If you've ever made transactions on popular blockchains like Bitcoin or Ethereum, you might have noticed that you always end up paying more than you initially planned. The reason? Gas fees. But why do they exist?

One of blockchain's core promises is enabling peer-to-peer transfers, freeing users from those pesky hidden charges associated with traditional systems. And since blockchain networks aren't run by any central entity, you might wonder: who collects these fees, and why are they necessary in the first place?

In this article, we'll take a deep dive into the concept of gas fees. We'll explore what they are, why they exist, and how they can be reduced.

What is this “gas fees”?

In the context of blockchain - “Gas” refers to the unit used to measure the computational effort required to perform specific actions on the blockchain. And yes, the term “Gas” was chosen deliberately—it’s similar to how vehicles need gas to move. Just like that, “Gas” keeps the blockchain network running. But how exactly?

For a blockchain to function seamlessly across the globe, numerous individuals—known as “miners” or “validators”—operate nodes. These nodes perform critical tasks like processing transactions and validating the blockchain. But here’s the question: What’s their incentive to do this? Why would anyone dedicate resources and energy to keep these systems running?

That’s where Gas fees come in. When you pay Gas fees, you’re essentially compensating these miners or validators for their work. This payment makes it worthwhile for them to maintain their nodes and ensure the network stays operational.

A Key Detail About Gas

It’s important to note that Gas is just a unit of measurement for the computational effort. While transactions are measured in terms of Gas, the actual payment is made in the native cryptocurrency of the blockchain. For instance, on Ethereum, Gas is paid for using ETH (Ethereum’s native token).

This is done to “disconnect” or “dissociate” the increase in price of Ethereum to the payment done in Gas. So if the value of Ethereum shoots up, as the computation required to the operation remains the same, the For example, even if Ethereum’s value skyrockets, the computation required for an operation remains constant. This ensures the “dollar cost” of performing a task doesn’t rise uncontrollably—assuming network activity remains stable.

But here’s the twist: there’s a catch...

Why Does the Gas Cost Vary?

While the amount of Gas required to perform a specific operation isn’t tied directly to the price of Ethereum, Gas costs often fluctuate. Why? The answer lies in network activity.

When network usage is high, Gas prices increase. This is because Ethereum follows basic economic principles: as demand for Ethereum rises, so does its price. High demand for Ethereum almost always leads to increased network activity, which, in turn, pushes Gas prices higher.

Let’s Break It Down with an Analogy

Imagine a bucket filled with diamonds of different sizes, and you’re asked to take as many as you want. Naturally, you’d grab the entire bucket, right?

But what if there’s a restriction—you can only take 10 diamonds? What would you do? You’d likely pick the largest diamonds first, ensuring you get the most value. You’d start with the biggest one, then the next largest, and so on, until you hit your limit. No reasonable person would start with the smallest diamonds.

The Mempool and Gas Fees

In this analogy:

• Diamonds represent the Gas fees offered by various transactions.

• The bucket represents the blockchain’s Mempool, where pending transactions wait to be processed.

• Miners/validators are the ones choosing diamonds (transactions) to pack into the next block.

Each block in the blockchain has a limit on how many transactions it can include. Miners prioritize transactions offering the highest Gas fees (the “largest diamonds”), processing these first.

When the network is congested with many transactions, miners have the luxury to choose the most profitable ones. Conversely, during low network usage, miners pick a broader range of transactions since the competition for block space is lower.

What Does This Mean for You?

If you want your transaction to be processed quickly, you’ll need to offer a higher Gas fee to incentivize miners to prioritize your transaction. On the flip side, if you offer a lower Gas fee, your transaction will sit in the Mempool longer and might take significantly more time to be processed.

Wait, Isn’t This Impractical?

If the entire world starts using a blockchain network like Ethereum, wouldn’t it become too expensive to transact?

You’re absolutely right. Ethereum’s transaction fees have, at times, soared above $50-$100 just for a single transaction. And if you’re deploying smart contracts (code on the blockchain), the Gas fees can skyrocket even higher!

So, What’s the Solution?

To make Gas more affordable, we need to expand the network's capabilities. Enter Layer 2 (L2) solutions—an innovative approach to reducing transaction costs while maintaining security.

What Are Layer 2 Solutions?

Layer 2 solutions allow users to process transactions off the main blockchain (Layer 1) and later bundle these transactions together to be written back onto Layer 1. By combining multiple transactions into one, the Gas cost is shared among many users, significantly lowering fees for each individual.

The best part? Layer 2 solutions still leverage the robust security of the base blockchain (Layer 1). It’s like taking a side road to avoid traffic but still arriving at your destination safely.

What Would Happen If We Had No Concept of Gas?

You might be wondering what would happen if blockchain networks didn’t charge Gas fees? While it might sound appealing at first—free transactions!—it would actually spell disaster for the network. Without Gas, the blockchain would face severe issues that could render it unusable.

1. Spam and Network Congestion

• Without Gas fees, anyone could flood the network with endless transactions at no cost, leading to overwhelming congestion.

• Malicious actors could exploit this by submitting frivolous or spammy transactions, making the network slow and unreliable for legitimate users.

2. Economic Imbalance

• Resource-heavy operations, like deploying smart contracts, would be overused without limits, draining the network's computational resources.

• This would result in unfair resource allocation, where some users or applications dominate network capacity, leaving others underserved.

3. Reduced Scalability

• Gas fees act as a prioritization mechanism, ensuring that the most critical and valuable transactions are processed first.

• Without this mechanism, time-sensitive operations could face significant delays, as there would be no way to sort transactions by importance.

The Bottom Line

Gas fees might seem like a burden, but they are essential for maintaining the health, security, and efficiency of blockchain networks. They discourage misuse, ensure fairness, and keep the system running smoothly.

How to get cheaper Gas costs?

No one likes paying extra fees, but gas fees are vital to keep blockchain networks functional and secure. Think of it this way: while credit card companies charge a percentage-based fee on every transaction, blockchain operates on a fixed-cost model. However, there are ways to minimize these costs. Let’s explore some strategies and alternatives:

1. Subscription Models

• Imagine paying a flat monthly fee for unlimited blockchain transactions—similar to a streaming service.

• This approach could significantly lower the overall cost for frequent users and ensure predictable spending.

2. Layer 2 Solutions

• Layer 2 networks process transactions off the main blockchain (Layer 1) and then batch them together to update the base chain.

• This reduces individual transaction fees while leveraging the security of the primary chain.

3. Layer 1 Alternatives: Solana as a Case Study

Some Layer 1 chains, like Solana, have achieved impressively low transaction costs due to their innovative design:

• Cost Comparison:

  • Solana: Fees average around $0.00025 per transaction (0.0012 SOL).

  • Ethereum: Fees can range from $3 to $10 per transaction and spike above $50 during congestion.

• Why Solana’s Fees Are Lower:

  • Efficient Design: Utilizes parallel processing and high throughput, handling 20,000+ transactions per block.

  • Transaction Complexity: A basic balance transfer costs 0.000005 SOL, while more complex operations like NFT sales might cost 0.000092 SOL.

• Optional Priority Fees:

  • For faster transaction processing, users can opt for minimal priority fees.

  • These fees depend on compute units, allowing for savings on less compute-intensive transactions.

• Compute Budget and Limits:

  • Each transaction gets a compute budget, dictating the resources it can use.

  • Transactions exceeding the compute unit limit per block are dropped to ensure network stability.

Takeaway: Smart Ways to Save

To lower your gas costs, consider Layer 2 solutions, explore low-cost Layer 1 chains like Solana, and keep an eye out for innovative models like subscription plans. As blockchain technology evolves, expect even more efficient solutions to make transactions accessible to everyone.

If you have a question or want to share your thoughts, feel free to reach out! I’d love to connect with like-minded individuals navigating this exciting and transformative technology.