Cryptocurrency Gas Fees

Fredrick Awino
21.08.2022
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Probably you have come across the increasing talk about the high energy demands for bitcoin mining. It doesn’t come easily to understand how is cryptocurrency mining and energy related. But, there is a strong linkage which recently made lawmakers in the USA concerned. This topic “US Congressional Group ‘Disturbed’ by Crypto Mining Energy Usage” features prominently in US periodicals pointing to an emerging concern about cryptos.

WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.

You remember that we in our previous articles showed that cryptocurrency mining is one of the ways to own the coveted bitcoins. However, the art and science of crypto mining is an expensive as well as high energy demanding. This energy demand is not only incurred during mining but also processing transactions. No wonder the concept Cryptocurrency Gas Fees now becomes an important talking point.

Initially, blockchain transactions were cheap before 2020. However, with the increase in NFTs and Web3, the price of mandatory blockchain transactions is the main barrier to entry for mainstream adoption.

A gas fee is a fee that is needed in conducting transactions. It also helps in executing contracts that take place in the Ethereum network. Its main aim is to compensate for the computing power utilized in processing the interactions.

The gas fees are utilized in rewarding miners for their computing power utilized in the verification of transactions. The gas fees mainly depend on the network’s processing power. For instance, in case the network has several transactions, then the demand for processing power will be high. In the end, it means that there will be increased gas fees.

The Way the Gas Fees Work

Cryptocurrencies including Ethereum work on a blockchain which is a digital ledger of transactions distributed to a decentralized network. It is different from cloud computing which is a centrally managed computing process.

The gas fees that people pay to go to the crypto miners. These are the people whose computers are utilized in validating transactions block in the Ethereum blockchain network. The gas is usually paid in Ether, which is the native currency of Ethereum.

In computing the gas fees, the following formula is used.

Total fee = gas units x (base fee + tip)

The gas units refer to the maximum amount of gas that a trader is willing to pay in completing a transaction. Different kinds of transactions in the Ethereum network need a varied amount of gas in completing a transaction.

Moreover, the base fee refers to the minimum amount needed in including a transaction in a certain block. The network computes the base fee based on block space and demand. When there are a high number of people using the Ethereum network, the base fees get higher. In case a block is mined, then the base fee is burned. This removes it from circulation.

The Reasons behind High Ethereum Gas Fees

Ethereum’s gas fees are a bit expensive. They are high in tasks such as transaction validation in decentralized applications and minting of NFTs. One of the reasons is because Ethereum utilizes energy intensive proof of work model.

The other reason why the gas fees are high is because of the computing processes. Ethereum has put a limit on the number of transactions carried out every second. As I said earlier, when the network is busy, the gas fees will be high. This is because, during this time, the Ethereum users provide a higher tip in increasing their place in line.

Furthermore, Ethereum the flexibility of Ethereum has made it soar in popularity. As more developers are using it, then the gas fees also increase. In addition, transaction complexity increases the fee amount. Also, executing a smart contract needs storing, managing, and recording a large amount of data.

Ways of Reducing Ethereum Gas Fees

For the past months, the Ethereum gas fees have been rising. This issue has made the network to be unstable. Just like a car, the Ethereum network requires fuel in securing operation. It is called gas fees. However, we need to know the ways we can use in saving money on them.

The first way of reducing the gas fees is by exploring the Ethereum Layer two solutions. The transactions which happen in layer one (Ethereum Mainnet) are expensive because of congestion. Therefore, there are layer two solutions, which assist the users to scale up the transactions. Transaction fees are reduced in layer two as it uses technologies including moving transactions and Rollups to the sidechains in the network.

Using simulation through the DeFi saver is another way of reducing the gas fees. There is no need of knowing the actual gas fee till you complete the transaction and pay for gas. Thus, as a trader, you may use the DeFi saver application in simulating transactions.

The other way of reducing the gas fees is by organizing transaction types. The reason is that the gas fee does vary with the kind of transaction that takes place in the Ethereum blockchain. Therefore, in saving the gas fees money, you should execute and organize the same transactions together.

Assessing network congestion in planning ahead may also assist in reducing the transaction fees. When there are many transactions, there are high chances that your transaction will be on hold. During the on-hold period, the gas fees that you agreed on will have increased. If the miners commence executing the transaction, then it might fail as you would have set up the gas limit below the current rate. In the end, you will have to pay gas fees

Author Fredrick Awino