What is Crypto Gas Fee and How To Calculate It? A Complete Guide

Before 2020, most transactions on the blockchain were quick and cheap. However, with so much traffic in the space and the rise of NFTs, blockchain transaction fees, also known as gas fees, are soaring. It’s slowly becoming a problem in the digital world because of its sheer volume.

Let’s look at what crypto gas fees are, how to calculate them, and what are the solutions to bigger gas fees.

What is gas fee?

In simplest terms, a gas fee is an amount that a user has to pay to complete a transaction on a blockchain like Ethereum or Bitcoin. The fee is mostly used as compensation to the miners for the computing power they provide, which essentially makes a new block to verify blockchain transactions.

The gas fees are usually paid in the official cryptocurrency of the blockchain that you’re using. So if you’re using Ethereum, it’ll be their native ETH coin. The price of gas is quite volatile and it depends on two major factors: block time, and transaction throughputs. Here’s what they mean.

  • Block Time: Block Time is the time needed for the blockchain to generate or create new blocks.
  • Transaction Throughput: Transaction throughput simply refers to the number of transactions a single block in the blockchain can process.

In other words, the faster the blocks are created and the more transactions a blockchain can hold, the lower the gas fees will be. Both these factors differ with individual blockchains like Bitcoin, Ethereum, and Solana, and each of them has a different level of efficiency when it comes to gas fees.

How to calculate Ethereum’s gas fees?

Let’s understand how gas fees are calculated. For this, we’ll take the example of the Ethereum blockchain.

To fully grasp everything about Ethereum, you’ll need to understand what Gwei is. Gwei is a denomination of the Ether or ETH cryptocurrency that is used in the Ethereum Blockchain. It is equivalent to one-billionth of one ETH and Gwei is used as it can easily simply specify Ethereum gas prices. In other words, if the gas price is 40 Gwei, it will be equal to 0.000000040 ETH. Here’s the formula to calculate Ethereum’s Gas fees.

Gas Fees = Gas Units Limit x (Base Fee + Tip)

And just as simple as that, you can calculate Ethereum’s gas fee price. The gas limit represents the total amount of gas that a user is willing to pay to complete a transaction on the blockchain. In this case, it’ll be Ethereum. For most Ethereum transactions, the wallets have set the gas limit at just over 20,000 Gwei, however, the power users can manually change the number according to their requirements.

When there are transaction wars, gas users can raise their prices and disrupt the entire ecosystem. If we talk about the base fees, each block in a blockchain has a fee that is solely related to the network traffic and the total number of transactions going on in it. Users also need to tip in the gas fees since that’s the compensation that the miners get for providing computation power and creating a new block.

In other words, the higher the fee you pay, the quicker the transaction will be processed. Moreover, in wallets like MetaMask, users can change max fee, max priority fee, and gas limits, giving them complete control over their transactions.

The problem with gas fees

The gas fees of major platforms like Ethereum and Blockchain have been concerning over the last couple of years. It is affecting scalability and the gas prices are hitting high. This is not only making trading unaffordable but also capping the overall performance of various blockchains.

Ethereum’s high gas has been one of the biggest concerns in the last couple of months until the organization decided to merge. So, are there any solutions to the soaring price of gas? And how can we fix them? Let’s find out.

Are there any fixes to reduce the gas fees?

Proof-of-Stake Model

Ethereum 2.0 will change from Proof-of-Work to a Proof-of-Stake model which will make the transaction throughput better. While the merge necessarily wouldn’t decrease the gas fee, sharding could technically help. Sharding simply splits the network into smaller pieces, ultimately delivering data faster and more efficiently. However, as efficient as it might be, since gas fee is dependent on the total traffic and load on the network, there may not be a big overall decrease.

Layer 2 Solutions

Layer 2 Protocol or L2 Blockchains are secondary scaling frameworks that are built on top of the layer 1 blockchains. These solutions have a mission to improve the overall transaction throughput and reduce gas fees doing so.

Final Take

Gas fees are an important part of a blockchain since they allow transactions to happen. But with soaring prices, we are also receiving unique and rare solutions. What do you think the future of gas fees will be? Will the Layer 2 protocols take over? Or will companies hard fork towards Proof-of-Stake consensus?