What Are Gas Fees?

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If you’re a long crypto participant, you will have spent your fair share of gas fee payments. For most, getting into NFTs such as the Bored Ape Yacht Club introduced them to the term however we’ll be looking at it in more detail. 

A Gas fee, also called a transaction fee, is the money you pay so your transaction can be processed and validated on a blockchain network. It is paid by the computer network to those who validate the transactions, as an incentive, to compensate them for the processing power it takes to secure the blockchain the way they do. It is similar to the processing fee you pay to banks or Fintech services like Payoneer, Moneygram, Swift and so on to process your transactions.

Unlike banks and fintech, however, blockchain transactions were envisioned by Satoshi Nakamoto to be free of “the cost of mediation” as he correctly put it. In practice it has not played out that way, to put it mildly. Transaction fees for Ethereum chain activities on OpenSea shot up to almost $2,000 for a single transaction

Compare that to what an average spends in a year on bank processing fees. So what is responsible for this boulder that stands in the way of the average not-wealthy person that crypto was meant to liberate?

 

Do we really need gas fees?

https://twitter.com/GoncentVanVinch/status/1486730321592664070?s=20

 

It doesn’t matter if you are sending a 0 transaction like in a smart contract, the network charges a transaction fee. But can’t we do away with the entire thing instead of complaining that gas fees are high?

Err, it’s not that simple.

The reason gas fees are paid to those who validate the transaction is that their validation is what keeps the network secure. This is especially true in Proof-of-Work chains like Bitcoin and Ethereum. The miners use special computers with really high processing power to choose what transactions to include in a block. It takes electrical power to keep those huge computers running, and they have to be purchased in the first place. The security of the blockchain would fall if there were no miners. It is only natural for them to be incentivised to keep the system secure.

 

What Is Gas On Bitcoin Like?

Called miners’ fees, Bitcoin gas fees were quite low in the beginning. As more and more people adopted Bitcoin, the processing power required increased, and with it the miner’s fee. It has spiked up to $60 when the network is really congested, like in the last months of 2017 during the ICO rush. 

Source: Ycharts.com

 

Bitcoin transaction fees are generally directly proportional to the data size of the transaction. Sending a transaction is actually sending data in bits. The network reads all separate inputs equally, whether it is $1 in the first transaction or $100 in the other. It costs the same fee to send $1 as it does to send a million dollars. This is unprecedented in the history of financial transactions!

However, if you send a million dollars in batches of $1,000, that is effectively 1,000 transactions, and you will incur a miner’s fee a thousand times of what you would have incurred sending the million dollars in one transaction. It is not exactly the same on Ethereum.

 

Why is gas high on Ethereum?

https://twitter.com/NFT_French/status/1461375329960873988?s=20

 

As with Bitcoin, network congestion on Ethereum ratchets up competition for block space and consequently drives up gas fees. This shows up massively on Ethereum beyond Bitcoin partly because smart contracts run on Ethereum. This is not just a one-off transaction but it can be multiple transactions from a single wallet in one minute. 

Source: Ycharts.com

The summer of 2020 was full of activity on the decentralised finance platforms built on Ethereum, and we saw a spike in price up to 0.03 ETH. In September 2020 Coinbase moved to list Uniswap’s native token and gas fees of UNI users was so high that Coinbase passed on the fees to users instead of taking it on as usual.

People screamed their heads off then. They thought they had seen it all. They had not. It did not cost as much in ETH terms this time, but because the price of ETH itself had gone up, the gas fee in dollar terms is staggering, reaching up to $400 on Uniswap and close to $2,000 on OpenSea as NFT and DeFi tend to require higher than the average.

Various other blockchains like Solana, Polygon, mostly Proof-of-Stake chains, have presented compelling alternatives to Ethereum’s problem of high gas fees. There are even solutions that have zero gas fees!

 

Blockchains with Near-Zero Gas Fees

As already mentioned, Solana furnishes its users with really low transaction fees in the neighbourhood of $0.005 per transaction. Polkadot uses its parachains for the business logic, freeing itself from the network congestion and staying feeless.

There are other blockchains that have found ways to almost eliminate gas fees for user transactions. You can find a collated list here.

 

Any solutions for Ethereum?

DeFi and NFT activity is picking up on Solana, Avalanche, Fantom and other blockchains, but the majority of smart contracts and engineers are still on Ethereum and Ethereum Virtual Machines that run on other networks. And gas fees are still an issue in 2022. 

Is there any solution? Firstly, yes. Cryptocurrency has drawn in some of the smartest people in the world, and these people have been working on this problem for a while. A couple of solutions are on the horizon. 

 

The usual occurrence is for users to budget gas as much as possible while requesting for their transaction to be processed, so that their transaction is not rejected. Sometimes when the congestion reduces just ahead of your transaction, you end up overpaying. Stable transaction fees are expected to end overpay. Upgrading to 2.0 is expected to take two years if all goes well.

Layer 2s and Zk-rollups have shown better results in reducing the cost of transactions. Layer 2 chains like Polygon take your entire transaction off the Ethereum network while maintaining the value of the Ether token. They let you move off the Ethereum network and back with virtually no cost. In June 2021 activity on Polygon reached seven million transactions, and the network decongestion it brought Ethereum was so massive that for the first time in six months, gas fees for Ethereum plunged to below a dollar!

Aave, Sushiswap and 1inch among others in the DeFi space have moved asignificant amount of their transactions onto the Polygon network. Cryption Network is building Polydex on top of Polygon to facilitate gasless transactions in DeFi. People now mint their NFTs on Polygon too. Considering the phenomenal momentum of innovation observable in the crypto space, other solutions to Ethereum high gas fees are definitely on their way.

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Disclaimer: The views expressed in The Coin Times are solely those of the authors cited. It does not constitute The Coin Times recommendation to buy, sell, or hold any investment. Before making any financial decisions, it is recommended that you undertake your own research. Use the information supplied at your own risk. For additional information, please see the Disclaimer.

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