Here’s what you are paying for.

Every crypto advocate praises adoption. But what will it bring to the table? For one thing, it will introduce this fundamental technology to the public. For another, it will help spot its flaws. Just take a look at Ethereum. The rising price, the emergence of the DeFi industry, and the recent NFT hype have promised a bright future for the network and, at the same time, made it clear that transaction fees have to drop.

It’s not the first time Ethereum fails to deal with the network’s overload. Back in 2017, the sudden popularity of Crypto Kitties – an unsophisticated collectibles game – have caused the first significant clog of the blockchain. The game team had to raise the fees from 0.001 ETH to 0.002 ETH, and given the Ether’s price at the time, it wasn’t too bad. And this leads us to another issue. The higher Ether costs, the more expensive its transactions become when we calculate the value in USD.

In the beginning of April the average cost of transferring an ERC20 token stayed around $12, according to Etherscan. Tokens (like USDT, for example) are moving away to cheaper blockchains escaping high transaction costs, and the upcoming July’s Improvement Proposal is set to complicate things even further.

If you know little about how Ethereum fees work or still not sure what to expect from the big change, we’ve got you covered.

Ethereum Fees: The Basics

Whenever you want to send a transaction or use an Ethereum dApp (decentralized apps running on blockchain such as exchanges, games, portfolio trackers, etc.), you have to pay a gas fee.

Gas goes to miners in exchange for executing computations and validating transactions. The amount of gas fee depends on the difficulty of the transaction. For example, when you transfer one token to a friend, it will take less effort than executing a complex smart contract, and the fee will be lower.

Gas fees are paid in GWEI herewith one GWEI equals 0.000000001 ETH. Two indexes determine what fee you will pay for each transaction: gas cost and gas price.

Transaction difficulty and gas limits

As mentioned earlier, depending on the complexity of transactions, the fees may vary. If you’re sending ERC20 to your friend, you’ll need around 65,000 gas (and 21000 for ETH) for the transaction at the moment. But if you want to seal the deal on Uniswap, your estimated gas limit would go up to 200,000.

The gas limit refers to the maximum amount of gas users would use for a transaction. When sending a transaction on the Ethereum network, one can manually set the limit they are ready to pay. To make sure you don’t go crazy (or stingy) with your gas, check Ethereum Gas Station beforehand. Another great service to help you with the estimated cost of Ethereum network transfers and other interactions is Gas Now. It shows the historical gas price data, pending transactions’ info, and features an average gas table.

The gas limit serves as a gatekeeper that stops users from paying more than they should when using devious dApps. Once the transaction is finalized and there is still some gas left, it will be sent back to the user. Whereas, if the limit you set is low, your transaction might get stuck, and eventually, you’ll get your funds back, minus the fee.

In 2021, Ethereum fees are soaring, but neither the amount of gas nor the transaction complexity is responsible for that.

Gas auction and gas price

Apart from the gas limit, you can also choose how much you’re willing to pay for the unit of gas. You can select a low, average, or high gas price and even set it manually. Now, why would anyone decide to pay more?

Miners can dive into the transaction pool and fish out those with the highest gas fees. When the network gets overloaded, the competition gets more challenging, and gas prices are skyrocketing. And the network tends to get overloaded quite often these days. The best chance to get your transaction executed fast is to set a higher fee. But once everyone starts raising the fee, it turns into an auction.

Ethereum’s block size is not fixed as Bitcoin’s, but it’s still limited and depends on miners’ gas limits reports. Also, there are no certain transactions that can fit in one block since they all demonstrate different complexity and require a different amount of gas usage. Another problem is that blocks are often consistently full (about 98% full in March 2020), which intensifies the competition.

Why don’t they increase the block size then? They do, but raising it too much and too often can harm the fundamental architecture of the Ethereum blockchain and compromise decentralization.

Devi’s breakthrough, soaring DEX trading, yield farming, NFT hype couldn’t help affecting Ethereum’s gas price that went all the way to 500 GWEI per transaction. One of the most vivid examples is Uniswap’s airdrop. In September 2020, the exchange announced that all the active traders are eligible for 400 UNI tokens (~$1,400), and users rushed to grab the freebie. That caused gas prices to rise up to 700 GWEI and, according to Glassnode, they’ve spent over $1 million on fees due to this affair.

A Way Out: EIP-1559 and New Gas Mechanism

Ethereum’s next hard fork is scheduled for July, and it is meant to change the rules of the game entirely. Once the Ethereum Improvement Proposal (EIP) 1559 comes into effect, the Ethereum transaction fee will be determined not by users but by algorithms.

Apart from that, the new update includes a mechanism allowing to avoid reaching maximum block capacity. While the block size increases to 25M gas, the target size will be kept at 12.5M, keeping the blocks only 50% full. And the new reduced fee will also come in handy.

Whoever sends a transaction will have to pay the base fee set by the algorithm. The amount of the base fee will be directly connected to the preceding block. If that block surpassed the target block size, the base fee would increase. Consequently, it will eventually become too expensive for some users to go through with their transactions, leaving blocks only half full. In turn, when the block is not reaching the 50% capacity target, the fees will also be reduced, and transactions become cheaper.

Another major change has caused quite a controversy among miners. Currently, most of their income comes from gas fees, but that’s about to change. After the EIP 1559 is released, instead of ending up in miner’s wallets, the base fees will be burned, aiming at fighting inflation. However, miners won’t be completely left out. Transaction senders will have an option to tip the miner to prioritize this transaction if the blocks are getting close to mid-capacity.

Will this new system help reduce gas fees? Chances are, it won’t. To finally deal with this issue, you have to address Ethereum’s scalability problem first. If the network load keeps increasing (and probably will) and the number of transactions per block won’t change, it’s pointless to expect a different result. Ethereum 2.0, on the other hand, can finally address this situation.

How to Reduce Gas Fees

Meanwhile, there are a few tricks that can help you reduce the gas fee when using DeFi apps.

Whenever it’s possible, combine related transactions. For example, if you have two different accounts that contain tokens you want to stake, do not do it separately. Transfer all the tokens to one account and lock all the tokens just once. Also, if you’re planning on staking a certain amount of tokens every week, consider staking the whole amount one time per month instead.
If you can, it’s best that you wait until the network is less congested. Check the current gas prices, and don’t just jump straight in when they are over the roof.
Stay aware of the network load and use services like Gas Now not to overpay. Sometimes it’s worth choosing a low-priority transaction and set a time frame instead of trying to compete with a bunch of already pending transactions. On the contrary, there are times when you need to set a higher fee than your wallet suggests.