What are Gas Fees?

After the introduction of cryptocurrency in the modern day economy, the way investing is done has changed. People have started thinking about their money very carefully and most of them don't want to let their money go to waste. 

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That is one of the reasons people turn to the crypto world. Now the crypto world might not be as stable as some other options but with its high risks come the high rewards that people love so dearly. So if you have decided to invest in a cryptocurrency, then this article would help you understand one of its key things.

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We will be telling you all there is to know about the gas fee or the Ethereum gas fee to be more specific. If you have ever wondered what gas fee exactly is or how it is calculated, then this article was written especially for you. So stick around and gain all the knowledge you seek.

What Is The Gas Fee?

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In its simplest form, a gas fee is basically an incentive paid to the miners as a reward for verifying transactions on Ethereum blockchain. This gas fee is paid by users performing transactions and it motivates miners to actively take part in validating them and thus keep the blockchain working. 

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In other words, Gas fee is the fee or pricing value that is necessary to complete a transaction on the blockchain platform. It is used in executing contracts on Ethereum as well. Gas fees on Ethereum are a small fraction of the cryptocurrency Ether (ETH).

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These are sometimes also known as gwei or nano-eth. The gas fee is used to allocate resources of the EVM so that a number of decentralized technologies like the smart contracts can work safely and securely without having the risk of being compromised.

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You can say that the Gas fee is very important to the Ethereum network as it is the very fuel that enables the blockchain to operate or run. It is a unit that measures the amount of effort required by the blockchains to carry out certain operations and then the fee that is charged to do it all.

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What Is Gwei?

Earlier 'gwei' was mentioned. It is another thing you would need to understand to completely absorb this topic. The gas fee is denoted in gwei. Gwei is a fraction of an ETH. If you were to evaluate 1 gwei then it would be equal to 0.000000001 ETH or 10^-9 ETH.

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The word gwei was derived from 'giga-wei' where 1 gwei is equal to 1,000,000,000 wei. 1 wei is the smallest unit of ETH present out there.

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To simplify it:

1 gwei = 0.000000001 ETH or 10^-9 ETH

1 gwei = 1,000,000,000 wei 

1 wei = the smallest unit of ETH

How Does Gas Fee Work?

Ethereum gas fee is one of the trending topics discussed in the crypto space and people are not really happy with it. However, we need to understand that gas fees are essential and can not be removed or eliminated from the Ethereum network. If you are wondering why then let us understand how this gas fee actually works. 

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As you might already know, Ethereum is one of the largest blockchains of all time. This blockchain is of course decentralized and thus there is not a single organization that controls the whole ecosystem. 

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Therefore, there has to be some way to incentivize miners so that they can meet the growing demand for validating transactions. Therefore, to validate the large number of transactions being carried out on the Ethereum network, miners from all over the world spend energy and are then rewarded with this gas fee along with some freshly mined ETHs. 

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Ethereum is the largest platform of dApps and hence there are numerous applications running on the Ethereum network. Ethereum blockchain has to take care of all the transactions including on and off-chain dApps, smart contracts and transactions of usual users.

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However, miners cannot validate all of these transactions simultaneously and hence a priority fee is currently used by this blockchain about which we will talk in a while. This priority fee is an additional fee over the base gas fee and users can put their transaction in priority by paying a higher fee than the rest of the transactions. 

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The miners will validate these transactions first while other transaction would be kept in “mempool” to validate sequentially after these transactions. Let’s take a look at certain terms to get a better idea about Ethereum gas fees and how it is calculated.

Ethereum Gas Fees And The London Upgrade 

The London upgrade performs an important role in the way we see the Ethereum Gas fees. This update took place in August 2021 and it redefined the way gas fees are calculated. To understand all new changes in the gas fees, first, we would have to take a look at how things used to work before the London upgrade. 

Calculating Gas Fee Pre-London Upgrade 

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Earlier, if you had to transfer say 1 ETH to someone, you would have to pay 1 ETH along with the Ethereum gas fees. To calculate this fee, you would have to multiply the total gas fee units by the current gas price per unit. 

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Here, the gas limit is 21,000 units and the gas price per unit is 200 gwei. Thus the Ethereum gas fee can be calculated as follows:

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Gas Fees= Total gas units x per unit price of gas 

                 = 21,000 x 200

                 = 4,200,000 gwei 

                 = 0.0042 ETH

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Therefore, to complete the transaction of 1 ETH, the total amount you will have to pay will be 1.0042 ETH, out of which, the gas fees of 0.0042 ETH will be credited to the miner's account. Later on, this system transaction fee model was changed with an upgrade. 

Calculating Gas Fee Post-London Upgrade

Earlier we have seen that to calculate the gas fees we need two values which are gas units and price per unit of gas. Whereas, the revised model includes a base fee, gas units and an additional tip. Let us see how it works.

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First of all, you must be wondering what the base fee is. Every block added to the blockchain has its base fee. The base fee of the current block is determined by the base fee of previous blocks on the network. This fee is highly controlled by the supply-demand system. Since the demand for the Ethereum network is more, we get to see a higher base fee for Ethereum.

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However, as per this new London upgrade, the base fee you are paying won’t be credited to the miner’s account. Instead, you will have to pay an additional fee which is called a tip. This tip is also called a priority fee as it can be used to put your transaction on priority by paying a higher priority fee. 

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Let’s consider the same example we saw above. This time to transfer ETH we will take into account gas units, base fee and additional priority fee. Let’s see how this works out in the post-london upgrade of Ethereum gas fees. 

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Consider that you want to transfer 1 ETH where the gas limit is 21,000 units and the base fee is 100 gwei. Let’s say you are willing to pay 10 gwei as a priority fee, then the calculation will be as follows: 

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Gas Fees= Total gas units x (Base Fee + Priority Fee) 

                 = 21,000 x (100+10)

                 = 2,310,000 gwei 

                 = 0.00231 ETH

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Therefore, the new London upgrade incorporates the new transaction fee mechanism where miners are rewarded with the tip given by users while the base fee is burned off the chain. 

Conclusion

So if you came here looking to understand what gas fees are and what are all the smaller details related to it, then we are sure you are going to go back satisfied. Gas fee is nothing but the small amount of fee you pay while trading cryptocurrencies amongst other things.

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If you are not including the gas fee in your calculations then you are in for a surprise. We helped you understand what gas fees are, how they work and how you can calculate them. If you still have any doubts regarding this topic then just let us know. And do read our other articles related to cryptocurrency and the world it’s a part of. 

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