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What are gas fees?

Over the past few months, beginning with the so-called "DeFi Summer" of 2020, gas fees on Ethereum have been a controversial topic of discussion. As network usage grew, gas fees increased, which made many smaller transactions unfeasible as the transaction costs were oftentimes as high as the amounts transacted.

What Are Gas Fees And How Do They Work?

"Gas Fees" are the transaction fees that users pay to miners on a blockchain to have their transactions included in the block. Currently, Ethereum has a relatively low number of transactions that can be included in every block, so when there's more demand for transactions, miners decide to include the transactions that pay more in gas. This incentivizes users to pay more to have their transactions processed faster.

Users can also decide to pay more upfront to ensure their transactions are included and added to the blockchain more quickly. You can go to websites such as Etherscan to check current gas levels, as well as how long it would take for your transaction to be mined with given gas fees.

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Current Ethereum Gas Prices on Etherscan

Effectively, every time you transact on the Ethereum blockchain, you negotiate directly with the network's miners. Gas is a unit that measures how much computational power of the blockchain your transaction requires to register on the network (a simple send of ETH is cheaper than a swap on an AMM like UniSwap).

Gas on Ethereum is measured in "gwei", as most of the time the fee is only a small fraction of the underlying asset, in this case being ETH or "Ether". A single unit of gwei is defined as one-billionth (or one nano) of Ether. So 1 gwei equals 0.000000001 ETH.

On the Ethereum blockchain, you almost always pay for your gas in gwei of the native ETH token. Let's take a look at an example relevant to Steakwallet (now Omni):

  • You're looking to stake The Graph (GRT) and have just sent 100 GRT to your Steakwallet (now Omni).

  • Now, you want to stake your GRT. This transaction requires gas, which needs to be paid in ETH, as GRT is an ERC-20 (Ethereum based) asset.

  • If you don't have any ETH, or not enough to cover the cost of the staking transaction, you won't be able to stake your GRT.

  • Similarly, if you wish to unstake your GRT, you need to make sure to have enough ETH to cover the gas fees for the unstaking process.

Quick Tip: Always check Etherscan for current gas price levels prior to completing any transactions. This ensures that if you are transacting during a period with a lot of network activity, you won't pay unnecessary gas prices. As gas prices change frequently throughout the day, you can wait for the right moment and save a lot of ETH over time. If the transaction can't wait, there's not much you can do but cough up the necessary gas fees to make sure your transaction is included.

How About Gas Fees On Other Blockchain Networks?

Since Ethereum has seen an increase in usage, which often happens when the value of ETH appreciates, an increase in Ethereum gas fees has followed. This priced out a lot of users that only wanted to transact smaller amounts, allowing other base layer (Layer 1 or "L1") blockchains, such as Avalanche, Solana, BNB Chain, and Polkadot, to challenge Ethereum's dominance. While each protocol has their own advantages, almost all of them offer lower gas fees (which attract smaller transactions), as well as a higher throughput – meaning the blockchain can handle more transactions per second (TPS).

Another difference is that other blockchains may allow for fees to be paid in the token that is being transacted. For example, if I want to stake my Terra (LUNA), I will need enough LUNA to cover my transaction fees, but won't need any ATOM (the native currency of the Cosmos blockchain, which Terra is built on). Of course, many of these blockchains may face similar issues as Ethereum if adoption grows quickly and traffic on the network increases. Below is a quick graph that demonstrates the change in Ethereum gas prices and levels of network activity over the past 6 months.

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Historical Ethereum Gas Price

As scalability issues and accompanying high fees continue to plague the Ethereum ecosystem, we are seeing more and more bridges that allow users to easily move their Ethereum based assets on to others chains. For example, you can move your AAVE to a different L1 blockchain or move your ETH to a Layer 2 protocol that aims to increase scalability on Ethereum. Layer 2s such as Arbitrum still use the Ethereum blockchain for finality, but allow users to transact at much cheaper rates.

It remains to be seen how transaction costs will improve once the Ethereum Mainnet transitions to Ethereum 2.0. Until then, L2s and other L1s will likely see more adoption, especially from new users coming into the ecosystem that find many dApps and other core applications replicated in one way or the other across all blockchains.

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