Crypto Gas Fee Explained

Every decentralized transaction involves contract signing, which comes at a price, depending on the blockchain and some other underlying factors.

While Bitcoin and Ethereum are known to charge exorbitant gas fees, Solana, Bitgert, ADA, and many other proof-of-stake (PoS) blockchains (besides Ethereum) charge relatively lower gas fees.  

What is a gas fee, and how do they charge you for it?

What Is Gas in Crypto?

A gas in crypto is the computing power required to mine or validate a block in a blockchain. Gas usage varies between blockchains and depends on the energy, GPU, and RAM strength used while mining or validating a block.

Generally, gas usage for the Bitcoin network, which uses the proof-of-work (PoW) protocol, is typically high since validators need to scale their mining rigs to solve complex, energy-intensive hash puzzles at an optimized speed. On the flipped side, this is a competitive task. That's because the more work a mining rig does in extending the chain, the more reward it gets.

Ethereum was slower, less scalable, and required more gas when it was on the PoW consensus.

However, Ethereum transactions are now faster, and the network is more scalable into more layers since it moved to PoS in 2022.

Other altcoin blockchains (blockchains besides Bitcoin), including Solana, Cardano, XRP, Polkadot, and Avalanche, among many others, require lower gas usage as they use the PoS mechanism.

What Is Gas Fee in Crypto?

A crypto gas fee is a price you pay for each transaction on a blockchain. You can also view it as the money you pay for the gas consumed during a transaction. Whether you're getting rewards or buying a token in a transaction, the gas fee isn't included in the cost or profit. It's for the validators.

For example, if an Ethereum NFT mint is free, you still need to pay a fraction of Eth, also called gwei, for the transaction.

Hence, the gas fee is a form of incentive for validators or miners to extend the chain and protect the network.

Gas fees are always chain-specific and vary by transaction. A blockchain usually charges based on its native token. For instance, you'll get charged in Eth for buying an Ethereum NFT on OpenSea.

While gas fees are typically a fraction of the crypto involved, they can accumulate depending on the number of transactions recorded. This also depends on the crypto demand relative to its supply. Once the demand exceeds supply, the network gets busier, increasing the gas fee.

And if the chain is receiving unusually high transaction traffic, gas prices might increase, as more gas is needed to validate transactions. This is typical of the Ethereum network.

The crypto price is another factor that can influence the gas fee. For example, if Ethereum's price rises, the dollar equivalent of the gas fee also increases.

That's one of the reasons some crypto traders avoid buying when the market is bullish. You can set a gas limit during a transaction. But validators determine if the set limit is acceptable or not, depending on the limit set by others transacting at that instance. If others have set a higher limit due to transaction scuffle, validators might decline your transactions and go for higher limits.

What Determines Crypto Gas Fees?

With all that said, here are some factors that can influence the crypto gas fee:

1. Transaction volume: As said earlier, the higher the number of transactions occurring at a time, the higher the gas fee tends to increase. However, some lightweight blockchains, including Solana, are generous with gas fees, and transaction volume may not significantly affect the gas fee.
2. Crypto price: The amount you pay in fiat for gas fees increases if the crypto rises in value relative to fiat. This still boils down to the upward shift in market demand, though.
3. Crypto demand and supply: Higher demand for a cryptocurrency can choke the network, resulting in costlier validations. This is often the case when a token or a project is rare and more people are transacting at once. Rarity sometimes leads to a gas war, a situation where only people willing to pay higher gas fees get their transactions approved.
4. Computational power: Although many blockchains have adopted the PoS protocol, which is faster, more efficient, and more scalable, the mainstream chain, Bitcoin, uses the PoW—which requires high computational power for block completion.

How Are Crypto Gas Fees Calculated?

The gas fee calculation method may vary with time and upgrade. For instance, Ethereum's method of calculating the gas fee has changed since the London fork in preparation for merging to PoS.

Each blockchain has a specific way of calculating the gas fee. However, Ethereum's way of estimating the gas fee gives us an idea.

According to Ethereum's documentation, the gas fee is calculated by multiplying the gas limit unit by the sum of the base fee and the user's tip.

Here's the mathematical equation:

Gas fee = gas limit + (base fee x user's tip)

So if you're sending 3 Eth to a friend, for instance, and the default gas limit is 21,000 units. You then decide to tip the validator 3 gwei (0.000000003 Eth) in addition to the base fee of 10 gwei (0.00000001 Eth).

The network calculates the gas fee thus:

Gas fee = 21000 x (0.00000001 + 0.000000003) = 0.000273 Eth

Thus, the total amount of Eth you send to your friend is 3 Eth + 0.000273 Eth, equivalent to 3.000273 Eth. However, Ethereum says it burns a base fee of 0.00021 Eth to improve Eth's rarity and increase its market value. So, this is removed from the computed gas fee, and the validator gets 0.000063 Eth.

How to Avoid High Gas Fees?

While many factors determine the gas fee, there are a few things you can do to avoid high gas fees on networks like Ethereum:

1. Use a layer 2 (L2) blockchain on Ethereum. An L2 blockchain is a super-chain, scaled version of Ethereum. So transactions are typically cheaper and faster on L2s.
2. Only transact when the demand is low or when the network is less congested. Weekends and midnights might be the best time to transact in web 3.0 if you want to reduce gas fees.
3. Switch to blockchains or networks with lower transaction fees. While this isn't financial advice, it reduces the gas fee you pay per transaction.
4. Use DApps that offer discounted transactions or use those that refund a percentage of your gas fee. While the latter is rare, an NFT marketplace like Blur rewards high-volume traders with the $Blur token.
5. Use gas fee calculators to estimate the gas fee before transacting to avoid spending beyond your budget. For this, we recommend Cryptoneur. Blocknative also comes in handy and provides gas-tracking extensions for Chrome, Firefox, and Brave. However, its usage can be a bit technical.
6. Study the daily Ethereum gas behavioral trend using chart tools like Ethereumprice.

Gas Fees Are an Integral Part of Web 3.0

While you may not completely avoid gas fees in web 3.0, improvements keep coming to how validators' machines consume gas.

For instance, Ethereum's L2 blockchain adopts a mechanism that reduces gas usage considerably, reducing the gas fee and making life easier for users.

So you might look forward to a point where you pay lower fees altogether---even on Ethereum. This is still speculative, though, since gas fees tend to increase as network usage rises. However, consistent upgrades and scaling have prevented this in many Ethereum and Bitcoin alternatives like Ethereum L2, Solana, XRP, and Bitgert.

Ultimately, the system can't afford to stop rewarding block validators for blockchains to keep existing.