What Are Gas Fees in Crypto?

Gas fees represent the compensation paid to miners and stakers who help make Ethereum network transactions possible. Although the mechanism and cost can vary, gas fees also apply across other blockchains. They ensure the smooth functioning of the blockchain network by compensating validators for their contributions. They’re essential for incentivizing validators to process transactions and ensuring the network’s security and functionality. 

By attaching a cost to each transaction, gas fees also help discourage malicious actors from spamming the network, as the financial burden of these attempts can become unsustainable. 

Ethereum Gas Fees Explained

In order to send and receive crypto on most blockchains, you must pay a transaction fee. This transaction fee can vary widely—from less than USD 0.0001 to over USD 100—depending on the blockchain and its current block space demand. On Ethereum, the transaction fee is referred to as the gas fee (or gas price). Ethereum’s native coin is ether (ETH), and all transaction fees are paid using ETH.

Gas fee are a key component of cryptocurrency transactions, ensuring the computational resources are falsely compensated on the Ethereum blockchain. For example, gas is required to send ETH, to mint and buy non-fungible tokens (NFT), and to utilize Ethereum-based smart contracts and decentralized applications (dApps). Gas fees ensure transactions are validated securely. While simple transactions—like sending ETH—cost less, complex operations (e.g., interacting with smart contracts) consume more gas, leading to higher costs. 

Other blockchains, like Solana and Binance Smart-chain, also charge transaction fees, but Ethereum’s model stands out for its complexity and flexibility. Ultimately, supply and demand for the Ethereum network’s resources determine gas prices. 

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When Are ETH Gas Fees Lowest? 

Ethereum gas fees tend to fluctuate based on network demand and congestion. Fees are typically lower during:

• Weekends and specific off-peak hours, when fewer transactions occur.

• Times to reduce network traffic, such as early morning URC.

Gas fee calculators and gas trackers are widely used. to help users calculate and plan transactions. Many wallets, such as MetaMask, include built-in calculators that will automatically set the gas fee for you in real-time. Otherwise, this user must manually set the gas fee to align with the current demand. On Ethereum, gas fee trackers that follow the gas price in real time are also used. This allows you to take a wait-and-see approach to identifying the lower gas fees.

Why Do Gas Fees Spike?

Ethereum gas fees can continuously spike for days when network demand exceeds the bandwidth capacity of Ethereum. When network capacity is exceeded during high-demand periods, gas fees increase to prioritize transactions. During high-activity periods in the crypto ecosystem, like spikes in Bitcoin and Ethereum usage, gas fees often rise significantly. 

Key examples include: 

• The ICO boom of 2017: The surge of initial coin offerings created significant network congestion.

• DeFi Summer of 2020: The rapid growth of decentralized finance (DeFi) platforms caused demand for Ethereum transactions to skyrocket.

NFT collecting and investing: Famous NFT project CryptoKitties contributed to severe congestion in the Ethereum network, showcasing its scalability limitations. These fee spikes reflect Ethereum’s supply-demand balance and play a role in maintaining network security by deterring spam. While frustrating, these surges highlight the importance of solutions like Layer-2 scaling technologies, which process transactions more efficiently.

Who Receives Gas Fees?

Gas fees go to those who support and secure the Ethereum network. The gas fee payouts depend on the specific layer of Ethereum processing the transactions: 

• Execution layer (formerly referred to as Ethereum 1.0): Here, gas fee payouts go to Proof-of-Work (PoW) miners on the Ethereum protocol. 

• Consensus layer (formerly known as Ethereum 2.0): With the Proof-of-Stake (PoS) mechanism, gas fees are distributed to validators who stake ETH to secure the network. 

The merging of Ethereum’s two layers, known as The Merge, took place in the summer of 2022 and marked the transaction to a full Proof-of-Stake model. This specific update reduced Ethereum’s energy consumption while maintaining network security and functionality. 

Gas Fee Denominations and Ether Transaction Fees

For ease of use, gas fees on the Ethereum network are typically dominated in gwei instead of ether (ETH). The unit of gas used to measure the computing power required for a transaction on Ethereum. Gwei represents one billionth of an ETH, simplifying calculations for users. For example, the same gas fee amount can be expressed as:

• 0.000000054 ether

• 54 gwei

• 54,000,000,000 wei

Since gwei is the most practical unit for users, gas fee trackers and calculators often refer to gwei values directly. As Ethereum gas fees have risen, Layer-2 solutions like dYDX, Loopring, Arbitrum, and Polygon have emerged to address scalability challenges. These technologies batch transactions off-chain before settling them on on-chain Ethereum’s mainnet, significantly reducing gas fees and improving transaction speeds. By leveraging these solutions, users and developers can minimize gas costs while maintaining security. 

Gwei to Gas Fee Example

Since Ethereum’s London Hard Fork implementation on August 5, 2021, gas fees on the network have utilized a base fee and a tip fee—or priority fee. The base fee is algorithmically determined based on demand for Ethereum’s block space and is burned to reduce the circulating supply of ETH. Transactions awaiting processing are held in the mempool, where higher tips ensure prioritization.

The priority fee, or tip fee, allows users to expedite transactions during network congestion. For example:

• Fast: These transactions should be processed in under 30 seconds.

• Standard: A standard transaction should take less than five minutes to execute.

• Slow: For those who can wait up to 30 minutes and want to pay a cheaper gas fee, you can choose a slow transaction-based gas fee.

Since Ethereum block time is around 13 seconds, a fast transaction is generally executed in the first or second block. 

How Do Gas Fees Work on the Ethereum Network?

Ethereum gas fees are calculated using the formula: 

• (Base Fee + Tip) x Gas Limit = Total Transaction Fee

For instance, sending ETH with a base fee of 75 gwei, a trip of 5 gwei, and a gas limit of 30,000 results in:

• (75 gwei + 5 gwei) x 30,000 = 2,400,000 gwei (or .0024 ETH)
  

This calculation highlights how gas fees ensure transaction prioritization while compensating validators and deterring spam. 

By adjusting the tip, users can control the speed and cost of their transactions in real time. The total transaction fees depend on the amount of gas needed for a transaction, which is influenced by its complexity and current network conditions. 

The Bottom Line

Ethereum gas fees play a vital role in maintaining the blockchain’s functionality and security. They incentivize validators, deter network spam, and enable smooth transaction processing. While fees can fluctuate based on the network demand, users can take steps to minimize costs by leveraging tools like gas trackers, using layers-2 solutions, and scheduling transactions during off-peak hours.

Visit Gemini today to learn more about ETH gas fees and explore resources on the  Ethereum network.

This article is for informational purposes only and should not be considered financial or investment advice. Cryptocurrency transactions involve risks, including high fees during periods of network congestion.