When you hear the word “gas,” you may think of filling up your vehicle or perhaps what you ate earlier. Still, in the context of cryptocurrencies, the word has a specific meaning. Slide down to know what gas means in the crypto world and how it works.
What Is Gas
The term ‘gas’ refers to the unit of computing effort required to carry out specific actions on the Ethereum network. Each Ethereum transaction requires a charge due to the computing resources required to complete it. The cost of completing an Ethereum payment is referred to as “gas.”
When speaking about the Ethereum blockchain network, gas refers to the fee or price value that must be paid to properly complete a transaction or execute a contract. Gas is priced in small fractions of the Ether (ETH) cryptocurrency.
It is used to allocate resources to the EVM (Ethereum virtual machine), allowing decentralized applications such as smart contracts to self-execute in a secure but decentralized manner.
The precise price of gas is set by supply and demand between the network’s miners, who may refuse to execute a transaction if the gas price falls below their threshold, and network users seeking processing capacity. The more sophisticated the transaction on Ethereum, the higher the gas fee will be.
How Gas Fees Works
Ethereum gas runs on a system of supply and demand. If the network is very busy and miners are struggling to keep up, gas prices rise. If the network is experiencing a slower period with excess mining capacity, prices drop.
The gas limit is the maximum amount of gas you’re willing to spend on a transaction. Typically, the gas limit for simple ETH transfers is 21,000 units of gas. Complicated transactions involving smart contracts, which require more computational energy for verification, may require a higher gas limit.
Gas units (limits)
This refers to the maximum amount of gas you are willing to spend on a transaction. While you are able to adjust how much gas your transaction will cost, it’s important to do so carefully. That is because different types of interactions with the Ethereum blockchain will require different amounts of gas to complete.
Base fee
This refers to the minimum amount of gas required to include a transaction on the Ethereum blockchain.
The amount of gas required for a base fee is determined by the demand for a transaction to be included, regardless of what type of transaction it is.
Because base fees are a factor of demand, they are dynamically adjusted based on the number of users interacting with the network at any given time.
Tips
Also known as a priority fee, tips are an additional fee made to have your transaction completed faster. This fee is better known as a tip because it provides an economic incentive for Ethereum miners to confirm your transaction before others.
When a miner verifies a transaction with a priority fee attached, they receive that fee as a tip for doing so. Because miners are able to see what transactions include tips, they will prioritize completing a transaction with the highest tips attached to make the most money they can.
How To Calculate Gas Fees
In order to get an understanding of why gas fees cost so much and how you can save on them, it’s important to understand how they are calculated.
Total Fee = Gas unit (limits) * (Base fee + Tip)
Conclusion
The cost of completing an Ethereum payment is referred to as gas. Each Ethereum transaction requires a charge due to the computing resources required to complete it.
The gas pricing mechanism is critical because it ensures that fees are charged in a fair and appropriate manner. As a result, it prevents resources from being wasted on operations that aren’t beneficial to the Ethereum network.
