Ethereum Gas Fees: Everything to Know

By  Beluga Research June 27, 2023

Image for Ethereum Gas Fees: Everything to Know

Summary

  • Ethereum gas fees are a measure of the computational power required to execute a transaction or a smart contract on the Ethereum network
  • A user must pay this fee to execute transactions on Ethereum
  • Gas is measured in units called gwei, which is a fraction of an ether (ETH), the cryptocurrency used on the Ethereum network
  • The price of gas is determined by the market demand for computational power

Overview

Gas refers to a measure of the computational power needed to execute a transaction or smart contract on the network. It is a term used in the Ethereum ecosystem, the second-largest cryptocurrency by market capitalization.

A Brief History

Software developers introduced the concept of gas to the Ethereum network when the blockchain went live in 2015. The concept is a way to prevent spam attacks and ensure that the network runs smoothly. Without gas, there would be no way to prevent users from executing computationally intensive operations on the Ethereum network. This could have caused the network to slow down or crash.

Gas limits the amount of computational power that can be used per transaction. Gas is measured in units called gwei. Gwei is a fraction– one-billionth to be precise– of ether (ETH), the cryptocurrency used on the Ethereum network. The price of gas is determined by the market demand for computational power. It is usually denominated in gwei per unit of gas.

What is Gas?

Gas is a measure of computational power. A user pays a certain number of units of gas to execute transactions or smart contracts on the Ethereum network. The number of units of gas for a transaction is equal to the computational power required to execute the transaction. For example, a simple transaction that only involves transferring ETH from one account to another may require a small amount of gas. A more complex transaction that involves executing a smart contract, like using a decentralized exchange (DEX) may require more gas.

When a user submits a transaction to the Ethereum network, they specify the amount of gas they are willing to pay for the transaction to be executed. The higher the amount of gas, the faster the transaction will be executed.

The Ethereum network is a decentralized platform that allows developers to build decentralized applications (Dapps) and smart contracts. Smart contracts are self-executing contracts with the terms of the agreement directly written into lines of software code. They are executed automatically when certain conditions are met.

Getting Started

  • Execute transactions and smart contracts. The payment of a gas fee allows a user to execute a transaction or smart contract.
  • Incentivize stakers to validate transactions and add them to the blockchain. A staker receives the gas fee paid by a user on top of their standard reward for solving complex mathematical problems.
  • Make a network more secure. The absence of gas fees means users could flood the Ethereum network with spam transactions.
  • Ensure that only legitimate transactions are executed on the Ethereum network. The presence of a gas fee makes it less likely that invalid transactions will be executed on the network.

Unique Aspects

  • Prevents spam attacks on the blockchain network. Since most blockchain networks are decentralized, anyone can initiate a transaction. Without gas fees, it would be easy for attackers to flood the network with spam transactions. This would slow down the network. It would make it difficult for legitimate transactions to be processed.
  • A limited resource. Each block on the blockchain network has a maximum gas limit. Only a certain amount of gas can be used to execute transactions in each block. If a transaction requires more gas than the maximum gas limit, it will be rejected by the network. Users must pay a higher gas fee to ensure that their transaction is processed quickly and efficiently.
  • Determined by the supply and demand of the network. Gas fees are subject to market forces. If there are more transactions being executed on the network than the nodes can handle, gas fees will increase. Users will compete to have their transactions processed quickly. Conversely, if there are fewer transactions being executed on the network, the gas fee will decrease. This is because there is less competition for block space.

Advantages

  • Incentivizes network security. Gas fees incentivize stakers to process transactions and maintain the security of the Ethereum network. Without the gas fee, there would be no incentive for stakers to validate transactions. Such a lack of incentives would cause the network to be less secure.
  • Reduces the potential for spam attacks. A spam attack occurs when an attacker sends a large number of low-value transactions to clog up a blockchain network. With gas fees in place, these attacks become much more expensive. The gas fee makes the attacks financially unattractive for attackers.
  • Provides flexibility. Gas fees provide users with the flexibility to choose the speed at which their transactions are processed. If a user wants their transaction to be processed quickly, they pay a high gas fee. If they are willing to wait, they pay a low fee.
  • Ensures fair distribution of network resources. Gas fees ensure that network resources are distributed fairly. If there were no gas fee, users could spam the network with low-value transactions. This would clog up the network. It would also make it harder for other users to execute their transactions.

Disadvantages

  • Can be expensive. The cost of the gas fee can be high, especially during times of network congestion. A high gas fee can make it difficult for users to execute transactions if on a tight budget.
  • Complexity. The gas fee concept can be complex for new users to understand. It is calculated based on the computational power required to execute the transaction. This can be difficult for users who are unfamiliar with the technical workings of the cryptocurrency world.
  • Network congestion. During times of network congestion, the gas fee can be very high. This makes it difficult for users to execute transactions. Congestion usually leads to delays and frustration.
  • Discriminatory. Gas fees can be discriminatory against small transactions. Small transactions require the same computational power as larger transactions. The gas fee is usually a fixed amount. This makes it proportionally higher for smaller transactions.