Ethereum Gas Fees Explained

date_range February 3, 2022
person Magic Square

As per previously stated plans, the Ethereum network is changing its consensus mechanism. Move over proof-of-work (PoW). It’s time for proof-of-stake (PoS) to shine! The process began back in 2020, with plans for its conclusion by 2022.

The founder of the Ethereum network, Vitalik Buterin, claims that the shift aims to overhaul the energy consumption of mining; The same process that’s used to validate and add transactions to the blockchain, all the while reducing transactional gas fees. 

We’ve all been talking about the negative impact of mining on the environment, but there was little to no discussion about the effect that switching to PoS might have on gas fees. Given that there’s still much confusion about what a gas fee is, let Magic Square explain everything you need to know and a bit more. 

More About Gas Fees

The blockchain is decentralized in nature. Anonymous miners and validators add and validate transactions in the blockchain network, which is, in fact, the bedrock of any transactional blockchain technology. 

The proof-of-work (PoW) system allows miners to solve complex mathematical problems to validate transactions on the blockchain. In turn, they receive a reward – an Ethereum token. 

While we’re talking about earning Ethereum tokens, there are two ways to get your hands on them. Firstly, you can get it by mining Ethereum and, in turn, get paid in fresh, newly minted Ethereum tokens. Secondly, you can receive Ethereum as fees from other users. This will happen when you process other users’ transactions. 

How Gas Fees Work

More than three thousand dApps are currently running steadily on the Ethereum network. All of these apps (and their transactions) want to be included along with other Ethereum network users. But alas, there’s a limited number of miners that can validate transactions in question at a certain time.

This is where miners get to a crossroads. They must choose between numerous transactions waiting for validation since not all transactions can be validated simultaneously. Why? you might ask because the energy cost would reach staggering highs.

What happens to unprocessed transactions? They’re stored in a “mempool.” It represents a contraction of memory and pool, and this is where miners can decide which of the given transactions they will validate. If you want speed, this is where our gas fee comes to the rescue! 

Users will add gas, which can also be observed as a priority fee, to the mempool. This way, they’ll prioritize their particular transaction, putting it on top of the base gas fee. In turn, they get a faster validation.

The main issue with users’ gas fees is their fluctuating nature. Usually, when more users are on the network, the gas fees increase accordingly. This situation creates an unequal environment, where the gas fees could increase basically overnight without the user having any control over those numbers.

Calculating Gas Fees

When we look at it this way, gas fees are minimal when we compare it to the value of 1 ETH, which is Ethereum’s native token. You calculate it in Gwei, which represents a small denomination of a single Ether unit. The total fee is calculated by using the following formula:

1 gwei = 0,000000001 ETH

Total fee = Base fee + Tip

  1. Base Fee – it’s the minimum amount of gas required for an Ethereum blockchain transaction. The congestion of the network determines the value of the base fee, which depends on the number of active network users. 
  2. Tip – is the additional fee paid by users and given to miners for prioritizing their particular transaction. 
  3. Gas Limit – is the bare minimum of gas a user will pay for a transaction. Users adjust gas spending, and they can ultimately determine how much they’ll spend. Again, network interactions dictate the minimum gas amount for completion. 

Why So Costly?

Finally, we come to the main question. Let’s review the facts. ETH prices have changed over the past few years. Given that gas fees are calculated in Gwei, a denomination of ETH, when ETH jumps in price, so do the gas fees.

It’s safe to say that ETH will continue to rise in value in the future, and gas fees will surely follow, along with the base fee and, ultimately, the tip you’ll have to give to be prioritized. After all, the popularity of DeFi and cryptocurrency, in general, are here to stay, always occupying the headlines. 

The promised shift to a new protocol, the PoS, will bring a dash of hope. It will help reduce Ethereum fees, keeping them in line with others on the market while upgrading the processing of transactions and its capabilities.

Although we’re keeping our fingers crossed for Ethereum 2.0, there are plenty of other chains already using PoS consensus for security. One of which, Solana, is Magic Square’s host chain, which we chose in order to minimize fees and support the best and most cost-effective dApp experience for our users. Follow us here on the blog and on social media for product developments and updates.