Gas (Ethereum): How Gas Fees Work on the Ethereum Blockchain

What Is Gas (Ethereum)?

Gas is the fee required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform. Fees are priced in tiny fractions of the cryptocurrency ether (ETH)—denominations called gwei (10^-9 ETH). Gas is used to pay validators for the resources needed to conduct transactions.

The exact price of the gas is determined by supply, demand, and network capacity at the time of the transaction.

Understanding Gas in Ethereum

The concept of incentives for work paid in fees (gas) was introduced to compensate miners for their work on maintaining and securing the blockchain—in addition to receiving block rewards.

After the proof-of-stake algorithm was rolled out in September 2022, gas fees became the reward for staking ETH and participating in validation—the more a user has staked, the more they can earn.

Ethereum validators, who perform the essential tasks of verifying and processing transactions on the network, are awarded this fee in return for staking their ether and verifying blocks.

Gas fees rise and fall with supply and demand for transactions—if the network is congested, gas prices might be high. On the other hand, they could be low if there is not much traffic.

How Do You Calculate Gas Fees?

Originally, gas fees were a product of a gas limit and the gas price per unit. In August 2021, Ethereum changed its calculations for gas fees to use a base fee (a set fee for the transaction set by the network), units of gas required, and a priority fee. The priority fee is a tip to the validator that chooses a transaction—the more you tip, the higher the chances are that your transaction will be processed faster.

Gas fees are calculated using this formula:

Units of Gas Used * (Base Fee + Priority Fee)

So, imagine you wanted to pay a friend 2 ETH, and you think it will require two units of gas. The base fee is 11 gwei, and you provide a tip of 3 gwei. Your gas fee would be:

2 * (11 gwei + 3 gwei) = 28 gwei

This equals 0.000000028 ETH. It's added to your transfer total, which is now 2.000000028 ETH.

Gas and the Ethereum Virtual Machine (EVM)

Ethereum, as a platform and system, is designed to be used by others to create more use cases for blockchain and cryptocurrency. For this reason, it is commonly called the Ethereum Virtual Machine, because applications can be created that run on it. The EVM is essentially a large virtual computer, like an application in the cloud, that runs other blockchain-based applications within it.

Many decentralized applications, cryptocurrencies, and tokens have been created using the EVM. Because the Ethereum blockchain is part of the EVM, the cryptocurrencies built on that blockchain require gas fees. For example, a popular token built on Ethereum's blockchain is DAI. Because it uses the Ethereum blockchain, users need to pay gas fees in gwei to conduct transactions on the chain.

Concerns About Ethereum Gas Fees

An ongoing concern for any cryptocurrency that requires transaction fees is the price users pay for the transactions. Before 2020, gas fees on Ethereum were very low, measured in a few cents with occasional spikes. After January 2020, gas fees began climbing as the network attracted new users, reaching more than $20 (sometimes much higher) for long periods.

After The Merge—the merge of the Beacon Chain and the Ethereum main chain when proof-of-stake was implemented—fees began to range from a few dollars to as high as $30. Because fees are generally reflective of network traffic, they can get very high sometimes.

Avoiding High Gas Fees

The only way to avoid high fees is to choose times when the network is not so busy, a challenging endeavor but not impossible. EtherScan provides a gas tracker that shows the day's high, low, and average gas fees, so you can try to time your necessary transactions using its tracker or another like it. The website also provides a Chrome extension you can install to the browser that lets you see gas prices in real time.

The Bottom Line

Gas fees are used on the Ethereum blockchain and network to incentivize users to stake their ETH. Staking works to secure the blockchain because it discourages dishonest behavior. For staking their ETH, owners are given small payments as a reward for helping to secure the blockchain and help it function.

Fees are determined by the amount of network traffic, the supply of validators, and the demand for transaction verification. The higher the demand and traffic, the higher the fees. When traffic and demand are lower, fees become lower.