Ethereum fees: Why are they so high?

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Ethereum Fees - Why are they so high (blog post image)

If you’ve been operating in the Ethereum blockchain, there’s a good chance you felt like ripping the hair off your head these last few days, especially if you’re a retail investor. Ethereum fees have literally never been higher and the cost of moving your assets can take up a good amount of your budget, making you question if it’s actually worth it. However, these fees are necessary to keep the network’s performance optimum. 

What is Gas?

Let’s start with the basics. Gas is the name given to the fees you have to pay every time you perform a transaction in the Ethereum network, whether you’re buying, selling, or moving cryptocurrency from wallet to wallet.

These fees are specified in Gwei (also called nanoether), which is a special denomination for a fraction of Ether (ETH), the native cryptocurrency of the Ethereum blockchain. To be extremely clear, 1 ETH equals Gwei, making it the best unit to determine Gas prices. For example, You could say Gas is 0.000000010 ETH, but it’s much easier to say it’s 10 Gwei.

You pay Gas for every single transaction you perform, but you may wonder… to whom? Who receives that payment? That would be miners, responsible for validating those transactions and keeping the network secure and transparent. If there was no Gas, there would be no rewards for miners and therefore no reason for them to provide confirmations to the blockchain. Without confirmations, transactions wouldn’t go through. In other words, you could say Gas is the fuel that allows the Ethereum blockchain to work.

Understanding Ethereum fees prices

We’ve said earlier that fees have never been higher. How did that happen? How does the network determine the exact amount we have to pay to perform a transaction? Well, fees on Ethereum respond to different factors.

First of all, there’s supply and demand. On one hand, miners can choose to reject transactions if they consider the Gas set for them isn’t worth the trouble. On the other hand, people who need their assets moved immediately and can’t wait for validations may be willing to pay a higher fee to get it cleared ASAP. Each user of the network can choose the Gas price they want to pay, but miners will always try to work on the higher fee transactions since their reward would be greater. That way, lower fee transactions are left last for confirmation, sometimes even rejected.

Let’s put it this way: There are 2 miners (A and B) and 4 transactions (1, 2, 3, and 4) waiting for validation. Let’s also say the transaction number is the Gwei they are willing to pay for the fee. Miner A and miner B will compete to confirm transaction 4 first, as it will reward them with 4 Gwei. One of them will win, and the other will move on to transaction 3. However, while they were mining, a new transaction appeared willing to pay a 5 Gwei fee. When Miner A finishes, he will move on to transaction 5 and leave 1 and 2 again until no more transactions with higher fees appear or until 1 and 2 are rejected.

This, however, will improve when Ethereum fully migrates to ETH2.0 in Q4 2021 or Q1 2022, when the blockchain switches from Proof-of-Work to Proof-of-Stake validation.

Another factor that affects Gas price is of course ETH value. As we said, although we often convert them to U.S. dollars or other fiat currency for clarification, fees are paid in ETH. That means that if ETH price rises against the dollar, the dollar value of your Gas fee will also be greater.

Lastly, there is a different fee for each smart contract executed on the Ethereum blockchain. Gas varies for transferring ETH than for USDC or any ERC20 tokens. The same goes for withdrawing assets from Metamask or Uniswap, Aave, and other DeFi platforms. Make sure you use Etherscan Gas Tracker to check the fees for each platform or token you’re using to avoid surprises and only pay amounts you’re comfortable with.

How to avoid paying high Ethereum fees?

First of all, let’s get one thing clear. Gas fees are inevitable if you have to operate in the Ethereum blockchain. There is absolutely no way you can move your assets or execute a smart contract without paying them. There are, however, more economic alternatives that you can try out.

The first and most obvious thing you can do to avoid high fees is to wait it out. Periods of high volatility often mean a lot of movement and thus, high Gas. If you can afford the time and the risk, leave your assets and wait for the waters to calm. Eventually, congestion will decrease and so will the cost of moving your money.

You can also convert your crypto to other tokens running on different blockchains, like Binance Smart Chain, Bitcoin Cash, or Litecoin, which are significantly more economic. Beware, however, that there are risks involved. The coin you switch to might dip, for example, making you lose more money than what you’d lost paying Gas. In that case, you may prefer to use wrapped tokens.

*Did you know? In the “Market Analysis” section of The Crypto App, you can find an overview of the different blockchains, their current traffic level, and the average fee for transactions in real-time. Download the app here.

Some platforms like Nexo Finance cover their users’ fees for withdrawal as a marketing and customer loyalty strategy. However, there is a catch. Allowing a platform to pay your fees means that they set it as they please, and therefore can choose the priority of your transaction. That is why you must make sure you’ve read and understood their terms and conditions carefully and are comfortable with them. Also, remember that someone always pays the fee, even when that someone isn’t you.

Summing up

Although in times of high volatility and heavy traffic like these Gas can become exorbitant, we need them to keep the network up and running, not to mention secure and fraudless. Luckily for all of us, we have many more economic alternatives to take into account. There is also a good reason to be hopeful since the imminent phase 2 of ETH2.0 is expected to greatly improve transaction processing, making the Ethereum blockchain not only more accessible but also more scalable and faster.

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