Understand Gas Fees in Crypto

Gas fees are transaction fees required to use certain blockchain networks, most notably Ethereum. On Ethereum, gas measures the amount of computational effort needed to process transactions or execute smart contracts, with users paying for that computation in ETH.

The term “gas” is most closely associated with Ethereum and other networks that use the Ethereum Virtual Machine (EVM). Other blockchains also charge transaction or network fees, but they may calculate and describe those fees differently. For example, Bitcoin transactions generally involve fees paid to miners (often referred to as “network fees” or “miner fees”) rather than gas fees.

What Are Gas Fees?

In simple terms, a crypto gas fee is the cost of performing an operation on a blockchain. On Ethereum, every transaction requires some amount of computational work, and gas provides a way to measure and charge for that work.

The amount of gas required depends on what a transaction does. A simple transfer of ETH requires less gas than a transaction that interacts with a complex smart contract. Examples of activities that can require gas include sending ETH or tokens from one wallet to another, using decentralized applications (dApps), swapping tokens, and deploying or interacting with smart contracts.

Gas fees are paid in a blockchain’s native cryptocurrency. On Ethereum, for example, users pay gas fees in ETH.

What Is Gwei?

Gwei is a small denomination of ETH used to pay for Ethereum gas fees. One gwei equals one-billionth of an ETH, or 0.000000001 ETH. One ETH equals 1 billion gwei.

Because gas prices are typically small fractions of an ETH, quoting them in gwei makes them easier to read. For example, a gas price of 20 gwei is easier to understand than 0.000000020 ETH per unit of gas.

How Do Gas Fees Work?

When you submit a transaction on a blockchain, the network needs to process and record it. On Ethereum, the amount of computational work required is measured in units of gas. You pay a fee based on the amount of gas your transaction uses and the current price of gas.

Gas Limit

The gas limit is the maximum amount of gas that a transaction is allowed to consume. Crypto wallets typically estimate the amount of gas a transaction will need and suggest an appropriate limit. More complicated transactions generally require more gas because they involve more computation.

If a transaction uses less gas than its limit, the unused gas is not charged. If a transaction runs out of gas during execution, however, the transaction can fail and the gas already consumed is generally still charged.

Gas Price

The gas price is the amount paid for each unit of gas. On Ethereum, gas prices are generally expressed in gwei. Ethereum’s gas pricing system includes a base fee and a priority fee (or tip).

Base Fee and Priority Fee (Tips)

Ethereum’s transaction fee has two primary components:

•   Base fee: The base fee is set by the Ethereum protocol and must be paid for a transaction to be included in a block. It changes based on how much demand there is for block space. When blocks are more heavily used, the base fee generally increases; when demand falls, it can decrease. The base fee is burned, meaning it is permanently removed from circulation rather than paid to a validator.

•   Priority fee: The priority fee, also called a tip, is an additional amount offered to the validator proposing a block. A higher priority fee can make a transaction more attractive for inclusion, particularly when there is competition for block space.

Ethereum transactions can also specify a maximum fee per unit of gas, which limits how much the sender is willing to pay. If the transaction ultimately costs less than that maximum, the difference is not charged.

How Gas Fees Are Calculated

For a typical Ethereum transaction, the basic formula is:

Gas used × (Base fee + Priority fee) = Total gas fee

For example, suppose you send ETH using 21,000 units of gas when the base fee is 10 gwei and the priority fee (tip) is 2 gwei.

The calculation would be:

21,000 × (10 + 2) = 252,000 gwei

Because 1 billion gwei equals 1 ETH, 252,000 gwei equals 0.000252 ETH. So, in this example, the sender would pay 0.000252 ETH in gas, in addition to the amount of ETH being sent.

This formula describes Ethereum’s fee structure. Other blockchains can use different systems for calculating transaction fees.

Why Do Blockchains Need Gas Fees?

Blockchain networks rely on distributed computers to process and record transactions rather than a single central authority. Operating these computers requires hardware, electricity, and other resources. Transaction fees help compensate the network participants who provide these resources, while also securing the network against spam and malicious attacks.

Compensating Validators

On Ethereum, validators help maintain the network by proposing new blocks and attesting to (voting on) those proposed by others. In return, they receive rewards, including priority fees from the transactions included in those blocks.

While gas fees are integral to supporting blockchain operations, not all of the fee goes to validators. On Ethereum, the base fee is burned, while only the priority fee goes to the validator.

Other blockchains employ different reward and fee models. For instance, proof-of-work networks rely on miners rather than validators, incentivizing them with newly minted cryptocurrency alongside transaction fees.

Recommended: Crypto Staking vs Mining

Preventing Spam and Network Attacks

Fees also make it costly to flood a blockchain with fraudulent or meaningless transactions. Without transaction costs, a malicious actor could potentially submit large numbers of transactions at little or no expense, consuming network resources.

Gas also places a limit on how much computation a transaction can perform. This helps protect Ethereum from programs that would otherwise consume excessive computational resources or run indefinitely. If a transaction uses up its available gas during execution, the computation stops rather than continuing without limit.

Gas Fees and the Ethereum Virtual Machine (EVM)

The Ethereum Virtual Machine, or EVM, is the software environment that executes smart-contract code on Ethereum. Serving as the engine behind the network, it turns code into actions on the blockchain. Several other blockchain networks are also EVM-compatible, including Polygon, Arbitrum, and Avalanche.

On an EVM-compatible network, gas generally represents the computational resources required to execute an operation. The fee is the amount users pay for those resources.

What Affects the Cost of Gas Fees?

The cost of a blockchain transaction can vary based on several factors, including network demand, the amount of computation required, and crypto market activity.

Network Congestion and Demand

When many users want to use a blockchain at the same time, competition for limited block space can increase transaction costs. On Ethereum, heavy network activity can cause the base fee to rise. Users who want their transactions included promptly may also offer higher priority fees.

Transaction Complexity

The more computational work a transaction requires, the more gas it generally uses. A simple ETH transfer generally requires 21,000 units of gas, transactions involving smart contracts can require substantially more. For example, a transaction that performs multiple operations or interacts with a dApp may use more gas than a basic transfer like sending crypto from one wallet to another.

The amount of gas used is determined by the transaction’s operations, not simply by the dollar value of the assets being transferred.

Market Events

Crypto market activity can indirectly affect gas fees. For example, a sudden increase in activity surrounding a particular token or dApp can lead to more transactions being submitted to the network.The resulting increase in demand for block space can contribute to higher Ethereum gas fees.

The market price of ETH also affects the dollar value of a gas fee, even when the amount of ETH paid for the transaction stays the same.

Why Are Gas Fees Sometimes So High?

Gas fees can become expensive when demand for block space increases. Ethereum can process only a certain amount of computation in each block, so periods of heavy activity can create competition for that limited capacity.

When demand is high, Ethereum’s base fee can increase. Users who want faster inclusion may also offer higher priority fees. Transactions involving complex smart contracts can be particularly expensive because they require more gas. Gas fees can fall when network activity decreases, although the timing and size of those changes can be difficult to predict.

How to Reduce Gas Fees

Network fees typically go hand in hand with using crypto, but several strategies may help reduce the amount you pay.

Use Layer-2 Scaling Solutions

Layer-2 (L2) networks are built on top of Ethereum and are designed to process transactions more efficiently. Many L2 networks bundle user transactions off-chain and use Ethereum for final settlement and security.

Because L2 transactions generally require less costly use of Ethereum’s main network, they can have lower transaction fees than comparable transactions on Ethereum mainnet. However, fees vary by L2, transaction type, and network conditions. To interact with an L2, you generally need to use a compatible crypto wallet and configure it to connect to the specific L2 network.

Time Transactions During Off-Peak Hours

Executing transactions on the blockchain when network traffic is lower may be the simplest way to reduce gas fees.

While there’s no off-peak window that guarantees lower costs, gas prices go up or down every 12 seconds, based on network traffic. If you need to make a transaction when gas fees are high, even waiting just a few minutes could make a difference. Fees can change frequently as network demand changes. If a transaction is not time-sensitive, checking the current estimated fee and waiting for lower network demand may reduce the cost.

Smart Contract Optimization (for Developers)

Developers can reduce the gas requirements of their applications by designing and optimizing smart-contract code to use computational resources efficiently.

Strategies can include reducing unnecessary computation and storage, combining operations where appropriate, and using Layer-2 networks when possible. It’s also important for developers to test and optimize contracts before deployment, since inefficient code can increase the cost of transactions for users.

Gas Fees on Other Blockchains

Ethereum is not the only blockchain that charges users for transactions. Other networks have their own fee structures, which can differ significantly from Ethereum’s.

For example, Bitcoin uses transaction fees rather than Ethereum-style gas fees. Bitcoin transaction fees are generally influenced by factors such as the amount of data in a transaction and demand for block space. While Solana also charges gas fees, its fee structure differs from Ethereum’s model.

Some EVM-compatible networks also use the concept of gas, but their gas prices and other fee parameters can be different from Ethereum’s. As a result, comparing gas prices alone does not necessarily tell you which network will be cheaper.

It’s also important to consider the currency in which you are paying the fee. A fee quoted in gwei, ETH, SOL, BTC, or another cryptocurrency can’t be directly compared without considering the unit and the current market value of that cryptocurrency.

Gas Fees on Public vs Private/Permissioned Networks

Public blockchains generally allow anyone who meets the network’s requirements to submit transactions, and transaction fees can vary with network usage. By contrast, private or permissioned blockchain networks restrict participation to approved users or organizations. Some may use fixed fees, different fee structures, or no transaction fees for certain participants.

These networks serve a different purpose than open public blockchains. A private network’s lower or nonexistent transaction fees don’t necessarily make it a practical alternative if you want to use public cryptocurrencies or dApps.

How to Check Gas Fees Before Transacting

Crypto wallets, exchanges, and financial institutions that offer cryptocurrency services will typically estimate network fees and display them before you confirm a transaction. Providers may also offer different fee options such as “slow,” “medium,” and “fast.” These estimates can change before a transaction is confirmed because network conditions can change.

You can also use online blockchain explorers and gas-tracking tools to check current network conditions. For example, Etherscan provides an Ethereum gas tracker that shows current fee information.

If the estimated fee is higher than you’re willing to pay and the transaction is not urgent, you may choose to wait and check again later.

The Takeaway

Gas fees are the costs associated with performing transactions and other operations on certain blockchains. On Ethereum, gas measures the computational work required to execute a transaction, while the gas fee is the amount paid for that work.

Ethereum’s fee structure includes a base fee, which is burned, and a priority fee that goes to the validator proposing the block. The amount you pay can vary depending on the transaction’s complexity, network demand, and the market value of ETH.

Crypto wallets, exchanges, and trading platforms typically display your estimated network fees up front so that you fully understand the cost of a crypto transaction before confirming it. When fees are high, checking current network conditions and waiting for lower demand may help reduce costs.

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FAQ

What happens if a transaction runs out of gas?

If a transaction runs out of gas, the blockchain stops executing it and the transaction fails. The gas that was already consumed is generally still charged because the network’s computing resources were used. The transaction does not complete, and changes made during the transaction are generally reverted. A transaction can run out of gas if its gas limit is set too low for the operation being performed.

Why did I pay gas for a failed transaction?

You can still pay gas for a failed transaction because validators or other network participants used computing resources to process it. On Ethereum, the gas used during the attempted transaction is charged even if the transaction ultimately fails. The amount depends on how much gas was consumed before the transaction stopped, rather than simply whether the transaction succeeded.

Are gas fees the same on every blockchain?

No. Gas fees and transaction fees vary among blockchains because each network has its own rules for measuring computational work, processing transactions, and pricing block space. Ethereum and other EVM-compatible networks may use a gas-based system, while networks such as Bitcoin and Solana use different fee structures. Even among EVM-compatible networks, gas prices and transaction costs can differ.

Can gas fees be zero?

Some blockchain transactions may have no fee for the user, depending on the network and how the transaction is sponsored or structured. On Ethereum, however, transactions normally require a fee to be processed. Certain applications may pay or subsidize a user’s fee through mechanisms such as sponsored transactions. A “zero-fee” transaction therefore doesn’t necessarily mean that no one is paying for the network resources being used.

Who receives gas fees?

Who receives a blockchain’s transaction fees depends on the network. On Ethereum, the base fee is burned — meaning it is permanently removed from circulation — while the priority fee, or tip, goes to the validator that proposes the block. Although other blockchains use different fee and reward structures, transaction fees are generally paid to the validators, miners, or node operators who dedicate computing power or capital to secure and maintain the network.

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