordable. To avoid overpaying for gas fees with Monolith, we recommend using the network in quieter periods and topping up larger amounts where possible. Ethereum has created a revolutionary new financial system. Now that you understand how gas fees work, you’re ready to enjoy the benefits of the decentralised token economy today.
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