Guide to Ethereum: What is Gas, Gas Limit and Gas Price?
in Ethereum (ETH)
As Decentralized Finance (DeFi) grows in popularity, some are shocked by the
high cost of gas fees when making transactions on the Ethereum blockchain.
If you're new to crypto, Ethereum is not just the "#2 coin behind Bitcoin" or the coin you have to buy to mint an NFT or buy a Pudgy Penguin — it's a world in and of itself. Ethereum is a massive community-run technology that enables people to build applications on top of Ethereum called dApps (decentralized applications). Ether (ETH) is the cryptocurrency that powers this world, and Gas is the mechanism that powers Ethereum.
Today, we look at the ever-changing cost of the Ethereum gas price needed to use this ecosystem — what is it, why do we pay it, is there anything we can do to cut the cost, and why is it an essential player in this massive movement?
Why does Ethereum have a gas system?
"Gas" is needed to pay for transactions on the Ethereum blockchain. Any time a user is making a transaction on Ethereum, such as moving an ERC-20 token from one wallet to another, swapping tokens on a DEX, borrowing or lending digital assets, staking an ERC-20 token, or even simply buying an NFT— the user will need to pay a fee in ETH (Ethereum's native token), and this is called gas.
Gas ensures that the transaction gets recorded by the miners on the Ethereum Blockchain. The fee pays for the miners to do the computational work needed to complete the user's transaction.
Gas Limit vs. Gas Price
When you are making transactions on the Ethereum blockchain, you will need to pay an eth gas fee. If you can adjust your Ethereum gas price, you will see settings for gas limit and a gas price. The combination of both of them is what determines the cost of the transaction. Gas limit is the maximum amount of gas units that you are willing to pay for the transaction. Gas price is the amount of ETH you are ready to pay for each unit of gas.
So how come when you pay for ETH gas, the payment page talks about gwei? Good question. Gwei is a denomination of ETH. Just like satoshi are a denomination of bitcoin. 1 ether = 1,000,000,000 gwei (109). 1 gwei = 0.000000001 ether. Just like 1 cent = 0.01 dollar. And to calculate the gas fee - we need gwei.
How to pay for the Eth gas fee
Let's say you want to buy an NFT on the Opensea marketplace. To make the transaction, you'll need to
1) Connect an acceptable wallet, like Metamask
2) Have a balance of ETH that's big enough to pay for the purchase and the gas fee. 3) Calculate how much gas you'll need.
If you are using Metamask, it will automatically tell you how much gas you need.
Here is a handy calculator that tells you what the current price of ETH is, how much Gwei is required, and what that will cost in USD. Using this can help manage your expectations.
Which protocols are helping Ethereum to reduce gas fees, and how to save gas
There are a few ways that you can lower your Ethereum gas price:
1) Choose a time when Eth gas prices are lower. The Ethereumprice website charts the price of gas against the time of day.
2) Get Ethereum gas price alerts for when Ethereum gas price reaches a level in your range - even if you have to wait a long time.
3) Use the advanced setting in Metamask to edit the maximum fee and use a slower suggested setting (low-medium-high). But make sure you don't set your gas too low or too high, as this can put you at risk of losing your transaction.
For example if you are trying to "mint" a limited-edition NFT. A low gas setting might save you a little money, but the NFTs could be all handed out by the time the transaction reaches its turn, and the user would both lose their fees and miss out on getting the NFT. People minting popular NFTs pay hundreds if not thousands of dollars in gas when there is that much traffic on the blockchain, as they are all trying to rush into getting their transaction on the block. This is called a Gas War!
Why is gas not needed in Bitcoin?
Transactions on the Bitcoin blockchain do also need to be paid for, but we don't call them gas. When interacting with the bitcoin blockchain, miners need to approve the transaction and the "Bitcoin transaction fee" pays for this.
When activity escalates, like in a bull run peak, fees will increase, and transactions will take longer to confirm because of the congestion on the blockchain.
Eventually, with the advent of Ethereum 2.0, gas fees will no longer be necessary on Ethereum, and the network will be easier to use, which will help it grow even more. We are all looking forward to that day!
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.