As the Ethereum ecosystem has grown, the network has become known for its cripplingly high transaction fees. The boom in the decentralized finance (DeFi) markets now means that it’s prohibitively expensive to send all but the highest-value transactions on the Ethereum mainnet. In February 2021, fees peaked at a record high of over $38 per transaction.
However, while network traffic is one part of the equation, there’s a lot more to transaction fee calculations. When you pay a fee for an Ethereum transaction, what you’re buying is computer power.
How much or gas your transaction will consume depends on its difficulty. All Ethereum transactions are based on smart contracts of varying complexity. A simple ERC20 token is based on only a handful of lines of Solidity code, so a token transfer will need less gas than executing a more complex smart contract, such as minting the DAI stablecoin.
The cost of gas isn’t calculated on any fixed basis. It’s effectively a supply and demand market, where miners are incentivized to include transactions in blocks based on the potential for earning profit from their share of the fees. The gas cost must be enough for a miner to pay for the computing power needed, with enough on top to make it attractive enough for them to include the transaction in their next block.
Therefore, as an Ethereum user, you’re effectively bidding against other users to have your transaction picked for inclusion over theirs. The economics behind gas costs explain why, as the Ethereum network gets busier, transaction fees rise accordingly. It becomes a seller’s market, where miners can pick and choose the most attractive transactions, and users are forced to keep bidding higher to make sure their transaction doesn’t get shunted to the back of the queue.
The gas limit gives users some degree of control over how much they’re willing to pay for gas and how much they want to use.
A standard gas limit for an Ethereum transfer is 21,000 Gwei (for ERC-20s, it’s 65,000). You can decide whether you want to pay high, low, or average, and the simulator will calculate the probability of your transaction being included in the next block. Your transaction is likely to go through more quickly if you pay more. But if you want a cheaper fee, you may end up waiting until a miner takes pity on you.
Sites such as EthGasStation carry out simulations on how much gas you’d need to buy and how much you’ll pay for a transaction.
If you play around with the gas limit, you could reduce the amount of gas you’re willing to use, but the danger is that you’ll run out of gas before the transaction completes. In this case, the miner stops processing, reverts the smart contract to its original state, and takes the fee anyway. And you have to start all over again.
Similarly, there are risks with inflating gas limits. Ethereum blocks can only contain a maximum of 6.7 million Gwei. So if you offer a high gas limit, the miner may well pass over your transaction because it will limit the number of other transactions they can include in their block.
The Ethereum Virtual Machine (EVM) is the engine that processes Ethereum’s smart contract transactions, and it works on a Proof of Work consensus model, which hopes to incentivize the network.
Ethereum’s gas costs are so high because Proof of Work is so computationally expensive, meaning it consumes a lot of energy. Once Ethereum moves towards the lower energy Proof of Stake model in the much-anticipated Serenity upgrade, gas costs are expected to decrease significantly.
Other blockchains, like Tron and Binance Smart Chain (BSC), also use versions of the EVM, but they deploy lower-energy incentive models. In the case of Tron, it runs on delegated Proof of Stake, whereas the BSC runs on Proof of Authority. Therefore, you’ll pay gas costs on both of these networks, calculated in almost exactly the same way as on Ethereum. However, due to the lower energy requirement, the gas fees are significantly lower.
Gas limits and gas price economics aren’t a perfect system, particularly not when combined with Ethereum’s energy-guzzling Proof of Work model. The high costs of transacting on Ethereum have proven to be prohibitive for many users and developers of apps using micropayments, like games.
However, newer platforms demonstrate that the gas model works well when combined with a more efficient consensus system. As Ethereum transitions to Proof of Stake, we can hope that it once again becomes a more attractive place for developers and users alike.
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