Gas is the fee paid for sending transactions on the Ethereum network. Whether you’re sending ether tokens, transferring any other ERC-20 compatible cryptocurrency, or running a smart contract on the network, you should plan on paying a modest fee for the transaction.
If you have any interest in cryptocurrency, understanding how Ethereum gas fees work is an important concept. In this article, we will look at how Ethereum gas works, how you can estimate your gas fees, and how you can work to minimize your expenses when transacting on the Ethereum network.
Definition of Gas
According to the developer team behind Ethereum, gas is the “fuel” that allows Ethereum to operate, similar to how you need to put gas in a traditional gas-powered car or truck to drive. But unlike filling your car at the pump, there’s a lot of complex math and computer work that determines gas prices and who gets paid.
Behind the scenes, countless computers are hard at work running the Ethereum network. These energy-intensive “miners” track every past and current transaction on the network. To help pay for the electricity and computer costs, those who buy and sell on the network have to pay those computers a fee. That’s where the gas comes in.
How Gas Works
Ethereum gas runs on a system of supply and demand. If the network is very busy and miners are struggling to keep up, gas prices rise. If the network is experiencing a slower period with excess mining capacity, prices drop.
Gas fees are typically measured in “gwei" and fluctuate with the price of the popular ether cryptocurrency (ETH). One gwei is equal to 0.000000001 ETH.
Not only do prices rise and fall with market demand, but you can also choose to be patient with your transaction for a discount or pay more gas to get to the front of the line. These fees don’t just apply to the ether token. Other ERC-20 tokens also run on the Ethereum network and require similar gas fees.
The Ethereum network is undergoing a major upgrade to version 2.0. This is intended to facilitate faster transactions with lower gas prices.
Gas limit is the maximum amount of gas you’re willing to spend on a transaction. Typically, the gas limit for simple ETH transfers is 21,000 units of gas. Complicated transactions involving smart contracts, which require more computational energy for verification, may require a higher gas limit.
For example, if you set a gas limit for 50,000 units of gas for an ETH transfer that requires only 21,000 units, you will get back the remaining 29,000 units. If you set the gas limit too low, your gas units will get consumed but the verification task will remain incomplete.
The price of gas and gas limits are set by the investors, and they are what determine the total transaction fees.
For example, Sam wants to transfer 1ETH to Nina. If the gas limit is 21,000 gas units and the gas price is 300gwei, the total transaction fee will be:
Total fee = gas limit x gas price = 21,000 x 300 gwei = 6,300,000 gwei or 0.0063ETH
A total of 1.0036ETH will be deducted from Sam’s wallet, with 1ETH going to Nina and 0.0036ETH going to the miner.
Do I Need Gas?
If you are transacting on the Ethereum network, you need to pay gas fees. This is the way gas was designed. However, you don’t need to buy gas or pay ahead. The gas price is simply added to your transaction.
All participants in Ethereum and other ERC-20 currencies have used gas even if they didn’t realize it.
Remember, gas is separate from any fees charged by your preferred crypto exchange like Coinbase.
Alternatives to Gas
If you don’t want to pay gas fees, you’re going to have to find an alternative cryptocurrency. However, you should expect to pay some sort of fee for any crypto transaction. That’s how the blockchains work—and how the miners get compensated for the hard work and expense they incur to facilitate your trade.
If you want to save on cryptocurrency fees, consider an altcoin like Stellar Lumens, Nano, Dash, or Iota.
Pros and Cons of Gas
Easy to use
No pre-purchase needed
Supports many cryptocurrencies
Can be expensive
- Easy to use: Gas is built into the network, so you don’t have to do any math or pre-planning unless you want to work to lower your transaction fees.
- No pre-purchase needed: You don’t need to keep a store of gas to transact. It’s deducted from your linked ethereum wallet automatically.
- Supports many cryptocurrencies: Gas supports an extensive network of cryptocurrencies, including Ethereum.
- Can be expensive: If you want a fast transaction or to send a transaction during a busy period, costs can be very high. The helpful ETHGasStation website helps you determine what you’ll pay before clicking the send button.
What Gas Means for Individual Investors
Transactions on the Ethereum network require gas fees to be paid. This is the incentive you are offering to miners on the network to choose your transaction to verify over other transactions out there.
If you set your transaction gas price too low compared to what’s being offered for other transactions, then your transaction may get “stuck” or remain pending. They will stay this way until gas prices drop and a miner considers your transaction worthwhile to process.
Investors should factor gas into the costs that they expect to incur for the transactions, including transferring tokens or even buying NFTs on the network.
Investors should especially watch out for expensive gas fees on transactions that could potentially even double their costs.
- Ether and many other coins and smart contracts that run on the Ethereum network require gas fees.
- Gas fees go up and down with market demand and transaction type.
- Gas prices are expected to fall with the Ethereum 2.0 upgrade.
- Your transaction may get stuck or remain pending if your gas offer is too low.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.