What are gas fees and how can we fix them?

Before 2020, most blockchain transactions were relatively inexpensive. But now, with the rise of Web3 and NFT, the price of compulsory blockchain transaction fees – also known as gas fees – is the biggest barrier to entry into the mainstream.

For blockchains like Ethereum and Bitcoin, gas prices fluctuate based on network congestion. That means the more people use the network, the higher the gas fee will be. And since Web3’s policies focus on democratization and inclusion, this fundamental scaling issue is essentially one of those core tenant questions.

Although the concept of gas is fairly straightforward, under the hood it can be rather complex. That’s why we’ve put together this in-depth explanation of gas fees, how they’re calculated, and what they’re doing to make etherium and other blockchains more affordable.

What is a gas fee?

As defined in our NFT dictionary, the gas fee is the amount that individuals pay to complete a transaction in a blockchain. This fee is used to compensate blockchain miners for the computing power they need to verify blockchain transactions. These are usually offered in the blockchain’s native cryptocurrency. Although the task of paying for gas is a paid one (you cannot perform blockchain transactions without it), the price of gas itself is highly volatile and dependent on various factors.

The two main reasons for each blockchain are the block time (the time required for the respective blockchain to create a new block) and the transaction throughput (how many transactions a block can process). Generally speaking, the faster blocks are created and the more transactions they can hold, the less block-space competition there will be. This results in cheaper transaction fees for all network users.

Let’s compare the block times and sizes of Bitcoin, Ethereum, and Solana.

Each block can process 500 to 4,000+ transactions, depending on the size of the transaction, with a block time of about 10 minutes and a maximum block size of 1 MB.

Solana has a block size of .4 seconds and a throughput of 20,000 transactions resulting in extremely low gas fees.

Meanwhile, Ethereum has a block time of 13 seconds and a block size of about 70 transactions. Although Solana’s gas fee is close to 00 .000025 per transaction (about 60,000 times less expensive than Ethereum), Ethereum is still far from the most popular blockchain for NFTs, DeFi, and other Web3 activities. With the size of these small blocks and so much network usage, it’s easy to see why Ethereum’s gas fees have gone out of hand.

How Ethereum gas fees are calculated?

To understand how Ethereum gas is calculated, we must first understand the gwei concept. Gwei is a very small value of ether (1 gwei = 0.000000001 ETH) used to measure gas consumption. For example, a gas fee of 30 gwei would be equivalent to 0.000000030 ETH.

Since Ethereum’s London Hard Fork in August 2021, Ethereum Gas Fee follows a general calculation:

Total Gas Fee = Gas Unit (Limit) x (Base Fee + Tip)

Let’s break it down a bit more.

A gas limit is the maximum amount of gas (or energy) that a cryptocurrency user is willing to pay when completing a transaction in a blockchain. For standard Ethereum transactions, most wallets and Exchange Gas set a limit of 21,000 gwei, but users are given the ability to manually edit this number whenever they please. In the gas war, where many users are competing for the priority of transactions in the next block, users often significantly increase their gas limit.

That said, Ethereum will only use the exact amount of gas needed to process the transaction. Any difference between your gas limit and the actual amount of Gwei will be returned to your wallet. Meanwhile, setting your gas limit too low can cause your transaction to fail, leaving you never able to recover.

Next is the base fee. Also introduced as part of the London upgrade, each block has a base fee that is dependent on network congestion. As a deflationary mechanism to offset new ETH issues, each base fee is burned, or Ethereum’s supply is canceled from circulation. Users are therefore encouraged to pay a one-time fee to the miners and are expected to include a preferential fee (tip) with each transaction. The higher the priority fee, the faster the transaction. In wallets like Metamask, users are able to adjust three values ​​(gas limit, maximum priority fee and maximum fee).

So with everything in mind, here is an example of a basic gas fee calculation. Suppose James wants to make an NFT mint for 1 ETH

1. The gas limit includes a tip of 21,000 units, base fee 50 gwei, and James 15 gwei.

2. The formula for gas calculation is: 21,000 (gas limit) x (50 (base fee) + 15 (tip)), or 21,000 x (50 + 15). It pays a total gas fee of 1,365,000 gwei or 0.001365 ETH.

3. When James NFT minutes, 1.001365 ETH will be charged from his wallet. The wallet associated with the NFT project will receive 1 ETH, miners will receive a tip of 0.000315 ETH and the original fee of 0.00105 ETH will be burned.

Users can set a maximum fee for the transaction, which includes their base fee and priority fee, giving them complete control over the amount they want to pay.

But even so, while this model makes FIC more predictable, it does not solve the problem of traffic-based pricing. That’s why Vitalik Buterin and the Ethereum team are working hard on a new, scalable version of Ethereum.

Make gas fees more affordable

Despite many delays, the Ethereum team has finally announced that its multi-phase Ethereum 2.0 upgrade will begin in August 2022. Designed to improve scalability, safety, and efficiency, Ethereum 2.0 will change from a proof-of-work consensus to a proof. -Off-stack model. Not only will this significantly improve the throughput of transactions (Ethereum 1.0 can process about 30 transactions per second, while 2.0 promises to complete 100,000 per second), but it will significantly reduce gas fees by reducing the amount of computing power required for each transaction.

Instead of the long awaited upgrade, users are relying heavily on the Layer 2 protocol for faster and cheaper transactions.

What is Layer 2?

Layer 2 Protocol (L2) is a secondary scaling framework built on top of existing Layer 1 blockchains (such as Bitcoin and Ethereum), designed to improve transaction throughput and reduce gas fees. The two most popular and trusted Layers 2 are Sidechain and Rollup.

Chain on the side

A sidechain is a separate blockchain network that connects to a main blockchain through a two-way bridge. Using smart contracts, sidechains are able to securely transfer tokens within the blockchain. Despite being connected to a major blockchain (mainnet), the sidechains operate under their own consensus protocol.

For Bitcoin, not only do sidechains like Rootstock (RSK) increase block times and significantly reduce gas fees, they also add extra functionality to the blockchain. RSK gives blockchain networks the power of scalable smart contracts, further expanding the potential use of Bitcoin.

Ethereum-based users rely on polygons as a quick, inexpensive, and scalable alternative.

Unlike Ethereum, Polygon works on a proof-of-stack consensus that provides significantly faster transactions, higher throughput, and lower gas fees. Polygon’s native token, MATIC, also offers gas, which is significantly cheaper than ETH, resulting in hundreds of dollars worth of MATIC penis instead of ETH. With this in mind, Polygon has become a select blockchain for Defy and Bulk-NFT trading. But despite all the reversals, it’s important to remember that Sidechain, including Polygon, comes with its own set of security and downtime issues.

Rollups

Rollups are scaling solutions that combine multiple blockchain transactions together, storing transaction data in the main blockchain (on-chain), while the transaction is performed in a separate chain (off-chain). While legalizing on-chain transactions but relying on off-chain performance, rollups offer increased throughput and lower gas fees. At the time of writing, there are two main types of rollups: optimistic rollups and zero-knowledge proof (ZK proof). Although both options come with advantages and disadvantages, each has already shown promise.

By now you should have a good idea about gas fees and how they work. While much remains to be seen since the advent of ETH 2.0s, it is certain that gas fees will never be completely eliminated. So remember to always keep extra cryptocurrency in your wallet for gas. You’re going to need it.

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