Ethereum Gas Fees: What is it? How is it Calculated?

What are Ethereum Gas Fees?

Gas on Ethereum is a unit of computational power that is required to execute transactions on the network. In exchange for using that computational power, users have to pay transaction fees. So, gas fee is the amount of transaction fee users need to pay to carry out transactions on Ethereum. Whether you would like to transfer ETH, or buy a non-fungible token (NFT), or mint your digital art as an NFT, you have to pay gas fees.

ETH gas fee varies based on different factors, which include network demand and usage, network traffic, supply of validators, etc. When there is a lot of activity on the network and validators are extremely busy verifying the transactions, the gas fee on Ethereum skyrockets.

You can check the average gas fee on block explorers like Etherscan, which is 37 gwei, as of February 2024. Gas fees are measured in terms of “gwei” as they are much lower than ETH. Wei is the smallest denomination of ETH and 1 quintillion Wei is equal to 1 ETH. And, 1 gigawei or 1gwei is equal to 0.000000001 ETH.

How is the Ethereum Gas Fee Calculated?

As we mentioned, gas fees are the transaction fees that you need to pay to execute your transaction on Ethereum. When you pay less gas fees, validators may not choose to verify and execute your transaction. If you pay more gas fees to execute your transaction faster, you will waste some ETH in gas fees. When you know how exactly the ETH gas fee is calculated, you can determine how much you need to pay.

Post Ethereum London upgrade, Ethereum gas fee is divided into two parts – “Base Fee” and “Priority Fee” or the “Tip”. The base fee is like the bill you get at the restaurant. You have to pay that to carry out your transaction. Base fee on Ethereum is determined by the network demand and adjusted based on the number of users interacting at that time.

On the other hand, the priority fee is like the tip you pay to the waiter. You can pay based on your preference. But, the more priority fee means the greater chance for your transaction to be chosen by the validators and the faster it will get executed.

Another important factor that comes into play when we discuss gas fees is the “Gas Limit”. Gas Unit or Gas Limit is the maximum amount of gas (computational power on the network) that is going to be consumed by the transaction you are initiating. You must always set the gas limit equal to the actual gas limit to complete your transaction. Or else, your transaction will be incomplete and the gas fee will be lost.

Let us say you are trying to pay 1 ETH to your friend. The standard gas limit required for 1 ETH transfer is 21,000 gwei. Let us say the base fee is 10 gwei. If you are willing to include a priority fee of 3 gwei, the total gas fee will be 273,000 gwei. In terms of ETH, the gas fee is 0.000273 ETH.

In the above transaction, 21,000 gwei of gas is consumed on Ethereum to execute that transaction. And, the base fee of 10 gwei is burned by the network and 3 gwei priority fee is sent to the validator, who verified your transaction.

Did “The Merge” Reduce Ethereum Gas Fees?

“Ethereum Merge” is the most iconic event in the history of blockchain. It achieved an impossible feat of transitioning Ethereum blockchain’s consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Post Merge, Ethereum is completely dependent on the PoS mechanism to run the network.

Crypto enthusiasts expected the gas fees to reduce after the Merge event. However, Ethereum Foundation clarified that the Merge does not have any influence over the ETH gas fees. Because, it only changes the network’s consensus mechanism but does not change the factors that influence ETH gas fees. As we discussed in the previous section, fees are calculated based on the network traffic, supply of validators, network demand and usage.

While layer2 scaling solutions like ZK-rollups and Optimistic rollups are trying to reduce network traffic, they are also expensive. To achieve faster transactions combined with lower gas fees, Ethereum came up with new upgrades such as Danksharding. When all the Ethereum upgrades are implemented, we can expect to see a considerable decrease in the ETH gas fees.