September 4, 2023
By Anjali Kochhar
There are no free lunches even in the world of banking and finance. With the advent of the digital revolution, the world talks about decentralized financing eliminating the need to be regulated by a central authority and intermediaries, thereby establishing a direct link between parties involved in the transaction and reducing cost. Despite improving the transaction and payment chain, services are not free.
Blockchain, cryptocurrencies, and bitcoins do involve an element of transaction fee or cost that incentivizes and encourages miners and users to run and execute more blockchain nodes. Irrespective of whether a blockchain or any digital currency for that matter uses proof-of-work (PoW) or proof-of-stake (PoS), every transaction in the digital universe has a fee.
For almost all blockchain smart contracts, Ethereum charges what is known as “crypto gas fees” or “gas fees” If you are a blockchain/cryptocurrency enthusiast and interested in using decentralized finance and decentralized application, you need to understand the concept of gas fee or crypto gas fee and how it works.
On that note, let us understand and deep dive into the concepts of gas fees and their relevance in the modern-day world.
The meaning of Transaction Fees?
In very simple terms, transaction fees could be understood as a form of “convenience fees” paid by the service receiver to the financial service provider for services rendered by them. It can thus be compared in an equivalent tangent to the additional charges levied on credit cards, each time a credit card is swiped. Transaction fees are the primary source of revenue for well-known companies like Visa, Mastercard, Paypal, etc which is either charged as a flat fee or a percentage per transaction.
Similarly, in the world of cryptocurrencies, transaction fees work in a similar fashion. Each time transaction materializes on digital assets, a transaction fee is levied. In the case of cryptocurrencies and blockchain, transaction fees go to operators instead of centralized companies.
The meaning of Gas Fees?
The gas serves as the fuel that sparks every transaction on the Ethereum network. However, it refers to the cost incurred to execute a financial transaction. With the varying type of transactions, the gas fees accordingly vary.
The user pays “gas fees” to the blockchain miner to execute their respective transactions on the blockchain protocol. It follows the basic demand and supply mechanism. If the demand is more for executing transactions, the miner chooses the high-paying transaction thereby prompting the users to pay more for having their transactions executed efficiently.
How Gas Fees are calculated?
As the field of bitcoins, cryptocurrency, and decentralized financing is ever-evolving, the industry is growing by leaps and bound, there is no standard and universally accepted formulae for calculating crypto gas fees. The uniqueness of the cryptocurrency mechanism is that each crypto has a unique fee thereby influencing how much an user will pay. Moreover, at any given point in time, the fee algorithm can be adjusted and tweaked as per the need.
However, a unique formula to calculate Ethereum gas fees is as follows:
Gas limit * (base fee + optional trip) = Gas Fee
In this case, “gas limit” denotes the maximum gas a user can use for a particular transaction on the blockchain. As a standard practice, Ethereum sets 21,000 units as the gas limit. Similarly “base fee” signifies the minimum amount needed to pay for a transaction to be executed on a blockchain network.
The opportunities and Pitfalls that surround Gas Fees
One of the drawbacks or shortcomings of gas fees is that they are very expensive. One of the major reasons for it to be expensive is that as Ethereum is one of the most used blockchains, there is a high volume of transactions and movement that happen and hence the transaction fees spikes up.
There are many instances where gas fees were outrageously high which in turn signifies the intensity and the real and rising cases of decentralized applications (DApps) and Ethereum.
As the high gas fees hurt many users which may not be pocket-friendly yet, Ethereum is taking an effort to figure out and craft solutions addressing its high gas fees. With new technologies and innovations emerging rapidly hopefully, Ethereum technology can offload high gas fees eventually making transactions cheaper, faster, and more transparent.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
