Our lowdown on what makes gas fees so volatile and how you can save money on them while trading.
Lo and behold, cryptocurrency has—more or less—entered the mainstream. Whether you want to trade non-fungible tokens (NFTs) or order food, you can pay in cryptocurrency. However, paying using cryptocurrency is not so straightforward. When making a transaction on the Ethereum blockchain, users are required to pay gas fees. It’s compensation users pay miners for the computing energy needed to validate a transaction.
Gas fees, also known as “gwei”, can go from US$5 to US$150 within seconds. Its high prices have been a sensitive spot for users who are all about using Ethereum. Here, we look at why gas fees are so high and how you can reduce them.
But first, how are gas fees determined?
The fees are determined by the demand and supply of computational power from miners. For instance, if there’s great demand for transactions on Ethereum, miners will demand higher gas fees to get the job done. On the other hand, if the supply of computational power on the miner’s end is not enough, they might settle for lower gas fees. What’s more? Miners can decline to process a transaction if they are not satisfied with the gas limit—the maximum amount of gas fees a user is willing to spend on the transaction—set by the user.
The transaction fee on Ethereum is made up of three parts:
- Base fee, which is the minimum amount mandatory for a transaction.
- Gas limit, which is the minimum amount (adjustable) a user is willing to pay for the transaction.
- Tip, which is an additional amount you pay to get your transaction prioritized by miners.
Here’s what the process typically looks like: all the unprocessed transactions on Ethereum are transferred to the “mempool”, a memory pool. There, miners choose the transactions they want to validate.
So, why are gas fees so high?
Largely, there are two reasons for gas fees being high:
- Ethereum’s popularity
As per experts, Ethereum’s value is set to grow by 400% in 2022. A range of decentralized applications (DApps), relating to games and supply chain solutions, as well as decentralized finance (DeFi) platforms (almost exclusively) use Ethereum. The greater the demand for Ethereum, the pricier the gas fees become. As more people interact with the blockchain platform, miners need greater computational power to keep up, thus leading them to prioritize transactions with a higher gas fee limit.
- Its various use-cases
Besides its popularity, Ethereum’s practicality also contributes to its high gas fees. Be it finance or advertising, supply chain management or healthcare, trading non-fungible tokens (NFTs) or fundraising—entrepreneurs and startups prefer using Ethereum. The platform has also been the launchpad for decentralized autonomous organizations (DAOs) and initial coin offerings (ICOs). Additionally, Ethereum adds value to many enterprises. For instance, in the music industry, it helps artists manage their royalties by automating royalty payments through their tokens. Its versatile utility further boosts its demand, thus increasing gas fees.
How can you avoid paying gas fees?
Here are four ways you can spend less on gas on Ethereum:
- Use Ethereum at a non-peak time, such as during the weekends. If there are fewer users, there is less demand for computational resources. That’s why gas fees will be reduced, too.
- Reduce your tip. If your transaction is not time bound, don’t rush it. Be patient and let it happen whenever.
- Use layer 2 scaling solutions, such as Arbitrum. Layer 2 transactions happen off the blockchain platform, thus not using up too much computational power or gas fees. The transactions are later verified on Ethereum.
- Use DApps that offer discounts, refunds or subsidies. Some DApps, like Balancer, offer a 90% refund on gas fees!
Gas fees do hamper the scalability of Ethereum, thus redirecting users to other platforms. According to the Managing Director at J.P. Morgan, Nikolaos Panigirtzoglou, “It looks like, similar to DeFi apps, congestion and high gas fees has been inducing NFT applications to use other blockchains. If the loss of its NFT share starts looking more sustained in 2022, that would become a bigger problem for Ethereum’s valuation.”
Ethereum recognizes the problem and is working towards lowering gas fees by shifting to the proof-of-stake (PoS) model from their current proof-of-work (PoW) model. Ethereum has not disclosed when it plans on shifting to the new model. Till then, make the most of our aforementioned tips to save some money trading crypto!
Header Image by Flickr
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