Gas refers to the unit that measures the computational power to process transactions on the Ethereum network. Gas fees are deducted from any transaction taking place on the Ethereum network, and gas price refers to the amount the user is willing to pay for the transaction.
Introducing Ethereum’s Gas
“Gas” fuels every transaction made on the Ethereum blockchain. In the simplest terms, it's the gas fee users pay to the validators for verifying their transactions. Gas fees apply to all transactions across the ecosystem, including the ones necessarily happen when engaging with decentralized finance and dapps.
Gas prices largely depend on market fluctuations; the amount of activity on the network, demand for validators, and supply largely affect the gas prices and how much users end up paying to perform transactions.
The concept of gas fee, or transaction fees on a blockchain, was introduced to encourage taking up transaction validation work across the network.
The decentralization of security in a blockchain is achieved with the help of the participants (nodes), who perform the verification work and collect rewards (a number of native tokens) for their contribution. The transactions are bundled in blocks, and validators are responsible for creating the blocks and adding them to the chain. Since Ethereum’s switch to the proof of stake consensus mechanism, nodes stake several ETH to become validators, and if they do the job correctly, they can collect their awards.
This guide explains the recent gas fee calculations as per the London Upgrade, how it is reflected on users, the reasons for spontaneously exorbitant fees, and how Ethereum addresses these problems.
Inner Workings of Gas Fueling
Ethereum has been on a roll in implementing life-changing upgrades for some time now. Gas calculations were also reconfigured and allegedly simplified after the London Upgrade launched back in August 2021. It discloses the new transaction fee formula as;
Gas fees = Units of gas used * base fee + priority fee.
Let’s break this down by explaining every included element for gas fee:
Gas Units — Every operation taking place on the Ethereum network uses a certain amount of gas, for example, a transaction may cost a minimum of 21,000 gas. Smart contracts include several operations and therefore use quite a lot of gas.
Block Size — Before the London upgrade, the Ethereum network’s block sizes were standard, much like other major blockchain networks. Now, the block sizes vary depending on the network demand. Each block has a target size of 15 million gas, but the size of the block increases or decreases depending on the number of transactions requested at a given time. A block can expand up to 30 million gas. The amount of computing power needed to complete a block in time for the next slot increases with its size. By capping block sizes, this centralizing force is resisted.
Base Fee — The base fee is determined by the protocol, and every block has a base fee that represents the lowest amount of fee required per unit. For a transaction to be included in a block, the offered price per gas unit must be equal to or higher than the base fee. The base fee is calculated depending on the previous block rather than the current block: if the target size is reached in the previous block, the base fee increases by 12.5% per block. This means that the base fee predominantly depends on the network activity: the higher the demand for transaction verifications, the higher the base fee.
The base fee is measured by Ethereum denominations called gwei (10^9 ETH). 1 gwei equals to 0.000000001.
Priority Fee — Users who wish to have their transactions settled faster may include priority fee in their gas fee offerings, which would help them fast-track the queue in the mempool, where transactions awaiting confirmation remain.
Max Fee — Users can also set a maximum amount of fee they are willing to pay for their transaction, which should be larger than the sum of the base fee and priority tip. The user is then refunded the difference between the actual sum and the max fee.
How Does This Work?
It sounds complicated at a glance, but London Upgrade automated the process of setting transaction fees, a responsibility that has largely fallen on the user previously. Instead of finding out the average fees for ETH transactions from explorers and setting an estimated amount, the wallets now can offer recommended fees depending on user needs.
As the base fee is calculated by the protocol, wallets automatically generate the base fee and calculate the priority fee depending on how fast the user their transaction to be settled. A decentralized Ethereum wallet MetaMask, for example, may offer up to three options for fast, medium, or slow transfers with differing transfer fees.
Why Are the Gas Fees So High?
The gas fee can get incredibly high simply due to the rising popularity of Ethereum, which has experienced a particular boom as the decentralized finance platforms have grown. As of September 2022, Ethereum holds 57% of the total value locked across blockchain networks using the proof-of-stake consensus mechanism.
Performing any operation on Ethereum means using gas, and gas space are limited in a block. Smart contracts specifically include a multitude of operations and therefore use fairly large amounts of gas. As the dapp functionalities grow, so do the operations included in smart contracts, which drives the prices as a result.
Being able to provide priority tip also means when there’s high demand, users will bid higher tips to get their transactions ahead of others, so surges may also drive priority tips.
Solutions For High Gas Fees
The outrageous gas fee largely boil down to the scalability problem every public blockchain face for the time being. Also dubbed as growing pains, scalability problem arises due to blockchain networks being limited in how many transactions they can process in a given time. There’s a limited amount of validators and limited space in blocks, and at times, too many transaction requests.
To get ahead of this, blockchains, led by Ethereum, have begun to introduce on-chain solutions such as sharding, which effectively partitions the network to be managed separately, and off-chain solutions like layer 2 solutions which help to offload some transactions in an adjacent chain to relieve the pressure on the main chain. Ethereum’s scaling platform Polygon, for example, exhibits the fracture of the cost of transaction users find on the main chain.
Will Gas Fees Stabilize?
Excessive gas fee have become one of the major issues Ethereum users and developers alike face, which paved the way for dramatic interventions to take place. Ethereum’s layer 2 solutions specifically gained traction.
In October 2022, the number of active addresses on the largest Ethereum scaling platforms, Polygon, Arbitrium, and Optimism has risen by 85%, surpassing the active addresses on the main chain. By carrying their transactions off-chain, users enjoy low transaction fees and speedy settlements.
Considering the size and amount of solutions as such Ethereum is employing, it wouldn’t be too wrong to imagine a stable future for gas fees.
