What Are Gas Fees?
Tech Deep Dives

What Are Gas Fees?

1 year ago

Contributor: Hermez Network does a deep dive into the problems and possible solutions for rising gas fees on the Ethereum network.

What Are Gas Fees?

Table of Contents

What Are Gas Fees in Ethereum?

“Gas fees” are the transaction fees that users pay to miners on a blockchain protocol to have their transaction included in the block. The system works on a standard supply and demand mechanism. If there is more demand for transactions, miners can choose to include the transactions that pay more, compelling users to pay more to have their transactions processed quickly and efficiently. Users of Ethereum can also choose to pay more for faster transactions, as seen in the diagram below. 
Wallets like MetaMask enable users to interact directly with the Ethereum network, choosing which amount of gas they wish to pay. There are several websites where you can track gas prices, like ethgastation.info or ethereumprice.org.

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How Does That Compare to High Bitcoin Fees?

Bitcoin is a proof-of-work blockchain, where majority decision (consensus) is represented by the “longest-chain-wins” rule. This means that participants in the blockchain network accept the longest chain of blocks as the only valid one. Network participants (miners) compete to solve complex cryptographic puzzles and become the first on the network to successfully validate each new block.

This requires significant computing power to compete and resources to maintain. Users of the Bitcoin network pay transaction fees to miners, incentivizing them to continue validating the network. However, this becomes a problem when there are a shortage of miners and high demand for block space. This happened in April 2021, when miners in China suffered an outage due to coal mines accidents, resulting in a drop in hashrate, slower block times, backlog of transactions and extra fees per block. Bitcoin's average transaction fees went as high as $59.

Why Are Ethereum Gas Prices So Expensive?

Gas fees can be high because Ethereum is one of most used blockchains — there is so much movement in the Ethereum chain that the blocks are full and transaction fees shoot up with each rise in demand.

Ethereum gas fees are not always astronomical, but they have spiked to incredibly high levels during peak periods in the past such as the 2017 ICO boom and the DeFi summer of 2020, both times where the value of Ethereum and the number of projects in the space skyrocketed, bringing congestion to the Ethereum network.
In many instances, Ethereum gas fees can be outrageous for most use cases. However, rising gas fees does demonstrate that there are real use cases for Ethereum and the decentralized applications (DApps) are built on top of it. 

If we manage to scale Ethereum, making it process more transactions and at a lower cost, new business models will emerge. One of the most successful use cases of a blockchain network so far is the aforementioned decentralized finance (DeFi) ecosystem.

The DeFi Summer

During the first half of 2020, several new projects in the decentralized finance space very quickly rose in popularity and made a lot of people very wealthy, very quickly, which led to a surge in their usage we now call the “DeFi Summer."

Lending, borrowing, flash loans, derivatives, yield farming and decentralized insurance were all popularized very quickly. DeFi was a booming ecosystem, and it also had its share of several hacks, rug pulls and other dramas.
On this chart from Gitcoin, you can see the evolution of gas prices over the last 14 weeks from May 2021 to August 2021.

Smart contracts have peaks of high demand. As the network gets busier, so does the price of its native asset (which is ETH in the case of Ethereum).

Increased Value of Ethereum

An increase in usage — which tends to come with the appreciation of ETH — means an increase in Ethereum gas fees for the whole network.
Ethereum's dominance as a base layer (Layer 1) for Web 3.0 is challenged by an array of protocols, like Binance Smart Chain, Avalanche, Solana, or Cardano, to name a few. The main feature of many of these projects is to offer lower gas fees and in some cases, a higher throughput, or volume of transactions per second (TPS).

The lower gas fees offered by these other blockchains come with their own issues. Gas prices are generally lower due to the reduced volume of traffic in those blockchains, and a significantly smaller number of DApps operating on them, at least when compared with Ethereum.

Average Gas Price of Ethereum as of Aug. 20, 2021
It is inevitable that some DApps are being priced out of the main Ethereum chain. These DApps often do not need composability with other Ethereum DApps and will move to side-chains, alternative chains or Layer 2 solutions. As scalability issues and high fees continue to stifle Ethereum, we are seeing an increase in bridges to move assets from one chain to another.
Layer 2 solutions are being developed to scale Ethereum and make it more competitive in the short term, while the network transitions to Ethereum 2.0. In the meantime, rollups are one of the most promising solutions and will likely be the catalyst that enables mainstream adoption of digital payment networks globally.

How Can We Create a More Sustainable Ethereum With Lower Gas Fees?

Many different technical approaches are being developed in parallel in order to scale the capacity of Ethereum, increase throughput and lower Ethereum gas fees. Out of these, rollups are beginning to show themselves as a promising solution.

By using Ethereum as the base layer and inheriting its security and decentralization, rollups allow users to make transactions without congesting the Ethereum network. We call Ethereum “Layer 1,” while a rollup is built “on top of it” as a Layer 2, expanding its original capabilities.

There are two main rollup groups: optimistic rollups and zero-knowledge rollups. Each of them has tradeoffs, and different use cases will be better suited for one type or the other. 

For example, in the Hermez ZK rollup, we’re leveraging zero-knowledge technology to highly compress the data of transactions. In this way, we can batch thousands of transactions and reduce the gas cost, resulting in the user paying a lot less (-98%) per transaction. 

The development and integration of different rollup solutions could foster a climate of commonwealth, rather than predatory competition. In any case, the whole Ethereum ecosystem will benefit from these technological innovations.

How Will the London Hard Fork and ETH 2.0 Affect Gas Fees?

The London hard fork is part of the Ethereum 2.0 roadmap. This would ultimately lead to the "merge", where the Ethereum mainnet would merge with the beacon chain proof-of-stake system. This event is highly anticipated, as it would mean increased scalability for the Ethereum network, resulting in lower gas fees and faster transactions.
In the recent London hard fork that went live on Aug. 5, 2021, Ethereum Improvement Proposal (EIP) 1559 was introduced, which make gas fees for every transaction lower and easier to estimate by including a base fee. Under EIP-1559, as long as a transaction is sent with a fee higher than the base fee and a tip for the miner, it will be included in the next few blocks. Gas fees sent to miners will also be burned, resulting in a deflationary effect that should raise the price of ETH.

Conclusion

The roadmap towards Ethereum 2.0 is long and complex, but we can scale Ethereum now thanks to the development of rollups and the increasing availability of reliable data. Ethereum founder Vitalik Buterin recently published his views on the power of ZK rollups on the scalability issue facing Ethereum:

In general, my own view is that in the short term, optimistic rollups are likely to win out for general-purpose EVM computation and ZK rollups are likely to win out for simple payments, exchange and other application-specific use cases, but in the medium to long term ZK rollups will win out in all use cases as ZK-SNARK technology improves. 

In the same way that rollups can scale Ethereum 1.0, they will also scale Ethereum 2.0, potentially making it able to outcompete traditional payment networks like PayPal or Visa in transactions per seconds.

At the time of writing, it is hardly feasible to trade or transfer tokens on UniSwap due to gas prices. Expensive network fees and low volume of processing transactions are blocking the way to mainstream adoption of digital currency. In the coming years, this will change completely, and soon we will be able to cheaply and efficiently transfer value between us all.

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