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Gas Fees

What Are Gas Fees in Crypto?

Learn what gas fees are, how to calculate them, why they’ve become expensive, and how to reduce them.

There is no shortage of complaints about high gas fees throughout the crypto community. For example, in April 2022, one Ethereum user spent $44,000 in gas fees to mint a Bored Apes ‘Otherside’ NFT, while many others paid thousands of dollars in fees for failed transactions. But, what exactly are gas fees, and how can you avoid paying excessive fees?

Let’s look at what gas fees are, how to calculate them, why they’ve become expensive, and strategies for reducing them.

Gas fees are a necessary evil when creating transactions on the Ethereum blockchain, but Ethereum 2.0 could help lower fees.

What Is Gas?

Gas refers to the amount of computational effort necessary to execute operations on the Ethereum network. Since Ethereum transactions need computational resources, everyone pays a “gas fee” to process transactions. These fees compensate Ethereum miners for completing proof-of-work algorithms and verifying transactions. 

Gas fees also provide a layer of security to the Ethereum network by making it too expensive for malicious users to spam it. The only way for attackers to sidestep these concerns is with a 51% attack, where attackers control more than half of the mining resources, enabling them to approve their own transactions by reaching a majority consensus.

Gas fees are paid in Ethereum’s native currency, ether (ETH), and denominated in gwei – or a billionth of one ETH. You can think of gwei to ether as cents to a dollar (except there’s a lot more). Using gwei, users can communicate and pay fees without typing in a bunch of zeros, especially as the price of ether increases and gas fees fall.

The growing popularity of Ethereum for decentralized finance (DeFi), play-to-earn gaming (P2E), and non-fungible tokens (NFTs) has driven gas fees higher over time. Although, of course, gas fees have fallen in recent months with the arrival of the “crypto winter,” which has brought down the price of ether and most other cryptocurrencies.

How Are Gas Fees Calculated?

The original Ethereum gas fee calculation was “Gas units (limit) x Gas price per unit.” So, for example, 21,000 x 200 = 4,200,000 gwei or 0.0042 ETH. Someone who wanted to send a 1 ETH transaction would need 1.0042 ETH total to cover the transaction fee. And the network would send the fee to the miner to validate the transaction.

The Ethereum London Upgrade changed how gas fees worked in August 2021. Under the new rules, every block has a base fee calculated based on the real-time demand for block space – you can think of it as a reserve price. Since the cost can only increase by 12.5% per block, you can always calculate the maximum base fee for a transaction.

Gas Fees
Gas costs after the London Upgrade. Source: Finematics

The new rules also change how miners receive compensation. Rather than paying out gas fees to miners, the upgrade burns the base fee and removes it from circulation. Instead, miners receive payment from tips (or priority fees) that users add on top of the base fee. You can think of these as a bidding mechanism to speed up transactions.

The Ethereum EVM handles all gas fee transactions. For example, a standard ETH transfer requires 21,000 units of gas. So, if you define a gas limit of 50,000, the EVM will consume 21,000, and you will get back the remainder. But, if you don’t specify enough gas (e.g., 10,000), the EVM will consume the $10,000 attempting to fulfill the transaction before failing.

How to Reduce Gas Fees

Gas fees are a function of Ethereum’s value and rising base fees due to demand for block space. Meanwhile, the supply of available mining resources depends on the cost of energy and processing power to complete proof-of-work algorithms. The good news is that there are several ways to reduce your gas fees.

Start by understanding the cost of a transaction. Using DeFi Saver, you can simulate transactions to understand how much gas will cost without actually running the transaction.

Next, you might consider using some other strategies to actually lower these costs:

  • Timing – Nights and weekends tend to have lower demand on the Ethereum network, leading to lower transaction fees. Using Ethereum gas charts, you can look at historical data to determine the best times to make transactions with the lowest costs.
  • Rebates – Some dApps offer discounts and rebates for gas fees. For instance, Balancer offers a gas fee refund of up to 90% in the form of their BAL tokens. Many of these services operate by grouping individual transactions.
  • Tokens – Gas tokens can help you make cost-effective transactions without relying on the market price at a given point in time. Using Ethereum’s storage refund system, you can mint gas tokens when prices are low and redeem them when they are high.
  • Layer 2 – Layer 2 solutions, like Polygon, provide cheaper transactions using roll-ups or sidechains. Depending on your requirements, you may be able to use these chains instead of the Ethereum mainnet to reduce gas fees significantly.
  • Max Fee – Setting a max priority fee can help you avoid unexpectedly large gas fees.
Gas Fees
How Ethereum 2.0’s Proof-of-Stake algorithms work. Source: / SEBA Research

Ethereum 2.0 aims to address these higher fees by using a proof-of-stake algorithm and sharding techniques. The new proof-of-stake algorithm will reduce the energy and processing requirements for mining, while sharding will split the blockchain to add transactions in parallel. In combination, these efforts should significantly reduce gas fees.

The Bottom Line

Gas fees are the cost of adding transactions to the Ethereum blockchain. Unfortunately, with the rise of DeFi and P2E games, demand for Ethereum transactions has risen, and gas fees have become expensive. The good news is that Ethereum 2.0 aims to address these problems by switching to a proof-of-stake approach to validating transactions.

If you buy and sell ether or other tokens, ZenLedger can help you keep everything organized for tax time. The platform automatically aggregates transactions across wallets and exchanges, computes your capital gain or loss, and populates the necessary IRS forms. You can even identify opportunities to harvest tax losses to lower your year-end tax bill.

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Justin Kuepper