- April 29, 2021
- Posted by: Anita Iyer
- Category: Blog
Know how Gwei is calculated and the recent drop in gas fees
The second-largest cryptocurrency by market capitalization, Ethereum rose to a new all-time high, trading at $2,700 on April 28. Today, the ETH is at $2,737.67 at the time of writing.
The continued growth for DeFi and other components of the Ethereum-based economy is aiding the currency break out of Bitcoin’s shadow. Big things are on the way for ETH with Ethereum 2.0 but where does it leave the fluctuating Ethereum Gas fee? Let’s find out
What is Ethereum Gas?
Gas refers to the fee required to conduct a transaction or execute a contract on the Ethereum block platform. Commonly referred to as Gwei, it is the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. In simpler terms, as a car needs gasoline to run, you need gas to run an application on Ethereum.
Each transaction on the Ethereum platform requires computational resources to execute hence, each transaction requires a fee. Gwei is priced in small fractions of the currency Ether (ETH). The primary use of gas is to allocate resources to the Ethereum virtual machine (EVM) to enable decentralized applications such as Smart Contracts to self-execute in a secure way.
Where does Ethereum gas fees go?
Like any peer-to-peer system, Ethereum is heavily dependent on the hashrate of their miners. To simply put, more the miners on the network, higher the hashrate making the system faster and secure.
There is a computational cost of using Ethereum’s virtual machine (EVM) and every transaction like adding two numbers, procuring balance of an account, sending a transaction, executing a smart contract, has an associated gas fee.
The miners on the system are responsible for putting transactions inside their blocks. To perform this function, they need to use their computational power to validate smart contracts and they charge a certain fee, Gwei to do so. To incentivize the miners to actively take part in the ecosystem, the Gwei has to be profitable enough for them to participate.
Gas fees is required to keep the Ethereum network secure. As every computation on the network requires gas to be executed, it is easy to keep spammers away. For preventing erroneous transactions or computational wastage in code, a limit on computational steps of code execution is set by each transaction.
Users won’t be able to move their ERC20 tokens without having any ETH in their wallet. Ethereum gas is required to facilitate transactions of utility tokens like iOWN Token. An ERC223 token, iOWN Token enables users to participate in crowdfunding campaigns within the block-chain based equity crowdfunding platform, iOWNX.
How is Ethereum gas calculated?
To calculate the transaction cost, you need to multiple the gas cost by gas price. The gas price is measured in Gwei and 1 Gwei = 0.000000001 ETH. Most popular Ethereum wallets estimate the gas prices and allow users to choose from slow, medium and fast transaction confirmation speed.
As we know, miners on the Ethereum platform are awarded fees to perform crucial tasks from verifying to processing transactions. So, miners determine the price of gas based on the computational power of the network needed to process smart contracts and other transactions. Users set a limit to the maximum amount of gas (ETH) they are willing to spend on a particular transaction, referred as ‘Gas limit’. A higher gas limit means miners have to work more to execute the transaction using ETH but the higher rewards act as an incentive for miners to prioritize the task.
The price of the gas is determined by supply and demand and the network’s miners can decline to process a transaction if the gas price does not meet his threshold. Any gas that is not used in a transaction is returned to the user. Before making a transaction, track the gas prices live and insert the right amount from the tracker to ensure your transaction is successful.
Why are Ethereum Gas fees so high?
The amount of fees needed to transact on the Ethereum network has breached records, ranging between $20 to $24 this year. On top of this, in order to relieve transaction congestion, miners raised Ethereum’s gas limit to almost 15Million in April 2021.
Below are few reasons for soaring Gwei prices:
- The fees are skyrocketing as more transactions are taking place on the Ethereum network and there is a finite block space available. The fee can range from a few Gwei to a few dollars depending on the transaction type.
- With the increasing acceptability of the DeFi space and its complex mechanics, a major chunk of gas fees is utilized in DeFi applications like Decentralized Exchanges, leading to the price spike.
- Gwen isn’t only used for transferring tokens between address but to perform other tasks like executing smart contracts, staking, pooling and lending.
- The increased cost of transactions on Ethereum networks has led to a growing demand for stable coins to realize these gains.
Will Ethereum gas fees drop?
Ethereum gas price is expected to drop in the coming months with Ethereum’s ambitious plan to scale the network to handle 150,000 transactions per second. Dubbed Ethereum 2.0, the upgrade will make the network fast and more secure. In Ethereum 2.0, the network will upgrade itself from Proof of Work (PoW) to Proof of Stake (PoS). Migrating to PoS eliminates the energy and labour–intensive problem of PoW and sharding leads to increase in transaction volume.
Early, this week Ethereum rallied to $2,300 as gas fees dropped to weekly lows over the weekend. On April 28, the estimated cost of transfers cost on an average of 45 to 65 Gwei for transactions between 15 seconds and one minute. The lower gas fees triggered bullish momentum for Ethereum on Sunday as more traders jumped in to save on transaction costs.
The upgrades to the Ethereum network will also further mitigate the high gas fees. The Ethereum Berlin Upgrade went live in March and the most anticipated Ethereum Improvement Proposal (EIP) 1559 will be packaged with the London hard fork this coming July.