Gas (Ethereum): How Gas Fees Work on the Ethereum Blockchain

Gas (Ethereum) Definition

Investopedia / Madelyn Goodnight

What Is Gas (Ethereum)?

Gas is the fee required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform. Fees are priced in tiny fractions of the cryptocurrency ether (ETH)—denominations called gwei (10-9 ETH). Gas is used to pay validators for the resources needed to conduct transactions.

The exact price of the gas is determined by supply, demand, and network capacity at the time of the transaction.

Key Takeaways

  • On the Ethereum blockchain, gas refers to the cost necessary to perform a transaction on the network.
  • Gas prices are based on supply and demand for the network's validation requests.
  • Transaction prices are based on the gas limit and gas price.
  • Transaction prices are denoted in tiny fractions of ether called gwei or in ETH.

Understanding Gas in Ethereum

The concept of gas was introduced to compensate miners for their work done on maintaining and securing the blockchain. Ater the proof of stake algorithm was rolled out in September 2022, gas fees became the reward for staking ETH and participating in validation—the more a user has staked, the more they can earn.

"Gas limit" is the maximum amount of work you're estimating a validator will do on a particular transaction. A higher gas limit usually means the user believes the transaction will require more work. "Gas price" is the price per unit of work done. So, a transaction cost is the gas limit multiplied by the gas price. Many transactions also include tips, which are added to the gas price (the more you pay, the faster your transaction is completed). The lower a user estimates their gas limit, the lower the priority in the queue they will be.

A transaction fee is similar to the fee you pay for a money wire transfer. You're paying the service provider for using their network.

Ethereum validators, who perform the essential tasks of verifying and processing transactions on the network, are awarded this fee in return for staking their ether and verifying blocks.

Another factor to consider is that supply and demand for transactions dictate gas prices—if the network is congested, gas prices might be high. On the other hand, they could be low if there is not much traffic.

Gas and the Ethereum Virtual Machine (EVM)

Etherium, as platform and system, is designed to be used by others to create more use cases for blockchain and cryptocurrency. For this reason, it is commonly called the Ethereum Virtual Machine, because applications can be created that run on it. The EVM is essentially a large virtual computer, like an application in the cloud, that runs other blockchain-based applications within it.

Many decentralized application, cryptocurrencies, and tokens have been created using the EVM. Because the Ethereum blockchain is part of the EVM, the cryptocurrencies built on that blockchain require gas fees. For example, a popular token built on Ethereum's blockchain is DAI. Because it uses the Ethereum blockchain, users need to pay gas fees in gwei to conduct transactions on the chain.

What Is Ethereum's Gas Fee Now?

Ethereum's transaction fees continue to fluctuate, but they haven't changed much since proof of stake rolled out—the update was not intended to change fees.

What Is a Gas Fee on NFTs?

A gas fee is a blockchain transaction fee, paid to network validators for their services to the blockchain. Without the fees, there would be no incentive for anyone to stake their ETH and help secure the network.

Why Do I Have to Pay a Gas Fee?

The Ethereum gas fee exists to pay network validators for their work securing the blockchain and network. Without the fees, there would be few reasons to stake ETH and become a validator. The network would be at risk without validators and the work they do.

How Is the Gas Fee Calculated?

The gas fee is calculated using Gas Limit * Gas Price per Unit. So if the gas limit was 20,000 and the price per unit was 200 gwei, the calculation would be 20,000 * 200 = 4,000,000 gwei or 0.004 ETH.

The Bottom Line

Gas fees are used on the Ethereum blockchain and network as incentives for users to stake their ETH. Staking works to secure the blackchain because it discourages dishonest behavior. For staking their ETH, owners are given small payments as a reward for helping to secure the blockchain and help it function.

Fees are determined by the amount of network traffic, supply of validators, and demand for transaction verification. The higher the demand and traffic, the higher the fees. When traffic and demand is lower, fees become lower.

Article Sources
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  1. Ethereum. "Gas and Fees."

  2. Ethereum. "The Merge."

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