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Gas Fees: What They REALLY Mean

●   5 min

High gas fees are a major hurdle in the mainstream adoption of cryptocurrency. Understanding more about crypto transaction fees will help you set the right amounts, avoid overpaying for network usage and achieve speedy transactions.

Here are some things you will be learning about gas fees today:

  1. How they are calculated by different networks
  2. The relation between the transaction fee and its settlement period
  3. Why gas fees are high at certain times

What are gas fees?

The gas fee is the transaction charge for transferring digital assets from one wallet to another. A gas fee is also charged for interacting with a smart contract on a blockchain network like Binance, Ethereum, or Solana. You have to pay this fee to miners or validators on the network to include your transaction in the block. 

When are they paid?

A gas fee has to be paid for every transaction on a blockchain. This fee is not a fixed amount and it fluctuates constantly due to various factors.

Who are validators or miners?

Those who validate transaction blocks to the blockchain are called ‘miners’ in the Proof-of-Work (PoW) network while they are referred to as ‘validators’ in the Proof of Stake (PoS) blockchains.

The miner/validator who adds your transaction to a block receives all such transaction charges in the block they add to the blockchain.

Why are gas fees needed?

  • The gas fee incentivises validators/miners to set up and operate the crypto mining rigs needed for processing crypto transactions.
  • The gas fee helps streamline the network traffic by creating a priority for the transactions waiting to be confirmed. 
  • This also plays a role in burning the circulating supply of network tokens.

How are gas fees calculated?

From Bitcoin to Ethereum, Binance and Solana, there are many networks that use different formulas for calculating the gas fee. 

In general, the amount of gas fee you pay on a specific network and the speed at which the transaction gets confirmed is determined by the network’s:

  1. Block limit
  2. Block time 
  3. Current transaction volume
  • Bitcoin gas fees are pretty simple and are calculated based on just the network congestion.
  • The auction-style fee model is used by both Ethereum and Bitcoin. This means that the one offering the maximum gas fee gets his transaction completed first. The highest bidder wins. This depends on network congestion at the time of the transaction and requires some smart guesswork.
  • Transactions on Ethereum are a lot more complex. Transferring ETH between wallets is much cheaper compared to minting an NFT on the same network. Some transactions are computationally more intensive and can get quite costly for the user.
  • Solana removes the guesswork from the auction-style fee model using deterministic transaction fees. The required rate for a transaction is set by the network based on the number of digital signatures from previous blocks, as well as, the number of signatures needed for completing the transaction.
  • Block time and block size are both vital parameters for determining gas fees. Compared to smaller blocks, large blocks on a network can handle more transactions per second. Faster block times also make a significant difference. So despite higher network traffic, the gas fee does not spike up so much.

However, large blocks with fast block time require miners and validators to invest in costly computer hardware. This leads to a smaller, more centralised network of validators and negatively impacts network decentralisation.

  • Layer 2 scalability solutions such as Polygon help reduce Ethereum gas fees and significantly speed up transaction times.

While Ethereum was notorious for its exorbitant gas fee, Binance was able to gain a solid foothold in the industry with its significantly lower transaction rates.

Innovative new networks continue to experiment with methods to lower the gas fee even more and attract additional users.

What currency is used to pay gas fees?

A blockchain network’s native token is used for paying the gas fee for transactions on their network. You have to pay in ETH for Ethereum, BNB for the Binance Smart Chain, SOL for Solana and so on.

How can I view the gas fees that I’m paying?

You can view the gas fees from the interface of your wallet. When you start a transaction, you will receive a request to pay the transaction fees.

As you can see in the below image, the gas fee for the BSC network is clearly mentioned in BNB and it is editable. This means you can change the fee amount as you wish. Setting a higher fee speeds up the transaction when the network is congested.

Why are gas fees so high?

How much the gas fee will cost is a matter of demand and supply. When there is too much demand, the cost rises accordingly. The more congested the network, the higher the fees.

For most blockchains, there is a limit to the data that can be added to each block. So when a miner processes a block, he tends to select transactions with fees that offer him maximum profit. When a miner or validator adds a block to the chain, they are usually rewarded with the blockchain’s newly minted native coins, as well as, the fees for all the transactions they added to that block. 

Without an adequate fee offer, you may have to wait quite some time to get your transaction confirmed. If there are others paying higher fees, the miners will process those first to fill their block and you end up waiting.

When there is a lull in the network activity, you can get away with paying a low gas fee. If there are not enough transactions to fill a block, it economically makes sense to accept low fees than no fees at all! 

However, when the activity levels rise, it gets expensive to use the network as there are too many transactions waiting for confirmation.

If the network is congested and your transaction is not validated, it eventually reverts back to your wallet after several hours. At times, it may take days before it reverts, leaving many people panicking they’ve lost their tokens.

Ethereum is well known for its ridiculously high network fees. On May 12, 2021, the average Ethereum gas price hit a whopping $70! On Nov. 9, 2021, when the Ethereum Name Service (ENS) airdrop was launched, the gas prices spiked to $63, the second-highest level in network history for average gas price.

Using Ethereum-based Defi protocols can cost as high as $150 to even $500 for a transaction. It’s best to let such gas insanity subside before you attempt any transactions. Recent updates have lowered Ethereum fees to an extent, but they are still quite high compared to other blockchains.

Conclusion

While gas fees are unavoidable when using crypto transactions, you can optimise your transaction timing if you understand how this system works. Using layer 2 blockchains also helps reduce the amount you spend on gas fees.

Gas fee depends on various factors including the complexity of the transaction and the traffic on the network.

Once you understand how your gas fee incentivises miners to validate your transaction, you will get better at getting your transaction validated at the earliest without paying excessive fees!

At Krystal, we offer multiple DeFi services in the convenience of one platform.

This includes swapping tokens using the best rates, bridging your tokens to different networks and earning passive income.

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