2021-10-14 20:54:29

What the Heck is Ethereum’s Gas Fee and Why is it Necessary?

When learning about crypto and eventually exploring the Ethereum or other blockchain platforms, investors will quickly come across the term “gas”. No it has absolutely nothing to do with what goes into a car but is necessary for certain blockchain platforms the same way gasoline is pretty crucial for most cars not inspired by Elon Musk.

What is Gas?

Gas is essentially a fee that is required to execute a transaction on the Ethereum blockchain platform. This gas fee is priced in small fractions of the cryptocurrency Ether (ETH) that are referred to as Gwei. To make things more complicated, Gwei is also sometimes called Nanoeth. Basically just think of ether as dollars of the Ethereum currency and Gwei as cents.

Simply put, gas is a fee paid to complete a transaction on Ethereum and is priced in ether.

Are Fees Necessary?

Of course in 2021 having to pay a fee to simply complete a transaction can feel ridiculous as many investors no longer have to deal with trading fees. However, there is a legitimate reason for gas fees. It pays for the mining that verifies the transaction and keeps the blockchain up to date.

How is the Fee Determined?

The amount of “gas” as transaction is determined by the supply of mining capacity and the demand for transactions to be verified. In this way it is similar to the prices of actual gas, where changes in either the supply or demand can have big impacts on the price.

The price is set in this free market manner simply due to the fact miners can decline to process any transaction if the gas price is not high enough for them. Essentially, the gas fee must be enough to outweigh the cost of the computational power needed to process these transactions.

Summary

The term “gas” was created to differentiate between the value of ether and the computational cost of using Ethereum’s virtual machine. Someone has to execute a transaction on the network and isn’t going to do it for free. It’s possible that supply (miners in this case) could expand so much that gas fees approach zero but the exact opposite could occur should miners leave the Ethereum platform. All that said, gas fees are here to stay as they are a necessary function to keep Ethereum running.

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