What Are Gas Fees in Crypto and How to Calculate Them?

Every crypto payment comes with some sort of fee, and the ones specific to Ethereum transactions are called gas fees. They are an integral part of the cryptocurrency experience, and you must keep them in mind while making transactions.

So, what are gas fees in crypto, and how do they work? How do you calculate them, and what affects their magnitude? Read on to get answers to all of your burning questions, including a few tips on how to minimize gas fees and make your transactions cheaper.

Understanding Crypto Gas Fees

The first thing you need to understand about gas fees is that they are primarily connected to the Ethereum blockchain. That said, nearly all cryptocurrencies have some form of transaction cost, and the term is sometimes used to denote the fees paid to the blockchain network.

In other words, transaction or on-chain fees refer to all transaction costs on any network, while gas fees are exclusive to the Ethereum blockchain.

current eth gas fees

With that out of the way, we will mainly focus on ETH gas fees since Ethereum is among the most prominent and widely used cryptocurrencies. Gas fees are integral to Ethereum, enabling users to conduct transactions and execute smart contracts on the blockchain. The fee is shown in small fractions of a single ether in a denomination commonly called gwei. One gwei is equal to one billionth of an ETH or 0.000000001 ETH.

The amount you’ll have to pay will depend on current supply and demand and network capacity, which we’ll cover later in the article.

How Do Crypto Gas Fees Work?

Gas fees are essential to the operation of the whole network, as they are the ones that compensate validators for staking and verifying transactions within the network. They enable the whole network to be self-sufficient, allow people to participate in its functioning, and get rewards for their participation.

Gas fees will fluctuate based on the current supply and demand of transactions. More specifically, if the network is crowded, the gas fees will rise, and the price will fall if the network congestion is lower. Moreover, gas fees tend to differ depending on the type of transaction you’re making. For instance, regular transactions are cheaper than calling a smart contract function like minting an NFT. The more complex the action, the more gas is required.

2021 NFT Craze Fun Fact

Gas fees reached massive proportions during the whole NFT craze in 2021, when the average gas prices were often between 150 and 250 gwei. However, the actual cost you had to pay was quite different. Not every transaction was the same, and each required different quantities of gas, so the price in dollars was often above $20 or even as high as $100 for a single transaction or several hundreds of dollars for a smart contract function call.

Naturally, these figures fluctuate constantly and are usually much lower on normal occasions, often around a dollar or a few dollars at the most.

This gas fee system hasn’t changed much over the years, even after the Merge. Namely, at the time, the Ethereum network moved from the proof-of-work (PoW) mechanism to the more eco-friendly proof-of-stake (PoS). Before the Merge, miners were awarded the fee for mining ETH, while those staking ETH would get compensated.

How to Calculate Gas Fees

You’re probably confused by the NFT craze examples and are wondering why the amount in gwei doesn’t correspond to the amount of the actual ETH (in dollar value) you pay when you’re making the transaction.

The truth lies behind the formula used to determine the exact fee. The current one in use was introduced with the August 2021 London upgrade and is as follows:

Gas fee = Gas limit (gas units) x (fixed per-block base fee + priority fee)

The minimum gas unit that has to be spent is 21,000 gwei. So, let’s say you want to send 0.05 ETH to someone. You choose to pay 70 gwei (or the base 60 gwei for that time and 10 gwei in priority fees). The amount you have to shell out would be 21,000 x (60 + 10) = 1,470,000 gwei.

The sum amounts to 0.00147 ETH, meaning you’ll have to send 0.05 + 0.00147 = 0.05147 ETH instead of 0.05.

As you can see, even though the base gas price might seem low, you still have to account for the gas limit and the priority fee you’ve chosen, both of which increase the final charge, i.e., the actual amount you must pay to make the transaction.

Before the London upgrade, the formula only contained the gas price instead of the base and priority fee. The actual gas price at any given moment was different, making it quite unpredictable. The said update was introduced to eliminate this volatility, resulting in users always trying to outbid each other and causing the gas fees to soar in many instances.

Why Do Blockchains Need Gas Fees?

As already mentioned, almost every blockchain needs some form of transaction fee to function and be self-sustainable.

With Ethereum, gas fees are paid to validators who hold ETH and are in charge of validating transactions of regular users. Considering Ethereum uses the proof-of-stake mechanism, users get to stake their ETH and automatically participate in this validation system, where they get a portion of the fees as staking rewards.

In other words, by staking ETH, you’re not only being a validator, which is crucial for the blockchain, but you also receive a form of passive income as compensation.

Gas fees are also used to calculate the number of transactions the network can handle per second. Transactions Per Second (TPS) metric is the standard, and the Ethereum network can handle roughly 12 to 15 TPS on average, while the max theoretical value is 119 TPS.

Moreover, gas fees also prevent transaction spamming as they increase the cost of a potential DDoS attack.

Gas fees also contribute to the stability and security of the blockchain, prioritize transactions, and prevent network congestion.

Factors That Affect Gas Fees

As you’ve seen in this guide, several factors affect the current gas fee, most notably, network activity and the current supply and demand on the network. Furthermore, protocol upgrades, like the London upgrade and the now-famous Merge, can have a significant impact, too. Let’s explain all of them in more detail.

1. Supply and Demand

Supply and demand, one of the most fundamental principles in economics, is always considered when calculating transaction costs. This is the most important factor in determining a product’s cost. When there’s a lot of demand, the gas fees will rise, and when the demand is lower and the supply is high, the gas fees will shrink.

It’s crucial to take this info into account when making transactions on the blockchain so you can save money on gas fees. While you can follow the market on your own, there are also plenty of tools, like Etherscan, that can be of great help.

2. Network Activity

The activity on the Ethereum network and most other cryptocurrencies also affects the gas fee size. The more users there are, and the more transactions are made simultaneously, the more clogged the network gets. In turn, this leads to a greater demand for resources for processing transactions, which further translates to higher gas prices.

Therefore, a priority fee is typically included in the gas fee formula. The more you pay, the higher priority your transaction will be given, and the faster it will be validated.

3. Protocol Upgrades

Protocol upgrades are another factor that can potentially influence gas fees. Just like any piece of software, every blockchain needs occasional updates, so this upgrade can alter the gas fee. The change to the code can also indirectly impact the gas fee by affecting the supply and demand.

For instance, with Ethereum, the Merge didn’t really affect the gas fees, but the London upgrade did, as it altered the formula used to calculate them.

Post-Merge Ethereum Gas Fees

The introduction of the massive upgrade called the Merge in September 2022 moved Ethereum from the PoW to the PoS consensus mechanism. Since that moment, everything has changed for the Ethereum blockchain, especially when it comes to how validators are rewarded.

However, the adjustment didn’t really impact the actual gas fees users had to pay. Instead, the fees continued to change largely based on the supply and demand.

Consequently, the network continued having the same problems with the high gas fees it has faced since becoming one of the most popular cryptocurrencies on the planet.

How to Minimize Gas Fees

You can’t avoid paying gas fees, but you can minimize them. Here’s three main ways to minimize gas fees:

Your main goal should be to make transactions when the network isn’t too busy, as that’s when the gas fees are the lowest. You can use resources like the already-mentioned Etherscan, as it shows you the day’s highs, lows, and averages.
If you’re not in a rush to have your transactions processed quickly, you can choose a minimal priority fee, which will lower your overall gas fee.
You can also tamper with your wallet’s fee settings to reduce the amounts spent.

Developers who use smart contracts can strive to optimize them further to get better gas efficiency.

Gas Fee Differences by Transaction Type

Whether you’re making a regular transaction with some other user, buying an NFT, interacting with a dApp, or making a more complex transaction with the help of smart contracts, gas fees will always apply.

However, the exact gas units will differ depending on the type of transaction. Sending ETH to someone is the cheapest type of transaction, and the gas units required are equal to 21,000 gwei. More complex transactions require more units. For example, sending an ERC-20 token would cost 65,000 gwei, while transferring an NFT would be as much as 84,904 gwei, at the time of writing.

Conclusion

Ethereum gas fees and transaction fees on most other blockchains are crucial for the functioning of the whole network. They determine how much you need to pay to get your transaction validated and are added to the amount of ether you’re sending. They also ensure the security of the network, prevent spam, and keep everything running smoothly.

Now that the question of what are gas fees in crypto has been answered, you’ll have a better grasp of them and be able to keep them as low as possible for your next transaction.