There’s nothing more frustrating than losing money. But that’s exactly what happens when you pay high fees for crypto transactions… or fees on transactions that fail.
What is a gas fee anyway? Gas fee is the term given to transaction fees on the Ethereum network. Gas is the fuel that allows the Ethereum network to operate, in the same way that a car needs gasoline to run.
Every transaction on a blockchain costs a fee. This “gas” fee goes to miners or validators who keep the blockchain running. This fee is paid even when a transaction fails. Source
What Are Ethereum Gas Fees?
Gas fees can vary wildly by hour, transaction, and blockchain. For example, on Ethereum (ETH) – a popular blockchain for decentralized finance (“DeFi”) – making a swap on an exchange can sometimes cost hundreds of dollars. The gas fee may even overshadow the amount you’re swapping. –
So, it’s important to understand how these fees work. That way, you can potentially avoid paying expensive fees, or fees for transactions that fail.
Let’s get started by looking at what makes up a gas fee…
Your gas price is going to be the price at which you set your transaction. For example, miners of the Ethereum blockchain look at gas prices and choose higher ones to include in their blocks to make the most profit. That’s because higher gas prices result in faster transactions.
Sites like CoinGecko, Etherscan, and many web-integrated wallets like MetaMask show current gas prices for low, market, and aggressive rates on the Ethereum blockchain – with aggressive being the fastest. – Source?
In a single day, gas prices can vary. You must also keep the gas limit in mind, which is the amount of gas you’re willing to spend on a transaction. It tells the blockchain how much gas you want to use. If your gas limit maxes out before your transaction goes through, then it fails and you still pay that gas fee. So, it’s important to set a high enough gas limit to make the transaction successful.
As we said, Ethereum is one of the most-used blockchain for DeFi transactions. But fees can be expensive. Polygon (MATIC), Cosmos (ATOM), Harmony (ONE), and Solana (SOL) are all trying to address high gas fees by making more scalable and adoption-friendly technologies. But it’s hard to deny the dominance that Ethereum has on the DeFi space.
There is some good news, though… Developers around the world have been tirelessly trying to improve the Ethereum blockchain.
On August 5, 2021, EIP-1559 launched. It aimed to reduce gas fees and lessen the total supply of ETH by introducing a “base fee” for all transactions and burning a portion of every gas fee. Source
But we have yet to see a significant improvement in fees.
Another improvement slated for Ethereum is the ETH 2.0 upgrade. ETH 2.0 will transition the Ethereum blockchain from a Proof-of-Work system that relies on miners to a Proof-of-Stake system that relies on stakers or validators. This should increase energy efficiency, speed up transactions, and potentially reduce gas fees. Source
The first phase has already been launched. With the “Beacon Chain,” users can stake their ETH to become validators.
The next two phases are set to launch over time. Phase two is “the merge” and will bring the Beacon Chain and mainnet Ethereum blockchain together. The last phase, “shard chains,” will reduce the congestion and load on Ethereum. You can read more about these upgrades Ethereum upgrades (formerly ‘Eth2’) | ethereum.org.
So, in the near term, to avoid high fees or failed transactions always check gas prices. You can check gas prices on CoinGecko, Etherscan, or on your Ethereum wallet before you make a transaction. If prices are high, be patient, and make sure your gas limit is set high enough for the transaction you’re trying to complete.
For more complex transactions, like swapping between two cryptos or providing liquidity to a liquidity pool, your transaction’s gas limit can be quite high. As you interact with DeFi protocols, you’ll get a feel for what seems right.
Your total gas fee is your gas price multiplied by your gas limit. Think of it like filling up your car with gas. If the price of gas is $4 and your car holds 10 gallons, you’re going to spend $40 to fill it up.
Disclaimer: The information and opinions expressed herein have been obtained from sources believed to be reliable but are not guaranteed for accuracy or completeness; are for information/educational purposes only; do not constitute a solicitation or recommendation for the purchase or sale of any security; are not unbiased/impartial; subject to change; may be from third parties. Opinions expressed are those of the Author and do not necessarily reflect those of B. Riley Wealth Management or its affiliates. Investment factors are not fully addressed herein. For important disclosure information, please visit www.brileywealth.com/legal-disclosures.