With the second biggest cryptocurrency being at the forefront of mainstream media recently, you might have come across the term “gas” or “Ethereum gas fees”. In this article, we’re breaking down what this means, what it’s used for, and what the future holds for gas fees as the network transitions into ETH 2.0.
What are Ethereum gas fees?
Getting straight into it, gas fees are the network fees payable on the Ethereum platform. Similar to how transaction fees need to be paid on the Bitcoin network when executing a transaction, Ethereum gas fees operate in a similar way.
In more technical terms, the term refers to the computational efforts required in order to execute specific operations. While the Bitcoin network facilitates transactions (being a medium of exchange), the Ethereum network allows users to do a bit more than that. On the network, developers are able to build decentralised applications (dapps) as well as smart contracts, each of which requires a different amount of energy or gas to execute.
Using a real-world example, if you were driving 100km your car might need 10 litres of fuel. 100km represents the utility value while the 10 litres represents the cost of executing the operation. Similarly, if you were making a transaction worth 100 ETH, the gas price to process this might be 2/100,000 ETH, the cost of executing the operation.
The fees are determined by supply and demand as well as the miners executing the operations, and if the fee is not aligned with the computational effort required, the miners will not complete the task (and instead choose to ignore it). Similarly to the miners receiving the transaction fees on the Bitcoin network, the miners responsible for verifying and processing these transactions are rewarded with the gas fees.
How is gas measured?
To distinguish between the cryptocurrency (ETH) and the gas fees, the fees are referred to as gwei. While this is a smaller denomination of ETH, gwei still provides a clear-cut value layer that is solely responsible for outlining the cost of the computation expenses.
Gwei, also known as nanoether (nano for short), is short for gigawei indicating it is worth 1,000,000,000 wei. Wei to Ethereum is what Satoshis are to Bitcoin, both representing the smallest denomination of the cryptocurrency. In summary:
- 1 gwei is worth 0.000000001 ETH
- 1 ETH is worth 1,000,000,000 gwei
To give you a better understanding, below is a summary of all the denominations of Ether:
1 ETH = 1,000,000,000,000,000,000 Wei
1 ETH = 1,000,000,000,000,000 Kwei
1 ETH = 1,000,000,000,000 Mwei
1 ETH = 1,000,000,000 Gwei
1 ETH = 1,000,000 Szabo
1 ETH = 1,000 Finney
1 ETH = 0.001 Kether
1 ETH = 0.000001 Mether
What ETH 2.0 means for transaction fees
The platform’s upgrade is designed to increase scalability, solve the current transaction fee issues and make the network able to handle thousands of transactions a second. As Ethereum migrates into its new version the network will be moving from a proof-of-work consensus to a proof-of-stake consensus, as well as implementing sharding.
This means that the mining process will move away from miners battling to be the first to solve the complex puzzle and create a block, instead, shifting to a verification process based on staking and random selection. No longer called miners, validators on the network will be chosen by random selection based on the amount of ETH they are currently staking.
The implementation of sharding (where a large chain is split into smaller chains called shards) allows for much faster transaction execution. Transaction validation will be assigned to various validators, each overseeing different shards. Recently there have been complaints across the industry of high gas fees experienced on the Ethereum network, this is due to high congestion which sharding will easily resolve.
The implementation of ETH 2.0 is believed to lower transaction fees, increase scalability, decrease the energy-intensive processes, and increase the number of transactions the network is able to handle.
Ethereum and the future
While we’ve covered the basics of what Ethereum gas fees are, there is likely to be a shift in the number of gas fees charged in the coming months. The concept will remain the same, users will still be required to pay a small fee in order to execute their transactions, however, it is likely that the sharding implementation will bring these fees down.
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