Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Jun 7, 2024
This article has been fact checked and reviewed as per our editorial policy.

Ethereum Gas Fees Guide

Learn about Ethereum gas fees in our complete guide, including understanding how gas fees are calculated, tips on how to reduce Ethereum gas fees, and increase gas efficiency.

What are Ethereum gas fees?

Gas refers to the fee you’ll pay anytime you make a transaction on the Ethereum blockchain platform. This network transaction fee covers the computational expenses associated with a given transaction. This makes sure users validating and processing transactions on the Ethereum network are rewarded.

What is gwei?

Gas is measured in gwei. Gwei is a denomination of ETH - the cryptocurrency used on the Ethereum network. Similar to how 100 cents make up a dollar, a billion gwei makes up 1 ETH.

Gwei is also known as a nanoether or nano - due to it being the ninth power of the fractional ETH:

1 ether = 1,000,000,000 gwei.1 gwei = 0.000000001 ether.

As you can see from the above, using gwei to specify gas fees makes it much simpler. So instead of saying your gas was  0.000000001 ether, you can say it cost 1 gwei.

Gwei isn’t actually the smallest unit of Ether - wei is. Weirdly, gwei is also sometimes known as Shannon. In fact, all the denominations of ETH have nicknames - as a nod to the ‘founding fathers’ of cryptography.

How are gas fees determined?

The exact price of gas is influenced by supply, demand, and the network’s capacity at the time of the transaction. During periods of high network congestion, gas prices can rise significantly. Conversely, when the network is quieter, gas fees tend to be lower.

Key components of gas fees

  1. Gas Limit: This is the maximum amount of work a user estimates a validator will need to perform to process a transaction.

  2. Gas Price: This is the amount of gwei a user is willing to pay per unit of gas.

  3. Base Fee: Introduced in August 2021, the base fee is a set fee for transactions determined by the network.

  4. Priority Fee: Also known as a tip, this is an additional amount paid to incentivize validators to process a transaction faster.

How to calculate ETH gas fees

Gas fees are calculated using the formula:

Gas Fee=Units of Gas Used×(Base Fee+Priority Fee)

For example, if you want to transfer 2 ETH and it requires 2 units of gas, with a base fee of 11 gwei and a priority fee of 3 gwei, the gas fee would be:

2×(11+3)=28 gwei

This equals 0.000000028 ETH, which is added to your transaction total, making it 2.000000028 ETH.

There are multiple sites that let you know the current gas fee rate like Etherscan.

Read next: What is Etherescan and how do I use it?

What’s the purpose of gas fees?

Gas fees serve multiple purposes within the Ethereum ecosystem:

  1. Compensation for validators: Validators are rewarded with gas fees for staking their ETH and verifying transactions. This incentive is crucial for maintaining the network’s security and integrity.

  2. Network spam prevention: By attaching a cost to every transaction, gas fees help deter malicious actors from spamming the network with unnecessary transactions.

Did the Merge impact gas fees?

In September 2022, Ethereum transitioned from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism in an event known as The Merge. This shift changed how validators are rewarded but did not significantly impact gas fees. Fees continue to fluctuate based on network demand and traffic.

One of the ongoing challenges with Ethereum has been the high cost of gas fees, especially during periods of network congestion. Before 2020, gas fees were relatively low. However, as Ethereum gained popularity, fees began to rise, sometimes reaching over $20 per transaction. After The Merge, fees generally ranged from a few dollars to as high as $30, depending on network traffic.

Read next: What does the Merge mean for your tax bill?

Why are gas fees so high?

So you pay gas in gwei anytime you make a transaction - simple enough. But if you’ve ever used the Ethereum blockchain before, you’ll notice that gas fees vary per transaction.

This is because gas varies based on supply and demand. The busier the Ethereum blockchain is, the higher the fee will go.

Ethereum stakers (formerly miners) verify and process everything on the network. They’re awarded this fee in exchange for providing this service. The more transactions there are to get through the more in demand their services are and the more power they’ll have to use.

Users can actually set a gas price limit for a given transaction. Then stakers can look through the transactions and decide which are worth their time and resources. If the gas price limit the user sets is low, it’s likely to be ignored. When the network is very busy, users will set higher gas price limits and the price of gas will rocket up.

So the price of gas depends on the movements in the wider market at the time. As investors have flocked to crypto DeFi apps, the average gas price has been much higher than usual as interest in the market grows.

How to reduce ETH gas fees

Time transactions

Gas fees can vary throughout the day and week. Using tools like EtherScan’s gas tracker, users can monitor gas prices and time their transactions for periods of lower network demand, typically late at night or midday.

Use layer 2 solutions

Layer 2 solutions, such as Polygon, Arbitrum, and Optimism, offload transaction volume from the main Ethereum chain to reduce costs. These solutions can offer significant savings, sometimes reducing fees by over 90%.

Use alternative blockchains

Other Layer 1 blockchains, like Solana and Avalanche, offer much lower transaction fees compared to Ethereum. These "Ethereum killers" have gained popularity due to their lower costs and faster transaction speeds.

Why do some transactions cost so much?

Transactions that involve smart contracts or token transfers (e.g., ERC-20 tokens or NFTs) typically cost more than simple ETH transfers. This is because these operations require more computational work. The complexity and resource demands of these transactions are reflected in higher gas fees.

How can I optimize gas efficiency?

Users can minimize costs for complex transactions by:

  1. Aggregating transactions: Platforms like 1inch and Matcha aggregate transactions to improve gas efficiency.

  2. Using yield aggregators: Services like Yearn Finance and Zapper optimize gas usage and can enhance returns on transactions.

  3. Leveraging DSN aggregators: ColdStack and similar platforms help optimize gas efficiency for data storage networks.

Don’t forget the tax bill

Although it might come as a surprise, gas fees come with tax implications. It’s not all bad news though, in some instances, you can use these to increase your cost basis and therefore reduce any taxable gain. You can learn more in our dedicated guide on Ethereum gas fees tax.

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