Blockchain transactions were very affordable prior to 2020. With the rise of Web3 & NFTs, mandatory blockchain transaction charges -- also known by gas fees -- are now the greatest barrier to mainstream adoption.
Network congestion is what determines the gas price for blockchains like Bitcoin or Ethereum. The network congestion is the reason why the gas fees are higher for more people. Web3's ethos of inclusivity and democracy means that this fundamental scaling problem largely challenges those core tenants.
Although gas can seem quite simple in concept, it can be quite complicated under the hood. This explanation explains gas fees and how they work. It also explains what Ethereum and other Blockchains can do to make them cheaper.
What's a gas charge?
Gas fees, as defined in our dictionary are payments made to complete transactions on a blockchain. These fees are paid to blockchain miners to cover the computing power required to verify transactions on blockchain. These fees are usually paid in the native cryptocurrency of the blockchain. Although gas payments are a common act (you can't do blockchain transactions without them), gas prices are highly volatile and depend on many factors.
Block time (the time it takes for a blockchain to generate new blocks) is the main factor for every blockchain. Transaction throughput (how many transactions can a block process) are also key factors. Block space competition will decrease if blocks are generated faster and can hold more transactions. This means that all network users will pay less for transaction fees.
Let's look at the block times and sizes of Bitcoin, Ethereum and Solana.
Bitcoin blocks take around 10 minutes. With a block size limit of 1 MB, each transaction can be processed anywhere from 500 to 4,000 transactions depending on its size.
Solana's block size is.4 seconds, and it can process 20,000 transactions per second. This results in very low gas fees.
Ethereum's block time is 13 seconds, and its block size is around 70 transactions. Although Solana's transaction fees are close to $.000025 per transaction (nearly 60K times cheaper than Ethereum), Ethereum remains the most used blockchain for NFTs and DeFi. It's easy for Ethereum's gas prices to get out of control with such a small block size and high network usage.
Read more: Top 5 NFT Marketplaces For Minting Your NFTs Without Gas Fees
How do Ethereum gas prices calculated
Understanding gwei will allow you to comprehend how Ethereum gas prices are calculated. Gwei can be described as a very small Ether number (1 gwei equals 0.000000001 Ethereum) that is used in calculating the cost for gas. To put it another way, 30 gwei for gas would equal to 0.000000030ETH.
Ethereum gas fees were established in August 2021 at Ethereum London hard fork.
Total Gas Fee = Limit Gas Units x Base Fee + Tip
Let's get down to it.
A gas limit describes the maximum amount of gas (or electricity) that a user can pay to complete a transaction using the blockchain. Standard Ethereum transactions have the gas limit set by most exchanges or wallets at 21,000 gwei. However users can edit this number manually whenever they like. Gas wars involve many users competing for the transaction priority in each block. Users will often raise their gas limit significantly.
Ethereum will only use what is necessary to process the transaction. Any difference in your gas limit or the amount of gwei you actually need is refunded back to your wallet. Your transaction will fail if your gas limit is too low. This can result in lost gas fees that you won't be able to recover.
The base fee follows. A base fee for each block was introduced as part of London's upgrade. It is dependent on network congestion. Each base charge is used to offset the issuance and revocation of Ethereum's new ETH. In order to compensate miners, users are asked to include a priority fee or tip with every transaction. The quicker a transaction will process, the higher the priority fees. MetaMask wallets allows users to modify all three values: the gas limit, max priority fees, and max fees.
Here is an example calculation for the basic gas fee. Let's imagine that James wants to create an NFT for 1 Ethereum.
1. The gas limit is 21,000 unit, the base fee for James is 50 gwei and James adds a tip of 15% gwei.
2. The gas calculation formula: 21,000 (gas cap) x 50 (base charge) + 15 Tip, or 21,000x(50 + 15). This results in a total gas charge of 1,365,000gwei (or 0.001365ETH).
3. James will debit his wallet with 1.001365ETH when he has created the NFT. The NFT wallet will receive 1ETH. The miner and tip of 0.000315 Ethereum will be paid to their wallets.
You can also specify a maximum fee to be charged for transactions.
This model is more predictable but doesn't resolve the problem of congestion-based prices. Vitalik Buterin is working tirelessly with the Ethereum team to create a new, scalable Ethereum version.
Making gas prices more affordable
Despite delays, the Ethereum team has announced that the multiphase Ethereum2.0 upgrade will start in August 2022. Ethereum 2.0 is intended to improve scalability. security and efficiency. This will greatly increase transaction throughput (Ethereum1.0 can process about 30 transactions per seconds, while 2.0 promises 100,000 per second), as well as significantly lower gas costs by reducing the amount of computing energy required for each transaction.
Users are still relying heavily upon Layer 2 protocols in order to make faster and more economical transactions, instead of the long-awaited upgrade.
What is Layer 2?
Layer2 protocol are secondary scaling platforms built on top of Layer 1 blockchains such as Bitcoin and Ethereum. Sidechains (and rollups) are the two most trusted Layer 2, and they are both highly popular.
Sidechains
A sidechain is a separate, blockchain-based network that connects with a parent blockchain through a two way bridge. Sidechains have the ability to securely transfer tokens back and forth between different blockchains through smart contracts. Sidechains, despite being connected to a primary blockchain (mainnet), operate under their respective consensus protocols.
Sidechains, like Rootstock (RSK), not only increase block times and dramatically reduce gas costs, but also add new functionality to Bitcoin's blockchain. RSK blockchain offers scalable smart contract capabilities that expand the number of possible uses for bitcoin.
Ethereum-savvy users tend not to trust Polygon, but Polygon is a fast, inexpensive, and scalable substitute.
Polygon works on a proof -of-stake consensus. This allows for much faster transactions, greater throughput, and lower gas costs. Polygon's native token MATIC is used to pay for gas. This token is considerably cheaper than Ethereum and can be purchased for pennies rather than hundreds of dollars. Polygon has grown to be a popular blockchain for bulk NFT trading and DeFi. Polygon has many positive aspects, but it is important to keep in mind that sidechains (including Polygon) come with their own problems regarding security and downtime.
Rollups
Rollups are scaling solutions which batch together (or roll up) multiple blockchain transactions at the same time. They store transaction data on the main Blockchain (on-chain), but execute the transaction on their own chain (off-chain). Rollups provide greater throughput and lower gas prices by validating transactions off-chain while relying on offline execution. At the moment, there are two main types if rollups: optimistic and zero-knowledge proofs. Each of these options has demonstrated promise, even though they have both their drawbacks and advantages.
At this point, you should have a solid understanding of gas prices and how they work. While there is much to see from ETH 2.0's arrival, it is certain gas fees won't be entirely eliminated. Always keep additional cryptocurrency in your wallet so you can use it for gas. It will be necessary.
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