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What Are Gas Fees and How are They Calculated?

Gas is the fee for effectively completing a transaction or contract on the Ethereum blockchain. For most newbies, it could be hard to understand what they are and their purpose, so let’s simplify it for you.

Gas fees is a major term associated with the Ethereum blockchain, but many people do interchange it with other blockchains. Those fees are usually called transaction fees for other blockchains that collect a bit of cryptocurrency to make a transaction. However, Ethereum’s “transaction fees” are known as “gas fees.” 

In this article, you will get a complete guide on the meaning of gas fees, how they work, their importance to the Ethereum network, and how you can calculate them. 

What Are Gas fees?

Gas fees are a term that dates back to when the Ethereum network was still a proof of work (PoW) network. However, after the Ethereum merge, gas fees are still in the network and have been used until now. Gas fees are simply dues one pays to interact with the Ethereum network; these fees are paid using Ether, the native currency of the blockchain. 

Before the Ethereum Merge, you paid these gas fees to compensate for the energy used by Ethereum miners to carry out a transaction and add a layer of protection to the Ethereum blockchain. These layers of protection added to the Ethereum blockchain make it almost impossible for hackers to add unknown elements. 

While gas fees are very important on the Ethereum network, you may only like the idea because of the extra cost it adds to your transactions. Whether this is the case or not, you should know how it works and how the network calculates it. The smallest unit of Ethereum is called qwei, and it is equivalent to 0.000000001 ETH. 

How Do Gas Fees Work?

Source- Finematics

Before the Ethereum Merge, the Ethereum blockchain operated as a proof of work (PoW) protocol, which has changed to proof of stake (PoS) after the merge. One of the selling points of the Ethereum Merge was that it would help reduce gas fees on the Ethereum network. Has that happened yet? No. 

Whether on a PoW or PoS blockchain, this is how gas fees work. When making a transaction on any blockchain, the transaction must be confirmed before the details are uploaded. The confirmation of these transactions works differently depending on the model of the blockchain network. 

In a PoW blockchain, your ability to solve the mathematical puzzle quicker on Ethereum as a validator confirms the transaction. For verifying these transactions, you get gas fees.

In a PoS blockchain, instead of solving mathematical computations to confirm transactions, you stake the blockchain’s native token to verify transactions. For staking tokens and verifying transactions on the blockchain, you are rewarded whenever the user pays gas fees. 

Gas fees usually take some time to complete, but there are some ways a user can make the whole process faster. In calculating transaction fees, you can pay a tip to the network if you want to be prioritised and complete your transactions more quickly. 

Why are Gas Fees important?

Gas fees are very important for the blockchain network and the user who verifies transactions. Gas fees are very important for the blockchain network, as they help keep the blockchain running and prevent hackers and other disruptive elements from taking over the network. 

When you pay a transaction fee to any blockchain network, the PoW or PoS model of the network confirms the transaction and adds a layer of protection to the network and helps prevent hackers. For the user who mines or stakes cryptocurrencies, gas fees are a way of making additional money whenever you confirm transactions on the network. 

How Are Gas Fees Calculated?

Source- Finematics

So many factors come into play in the calculation of gas fees in different blockchains, and they are:

Using the Ethereum network as an example, the formula for calculating gas fees is Total Gas Fee = Gas Units (Limit) x (Base Fee + Tip). 

The gas unit limit is the maximum number of Ethereum you would spend on a single transaction; the higher the gas units, the higher your chance of getting your transaction approved. The base fee is the minimum number of Ether tokens needed to carry out a transaction on the blockchain. Then the tip is also called the “priority fee,” which you pay if you want your transaction to be made faster. 

These factors combine to make up the Ethereum gas fee; however, it might be slightly different when transacting on another blockchain network. 

Why Do Gas Fees Get So High?

If you have been making transactions and monitoring the amount you spend on gas fees, you will notice there are times when the gas fees are high and low. This is because of the supply and demand rules that apply to any blockchain network. 

When many people on a blockchain network try to make transactions, the gas fees are very high. But when the activities on the network are very low, with few people making transactions, the gas fees are usually low. 

This is why gas fees are usually high during working hours in Europe, the US, and other major countries. When gas fees are high and the blockchain is congested, adding a tip to your gas fees can make the transaction go faster. High gas fees were common during the NFT surge on the Ethereum network in 2022.

Final Thoughts

Gas fees are essential in the crypto industry, affecting most people who receive and send cryptocurrencies. They are significant because they help miners or stakers earn money whenever they confirm a transaction which keeps the blockchain running and secure. Think of gas fees as the cost you pay to use the blockchain network. It’s important to be mindful of gas fees when making transactions on the blockchain, as they can affect the total cost of your transaction. So, it’s a good idea to check and understand the gas fees associated with your digital transactions before making them. 


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