Gas? No, this isn’t the one you use for cooking or fuelling your car 🌚. If you’ve ever made a transaction using cryptocurrency, especially on blockchains like Ethereum, you may have noticed something called a “gas fee” in the transaction breakdown.
And if you’re a newbie, you may have heard crypto bros complaining about expensive or high gas fees on some blockchains. What exactly is a gas fee in crypto, and why should you care as a trader? Let’s break it down the Quidax way 👇.
What is a Gas Fee?
A gas fee is a small payment you make to use a blockchain network when transacting on it. Think of it as a toll fee that everyone pays to access a road with a toll gate. In this case, the road is the blockchain, while the toll you pay is the gas fee.
So, whenever you do a transaction on any blockchain — whether you’re sending crypto to your guy for his birthday, swapping tokens like Ethereum (ETH) to Tether (USDT), or minting a non-fungible token (NFT) — you’re asking the network to process and confirm your transaction.
However, transactions don’t just happen because you say so (not even Satoshi, the founder of Bitcoin, or Vitalik Buterin, the co-founder of Ethereum, has that power). For crypto transactions to be processed, a group of people called miners (on proof-of-work networks) or network validators (on proof-of-stake networks) play a crucial role.
These people either complete a task to have your transaction allocated to them or use their computers to secure and verify the transaction. And their reward? The gas fee you pay.
Why Is It Called “Gas”?
The term “gas” is borrowed from the idea of fuel (which many Nigerians refer to as petrol). Just like a car needs gas to move, a transaction on a blockchain needs gas to be processed. The more complex your transaction, the more gas it needs to be processed.
For example, you’ll typically use less gas when sending ETH from one crypto wallet to another. Swapping tokens on a decentralised exchange (DEX) like Uniswap uses slightly more. Interacting with a complex smart contract might use even more gas.
Additionally, when many people use the blockchain for transactions simultaneously, gas fees increase due to congestion. It’s like the surge you experience when you order a ride to your date on Valentine’s night.
How are Gas Fees Calculated in Crypto?
Different factors determine transaction or gas fees in crypto. Unlike popular belief, Ethereum isn’t the only blockchain with gas fees. Other blockchains, such as Polygon, BNB Chain, and Avalanche, also charge gas fees. However, we’ll use Ethereum in this example, as it’s the most popular.
When calculating Ethereum gas fees, several factors come into play, including the ETH price at the time of the transaction, the transaction’s complexity, and the number of people conducting transactions at the same time as you.
Ethereum gas fees are usually charged in Ethereum’s native token, Ether (ETH). Since traders are not charged up to 1 ETH as a fee, a lower denomination of Ether called “Wei” is used.
For context, 1 ETH = 1 quintillion Wei (a quintillion is simply a number with 18 zeros after it).
So, a common wei denomination called gigawei (gwei) is used for gas fees. And 1 gwei = 1 billion wei. For context, 1 gwei = 0.000000001 ETH.
Total Gas Fee = Gas Unit * (Base Fee + Tip). Not all of us like maths, right 😂?
Now, let’s break down these three terms.
Gas Units
A gas unit is the maximum amount of fee (gas) you want to spend on a crypto transaction. When trading, it is essential to have a gas unit in mind and adjust it carefully from time to time, depending on the type of transaction you want to execute.
Base Fee
As the name implies, a transaction base fee is the minimum amount of gas you need to add your transaction to the Ethereum blockchain. However, base fees are usually determined by market demand, so they vary from time to time across different transactions.
Tips
Tips are also called priority fees, and they are the extra money you add to your transaction to make miners prioritise it. When there’s a tip, a miner knows it’s more money for them, so they’ll pick up and complete a tipped transaction faster.
Bonus Tip: If you set your gas unit at a lower price than the transaction base fee, your transaction will not be processed or completed. Instead, the blockchain will reverse it, and you’ll lose the gas fee you paid.
Now, let’s get practical.
If you want to surprise your crypto friend with 1 ETH on their birthday, and the average gas unit for an Ethereum transfer is 21,000 gwei, with a base fee of 200 gwei. But you want the money to hit his wallet as soon as possible, so you add 10 gwei as a tip.
For this transaction, your total gas fee will be 21,000 gwei * (200 gwei + 10 gwei) = 4,410,000 gwei or 0.00441 ETH.
So, with 1 ETH valued at approximately 3,900 at the time of writing this article, you’ll pay about $17 as the gas fee.
Why Are Gas Fees Important in Crypto?
Gas fees might seem like a cost eating into your money, but they are crucial in making blockchains run smoothly and securing them. Here’s why they matter on a deeper level:
1. They Prevent Spam and Network Abuse 🛡️
Without gas fees, someone could flood the blockchain with thousands of meaningless transactions, clogging the system. Gas fees make every transaction cost something, which discourages spamming and keeps the network running smoothly.
2. They Help Prioritise Transactions ⚡
When the network is busy, gas fees are higher than usual, making it necessary for people to pay more to get their transactions processed faster. This additional incentive helps the network to decide the most urgent or valuable transactions.
3. They Support Decentralisation 👥
Gas fees reward miners or validators who maintain the blockchain’s operation without relying on a central authority. These fees encourage more participants to help secure and maintain the network, making it stronger, safer, and more decentralised.
4. They Reflect Blockchain Activities 🧑🔧
High gas fees usually signify high demand and network activity. This data enables developers, investors, and users to understand what’s happening on the blockchain in real-time and make informed decisions.
Summary: Gas fees aren’t just extra costs. They’re a fundamental part of how blockchains work, ensuring fairness and efficiency.
Why Should You Care About Gas Fees?
Gas fees might seem like small change, but they add up quickly, especially if you trade often or use multiple DeFi platforms. Here’s why they matter:
- High Gas Fees Affect Your Profits
If you make a $100 trade but pay $25 in gas, that’s 25% gone. High gas fees can eat into your money. - They Can Cause Delays
If you set a gas fee too low, your transaction might get stuck, delayed, or even reversed, especially during peak periods. This could cause you to miss out on price changes or opportunities. - They Influence Strategy
Some investors plan their actions around low-fee times (like early morning or weekends). Others prefer to use lower-fee blockchains. - They Matter in DeFi and NFTs
In decentralised finance (DeFi), you might make several transactions to stake, borrow, or earn yield. Each one has a gas cost. The same goes for minting or trading NFTs.
How to Save on Gas Fees
- Use cheaper Ethereum-based networks, such as Arbitrum and Optimism, to incur lower fees.
- Consider cheaper blockchains like Solana, Polygon, or Binance Smart Chain (BSC).
- Avoid transactions during peak hours. If possible, wait till the congestion dies down.
- Use gas trackers like Etherscan’s gas tracker to monitor fees before you process a transaction.
Final Thoughts
Nothing comes for free, so gas fees are an inevitable part of the crypto world. They secure and incentivise the people who help run various blockchains. While these fees can be annoying, especially when they’re high, you now know how to find smarter and cheaper options.
So, next time you send crypto or swap tokens, remember that your little gas fee is the price to pay for doing business on the blockchain. But you don’t have to lose a chunk of your funds to fees, so you can always choose cheaper blockchains and crypto networks available on Quidax.
