Blog Crypto What is gas in cryptocurrency? Gas fees explained

What is gas in cryptocurrency? Gas fees explained

date March 26, 2021 time 6 min read 3342 views

The terms ‘gas’ and “gas fees” were introduced on the Ethereum network as a measure of the cost of validating transactions. These transactions include crypto swaps, exchange, trading, crypto transfers, among others. The gas concept helped to distinguish between the actual value of the ETH crypto and the cost of computational power used to validate transactions on the Ethereum blockchain. Over time, gas fees in crypto have become a synonym for network fees charged to users to validate transactions on other blockchains.

On March 14th, 2021, Business Insider Africa reported on a user named Martin who bought an NTF worth $30 on Rarible (an Ethereum-based digital assets marketplace). Martin was surprised when he ended up parting with an extra $200 in gas fees. More than six times what the NFT was worth.

So what does gas mean? Why do you have to part with tens and sometimes even hundreds of dollars for a small, single transaction? And is there a way around it?

Read on to find out how gas fees in crypto work and how to save your hard-earned money when carrying out crypto transactions.

Crypto transactions on most blockchains have massive hidden costs in the form of crypto gas fees
Crypto transactions on most blockchains have massive hidden costs in the form of crypto gas fees (source: bitcoinwiki.org)

What is gas in cryptocurrency?

Simply put, gas is the computing power needed to validate a particular transaction on Ethereum. On other blockchains like Bitcoin, gas is referred to as “network fees”.

Ethereum happens to be the most popular blockchain in the market right now, hosting over 3,000 DApps (decentralized applications), 4X the number of DApps on most blockchains. Most developers prefer to build their projects on Ethereum because it is feature-rich and easy to use. 

Miners on proof of work blockchains like Ethereum validate every transaction using computational power or electricity to mine. You, the user, must pay for this power in the form of gas or network fees.

How transactions are verified on blockchains

Transactions on a blockchain are validated either through the Proof of Stake (PoS) or Proof of Work (PoW) methods
Transactions on a blockchain are validated either through the Proof of Stake (PoS) or Proof of Work (PoW) methods (source: youtube.com)

There are two main methods of validation on a blockchain: Proof of Work (PoW) and Proof of Stake (PoS) mechanisms. 

PoW blockchains refer to networks where transactions are validated by complex computations from miners. These computations require lots of electricity which leads to higher gas fees. Ethereum and Bitcoin fall under PoW blockchains. 

In PoSblockchains, validators earn the right to validate transactions and earn interest from network fees based on the value of crypto they have locked up (staked) in the network. Since PoS blockchains do not require large amounts of energy to approve transactions, users pay fewer network fees. Examples of PoS networks are Cardano and Cosmos. It’s worth noting that Ethereum has plans to become a proof of stake protocol in the future to cut gas fees.

What is gas in Ethereum?

Since Ethereum is a PoW blockchain, miners use computer power to validate transactions. The introduction of gas fees helped to separate the cost of computational power used on Ethereum from the cost of the Ethereum cryptocurrency. 

Gas is measured in Gwei which is another word for a unit of about 0.000000001 ETH. Similar to comparing dollars to cents.

While gas is a term specific to the Ethereum network, today, ‘crypto gas fees’ have become a synonym for network fees on other blockchains.

How to calculate crypto gas fees on a blockchain

You will incur network fees for every transaction you need to carry out on a blockchain. 

Transactions include anything that requires crypto to move from one wallet to another:

  • Depositing and withdrawing crypto from an online account.
  • Transferring crypto from one wallet to another.
  • Crypto trades and exchanges.

Gas fees depend on two factors:

  1. The size of your transaction or any other factors that could make the transaction use more network resources. Fees are lower for less complex transactions.
  2. The number of transactions waiting to be validated on the network (network congestion). Fees are lower in networks with less congestion. 

DeFi projects built on the Ethereum network often suffer from insanely high gas fees (as is the case with Rarible.) This is because the Ethereum network already has a congestion problem.

What are crypto gas limits?

A gas limit is the maximum amount of gas (computational power) you are willing to pay for to process and validate a particular translation. Ethereum lets you set your preferred gas limit but there’s also a standard gas limit for all ETH transactions which is 21,000 units. 

Setting your gas limit is tricky because you need to ensure that you set just the right amount of gas. 

If you set a lower gas limit and your gas runs out before miners finish validating your transaction, you cannot recover used gas since miners have already used up computer power on the incomplete transaction. 

However, if you have set a higher gas limit than you need, you can recover unused gas.

Note that even when there’s enough gas and miners fail to validate your transactions, you still have to pay gas fees.

What is crypto gas price?

Gas price is the price of one unit of gas. One Ethereum, this is measured in Gwei. The price of gas can go up depending on the demand and supply of computational power or congestion on a blockchain. When there’s less demand, prices are lower and vice versa.

Crypto gas limits vs gas prices

On Ethereum, gas fees are a component of gas limit and gas price. 

gas fees = gas limit * gas price

Crypto Gas fees also depend on the speed of a transaction

If you want to send Ethereum from one wallet to another, some wallets like MetaMask allow you to choose how fast you want your transaction to be verified. 

There are slow, average, fast, and advanced options. Faster transactions attract the highest fees and slow transactions are cheaper. With the advanced option, you get to set your gas fee rather than accept the given options.

How you can pay less in crypto gas fees

Now that you know how gas fees work, how can you ensure that you pay lower fees when you are using a crypto DeFi product? Here are several ways.

Carrying out many small transactions means that you have to pay gas fees for every transaction. This may cost you more gas fees. If you wait it out and combine all those small amounts into a lump sum you may save a significant amount on your transactions.

Watch out for times when network activity is low/uncongested

More transactions waiting in line to be verified on a blockchain equals higher crypto gas fees
More transactions waiting in line to be verified on a blockchain equals higher crypto gas fees (source: blog.paperchain.io)

You may save a lot on moving your crypto by rescheduling non-urgent transactions. Network congestion often follows predictable patterns based on the number of crypto users on the network.

To help you know when a network has less traffic, you can check its gas price chart. The Ethereum gas price chart shows less activity and hence lower gas prices (between 89 and 99 Gwei) on Saturday and Sunday at around 09:00 – 10:00 AM.  These can be good times to transact at lower gas fees. 

Estimate enough gas to avoid running out

As discussed earlier,  you do not want your gas running out before miners validate your transaction. In these cases you still pay a fee even though the transaction fails.

Luckily, you can use tools such as Gas Now and ETH’s gas tracker to help you estimate the gas you’ll need for your transaction. 

Go for the slow transaction option for non-urgent transactions

Transactions that confirm almost immediately are significantly more expensive than those that take longer. When you can wait, choose the slow option. 

Move your transactions to a sidechain/layer 2 protocol 

Sidechains are independent blockchains that are compatible with Ethereum (or other underlying blockchains) but employ their own consensus mechanism to validate transactions. That means you can move your crypto to a sidechain to carry out faster and cheaper transactions. When you need to, you can move your crypto back to the original blockchain.

If you’re a developer on Ethereum, you can build your project on more affordable and less-congested developer-targeted sidechains like SKALE, Loom, and Polygon.

Use tokenized gas

There’s an emerging concept letting you save on gas by using ‘tokenized gas.’ This involves buying gas when it is cheap and storing it in the form of tokens. You then deploy it when the prices go up. 

Choose DeFi platforms that let you carry out internal transactions with 0 transaction fees

As a crypto user, gas or network fees may not be all you have to deal with. 

When you’re carrying out transactions within a DeFi platform, you may also get slapped with internal transaction fees.

To avoid internal transaction fees, choose DeFi platforms that let you carry out 0-cost transactions within their platform.

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Tags: what is gas limit and gas price what is gas in ethereum crypto transfer fees gas fees crypto crypto gas price what does gas mean crypto gas limit gas limit vs gas price what is gas in cryptocurrency

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