Gas Fee refers to the transaction fee paid in a blockchain. The term was originally coined by Ethereum and was also later used for Ethereum-related blockchains like Optimism, Avalanche, Cardano, and BNB among many others. However, with time it was used in general to refer to transaction costs on a blockchain.
Gas Fee in a blockchain depends on several factors as network congestion, network utility rate, amount of state change, the type of transaction, and a few other factors.
Factors Affecting Gas Fees
Gas Price
What it is:
Gas price refers to the amount users are willing to pay per unit of gas to have their transaction processed. On Ethereum, gas is priced in gwei (1 gwei = 0.000000001 ETH). The price per gas unit fluctuates based on network demand and user competition, as gas is essentially auctioned. When demand is high, gas prices rise, and when the network is less congested, they fall.
How it affects gas fees:
The higher the gas price you set, the more likely your transaction will be prioritized by validators. In periods of network congestion, users may need to offer higher gas prices to ensure their transactions are processed quickly.
Gas Limit
What it is:
The gas limit is the maximum amount of gas you are willing to allocate for a specific transaction. Different transactions require different amounts of gas depending on their complexity. In Ethereum, a simple transaction like sending ETH has a minimum gas requirement of 21,000 units. More complex operations, like interacting with smart contracts, will require more gas.
How it affects gas fees:
If the gas limit is set too low, the transaction will fail and won’t be processed. Setting an appropriate gas limit ensures your transaction has enough gas to be completed without running out mid-execution.
Network Congestion
What it is:
Network congestion occurs when the number of transactions being submitted exceeds the blockchain’s ability to process them within a certain timeframe. For example, Bitcoin processes around 6-7 transactions per second (TPS), so if 10 transactions are being submitted per second, the excess creates a backlog, causing delays and higher transaction fees.
How it affects gas fees:
When Bitcoin’s network is congested, users need to offer higher gas fees to get their transactions included in blocks sooner. Congestion is one of the biggest drivers of increased gas prices.
Network Utilization Rate
What it is:
Network utilization rate refers to how much of the available block space (or “blob space“) is being used in Ethereum. This rate measures the extent to which the blockchain’s resources are being consumed by pending transactions and data.
How it affects gas fees:
A higher network utilization rate means that more of the available block space is in use, leading to increased competition among transactions and driving up gas fees.
State Change
What it is:
State change refers to the modifications made to the blockchain’s stored data as a result of executing a transaction. Any change in the state, such as token transfers, smart contract execution, or account balances, generates a “state change” on the network.
How it affects gas fees:
More complex transactions that generate large or numerous state changes (like deploying a new smart contract) require more gas. This is why smart contract deployments cost significantly more gas than simple token transfers.
Gas Limit (Wallet Setting)
What it is:
The gas limit can also refer to a user-defined limit set in Ethereum wallets, like MetaMask, which controls the maximum gas you are willing to pay for a transaction. This gives users the ability to manage transaction costs.
How it affects gas fees:
If you set your gas limit too low and the transaction requires more gas, it will fail, and the gas already spent will be wasted. Setting an appropriate gas limit ensures the transaction can be processed fully, even if it costs more than initially expected.
Priority Fee (Tip)
What it is:
The priority fee, often referred to as a “tip,” is an additional amount users can offer to incentivize validators (or miners) to process their transactions faster. With Ethereum’s transition to Proof of Stake, validators now include transactions in blocks.
How it affects gas fees:
Higher priority fees can push your transaction to be processed more quickly, especially during high network congestion. Validators prioritize transactions with higher tips since it increases their reward, meaning users who pay more in priority fees are likely to get faster confirmations.
Block Size
What it is:
The block size refers to the maximum amount of data that can be included in a single block on the blockchain. Unlike Bitcoin’s block size which is measured in bytes, Ethereum’s block size is measured in “gas limits,” determining the total amount of gas all transactions in a block can use.
How it affects gas fees:
If many users are trying to include their transactions in a block, and there isn’t enough space (or gas limit) for all of them, competition increases, driving up gas fees. A higher block size allows more transactions to fit, potentially lowering competition, but Ethereum dynamically adjusts this, meaning fees depend more on demand.
Smart Contract Execution
What it is:
Smart contracts are self-executing programs on blockchains that automatically run once specific conditions are met. These contracts often include complex logic and require gas for every operation they perform.
How it affects gas fees:
More complex smart contracts consume more gas because each line of code requires computation. If you’re interacting with a complicated smart contract (e.g., DeFi protocols, NFT minting, etc.), expect to pay higher gas fees. Simpler transactions, like sending ETH, cost less.
Token Transfer Type
What it is:
The type of token being transferred refers to the different standards of tokens on Ethereum, such as ERC-20 (fungible tokens), ERC-721 (non-fungible tokens or NFTs), and ERC-1155 (multi-token standard).
How it affects gas fees:
Different token types have different requirements in terms of gas. For example, transferring an ERC-20 token (like USDC) may be cheaper than transferring an NFT (ERC-721) because the logic involved is simpler. Multi-token transfers (ERC-1155) are optimized to be more gas-efficient, especially for batch transfers.
Validator Demand
What it is:
Validator demand refers to how many validators are active and available to process transactions on the Ethereum network. Validators confirm transactions and include them in blocks.
How it affects gas fees:
If demand for validators is high (e.g., in times of peak network activity like during a token launch), gas fees tend to rise because more people are competing for limited block space. Conversely, when the network is less congested, gas fees decrease because validators have more capacity to include transactions.
Gasless Transactions
Here, the gas fee is sponsored by the owner of the platform. This was a previous marketing technique to attract visitors that do not want to pay high gas fees.
However, they rarely matter these days as Ethereum has scaled enough to reduce gas fees.
How Gas Fee is Calculated?
Gas fee calculation needs the following:
- Gas Units used
- Base Fee
- Priority Fee
- Gas Limit
Total Gas Fee Calculation Formula
The following formula determines the total gas fee you pay:
Total Gas Fee=Gas Units Used×(Base Fee+Priority Fee)
For example, if you send a simple ETH transfer (21,000 gas units) with a base fee of 20 gwei and a priority fee of 3 gwei:
- Base fee = 21,000 × 20 gwei = 420,000 gwei (0.00042 ETH).
- Priority fee = 21,000 × 3 gwei = 63,000 gwei (0.000063 ETH).
- Total gas fee = 0.00042 + 0.000063 = 0.000483 ETH.
Adjustments Based on Network Conditions
- Under congestion: Base fees increase due to demand, and users might need to set higher priority fees to have their transactions processed faster.
- In low activity periods, Base fees decrease, and lower priority fees may still result in timely processing.
Pro Tips to Save on Gas Fee
- Transact in Non-Peak Hours: The number of people transacting on a blockchain drops significantly during the early hours of the day or anytime after 3 AM. Usually, there is a difference of 2x or 5x.
- Transact Using Layer-2s: Layer-2s are very safe these days, and Ethereum is making them even safer and a lot cheaper with the introduction of state proofs.
- Transact After Market Crashes: I have seen user activity drop after a market correction, and there is a significant drop each time the market crashes 10% or more.
