Ethereum established itself as the most widely used blockchain network and surpassed Bitcoin in terms of transfer of value back in 2021. However, The platform’s failure to address high transaction fees and lengthy processing times frustrated its growing investor base.
These issues were supposed to be addressed by Ethereum’s 2022 major upgrades, including The Merge. Although it did not directly lower gas fees, this upgrade provided the technical foundation for future gas optimizations.
Let’s look at the expected changes in 2023 to understand better Ethereum’s gas system and how they will impact our activities in the crypto world.
The basics about Ethereum Gas
On a daily basis, more than 1,000,000 transactions are made on the Ethereum blockchain. These transactions and the security of Ethereum 1.0 are managed by nodes.
These computers contribute their computing power to the network. Miners are the most important computers in this group. They are responsible for prioritizing transactions in order to ensure that the blockchain doesn’t get too hot.
To add a transaction to the Ethereum network, a gas fee is required. The amount of gas needed depends on the transaction’s complexity and network competition, and miners are rewarded for their efforts with cryptocurrency.
However, the former Proof-of-Work model was labor-intensive and certainly not very environmentally friendly. This is why Ethereum 2.0 adopted a Proof-of-Stake model instead.
Even after The Merge, the Ethereum gas fee remains in place. However, it will be used differently. Gas units are used to measure miners’ contributions, and a standard transaction requires 21,000 units. The denomination used to pay miners is called Gwei, which represents the one billionth part of an ETH. For a standard transaction, a miner should receive 2,310,000 Gwei or 0.00231 ETH.
Gas prices fluctuate depending on the complexity of the transaction. A simple transfer may require 21,000 gas units, while more complex transactions, such as those used in decentralized finance, may require over one million gas units. The price of gas is denoted in Gwei, and a 21,000 gas transaction with a Gwei price of 5 would cost 105,000 Gwei or 0.000105 ETH.
How do ETH gas prices fluctuate?
The Ethereum blockchain is not just some boring digital platform – it’s more like a bustling walkway. Just like a busy street, when few people use it, there’s enough space for everyone to move around freely.
However, as more and more people try to use it, the available real estate becomes scarcer and more valuable. And just like the real estate market, the price of using the Ethereum network is driven by supply and demand.
To use the network, Ethereum users need to complete transactions that must be confirmed by miners. But before they can do that, they have to set their Ethereum gas limit, which is the maximum amount they are willing to pay.
The higher the gas limit, the more computational work is required by the miners, which motivates them to prioritize those transactions and remove them from the “mempool” – a database of unconfirmed transactions.
Why gas fees go up
So, what factors can cause the gas fees to fluctuate? Well, there are a few things to consider. For starters, the price of ETH can oscillate, and since rewards are provided in the native coin of the network, it can impact the gas price.
Moreover, the demand for transactions to be confirmed can change. Higher volumes and a greater demand for faster confirmations will naturally drive up the price.
While the amount of gas required for any given transaction remains constant, the gas price is dynamic. Users set the gas price when sending a transaction, and then the transaction is sent to the mempool, where miners can include it in the next block.
Miners are rewarded with transaction fees, so they are motivated to prioritize transactions with higher gas prices. As a result, users end up in an auction-style market where they bid up the gas price to make sure their transaction is picked up and settled quickly.
In short, less demand for block space will result in lower gas fees. Typically when the Ethereum price goes up, the Ethereum gas price also tends to increase. Similarly, if the demand for settlement on Ethereum increases, so does the average gas price, and vice versa.
These two market conditions are the driving force behind the dynamic gas price that we see today. Who knew that using a blockchain could be so much like navigating a bustling street market?
The Block Gas Limit
Have you ever wondered why Ethereum gas prices skyrocket when the network is congested? It turns out that miners can’t just process every transaction in the mempool to maximize their earnings. This is because the Ethereum network is restricted by its gas limit, which represents the maximum amount of gas that transactions within a block can consume.
Now, here’s the kicker: the gas fee limit, combined with high demand, has contributed to the outrageously high gas fees that users often experience. With a block gas limit of 30 million gas (although 15 million is more realistic), theoretically up to 714 transactions could be included in a block, assuming everyone paid 21,000 units of gas and it took around 16 seconds for each block to be mined. But let’s face it, different amounts of gas will be used for each transaction, so this is just a pipe dream.
To make matters worse, one transaction requires multiple block confirmations, technically 14 for Ethereum, and sometimes upwards of 50 for trades on crypto exchanges. This means that setting lower gas fees may leave a transaction showing as pending or could cause it to fail altogether, leaving users frustrated and out of pocket.
But wait, there’s more! The block gas limit is set by miners and has changed over the years, causing controversy in the Ethereum community. In 2015, the limit was a measly 5,000, and it has been increased several times since then. Although raising the limit allows for more throughput on the Ethereum blockchain, it also increases the overall size of the blockchain in bytes, creating more strain on the system.
Gas fee auction
So why the auction for gas prices? The answer lies in the fact that Ethereum blocks are restricted by the sum of the transaction gas used in the block.
If the block gas limit was, say, 10,000,000, then each block (which is mined roughly every 15 seconds) could include a maximum of 476 transactions, assuming each transaction used 21,000 gas. But as we’ve seen, in reality, each transaction will use a different amount of gas, causing a bidding war for spots in the next block.
In summary, the relationship between Ethereum price and gas prices is not as straightforward as you might think. Despite miners getting rewarded for each new transaction they help bring to the network, there are limits on the number of transactions that can be processed in each block.
This, combined with high demand and a complex block confirmation process, creates a system where users must bid up gas prices in order to have their transactions confirmed. It’s a cutthroat world out there on the Ethereum network!
What happened to gas prices after The Merge?
The Ethereum community has been waiting for The Merge with bated breath for nearly half a decade. The anticipation only grew stronger as issues such as high gas fees, sluggish confirmations, and environmental concerns continued to plague the network.
The Merge is just one part of the ambitious Eth 2.0 upgrade plan, which also includes the Beacon Chain and Shard Chains. The Beacon Chain, which introduced Proof-of-Stake to the network, has also been released.
The Merge made its grand entrance in September 2022. During August 2022, ETH was trading between the bewilderingly low prices of $1600 and $1800, much to the surprise of many in the crypto community.
Although The Merge did not magically lower gas fees overnight, it was a necessary step toward achieving that goal. The real magic lies in the synergy between The Merge, sharding, and Ethereum’s “rollup-centric” roadmap.
According to the Ethereum Foundation, sharding will distribute the burden of storing compressed data from rollup contracts, paving the way for exponential growth in network capacity. By enabling robust layer 2 ecosystems, these innovative upgrades will ultimately bring down gas fees for the everyday Ethereum user, a prospect that is both exciting and astonishing.
Useful ways to reduce gas costs
Unquestionably, while sharding and Layer-2 solutions hold the promise of eventually reducing gas fees on the Ethereum network, it behooves users to stay informed about how to manage these costs until then. Here are a few astute strategies that could lead to significant savings on this blockchain network.
As previously mentioned, Layer-2 solutions shift transaction information off-chain and then relay the results back onto the Ethereum network.
This innovative approach alleviates the burden on the network and has garnered praise from none other than Vitalik Buterin himself. L-2 solutions such as Arbitrum, Polygon, and Optimism are among the finest of their kind.
Test your transaction
To reduce gas fees, it is critical to ascertain the cost of the transaction first. Several online tools, including Tenderly, DeFI Saver, and others, enable users to simulate a crypto transaction, thereby ensuring that any issues are identified and corrected while revealing the cost of the transaction under specific parameters.
Learn to anticipate network congestion
While far from ideal, it may be necessary to strategize and carefully select the moment when a transaction is to be processed. Network congestion is often brought on by the extreme use of the blockchain. To avoid this, one must stay apprised of the latest developments that could drastically increase the demand for Ethereum.
Leverage Ethereum’s storage refund
Network nodes are required to retain a plethora of information related to transactions. Ethereum offers storage refunds when some of this information is deleted, thereby relieving network congestion. For instance, GasToken enables users to tokenize stored gas.
Choose an auspicious moment to run your transaction
Although the Ethereum network may seem like a bustling promenade most of the time, it is not always thus. One can consult online tools to predict when Ethereum transactions will be at their nadir. By timing one’s action just right, it is conceivable to cut one’s gas fee costs in half, if not more.
Use apps that minimize costs
Numerous dApps exist today that specifically help users minimize the cost of transactions on the Ethereum network.
Consider a Layer-1 alternative
Ethereum’s place in the crypto sphere is unlikely to be challenged anytime soon. Nevertheless, several new blockchain networks have emerged in recent years that offer lower transaction fees and can handle more transactions at higher speeds. For example, the Solana network charges roughly $0.00025 per transaction. Other options to consider include Cardano, NEAR Protocol, or Binance Smart Chain.
Consolidate transactions when possible
Gas fees fluctuate based on the type of transaction, and of course, users will have to pay gas fees for each subsequent transaction. To mitigate this, it is best to aggregate one’s ETH coins into one address. This is possible when one wishes to transfer ETH from various crypto wallets into the same dApp.
Ethereum upgrades and what the future has in store
According to Vitalik Buterin and the Ethereum team, other updates are coming. The promise that that these will reduce network congestion. Could it be that once and for all, Ethereum gas feel will be lowered for all users?
Ethereum, as well as the entire crypto-sphere, have a long way to developing to their true potential. With plenty of interest in this technology, certainly, both the motivation and the ability to create improvements exist. There are many reasons to be optimistic.