Yuga Labs, the company behind the Bored Apes NFTs, “broke” Ethereum on May 1, 2022. Yuga was releasing their brand new “Otherdeeds” NFTs. The demand was so high that it shot Ethereum gas fees through the roof. As gas fees reached new heights, it pretty much made Ethereum unusable.
Let’s take a few minutes to learn more about gas fees, and the factors responsible for its fluctuating price. We will also be looking at moments in Ethereum’s history where gas prices went out of control and try to understand the trigger behind the spikes.
So, what are Ethereum gas fees?
“Gas” is the fuel that powers the entire Ethereum ecosystem. When you interact with a smart contract or send a transaction, it needs to be processed by Ethereum miners using their computational resources. You can think of “gas” as the amount of processing power the miners need to complete your operation. So, to compensate for this, you will need to pay miners “gas fees.”
Tl;Dr: Interacting with Ethereum requires the network to spend “gas.” As a user, you need to pay “gas fees” to compensate the network for using its computational resources.
Think of gas fees like the delivery charges you pay Uber Eats for processing your order.
There is one more term you must know before proceeding – “gas limit.” The gas limit is the maximum amount of gas that one is willing to spend on a single transaction.
Why are Etheruem gas fees so high?
Ethereum gas fees are directly related to network demand. Think of it like this: Each block on the Ethereum network has a limited block space. So when there are a lot of transactions lined up, users may “bribe” the miner by providing higher gas fees. As a result, the miners will be financially incentivized to accept transactions with a higher gas fee. As more users follow suit, this significantly increases the median gas fees, leading to higher gas fees.
Usually, an Ethereum block can accept upto 30 million gas. However, the demand for Otherdeed NFTs was so high that a single NFT required 100,000-200,000 gas to mint.
How are Ethereum gas fees calculated?
The unit used to measure Ethereum gas fees is “wei.” 1 ETH = 1 quintillion wei. The most common unit used to measure fees is gwei or giga wei or 1 billion wei.
So, if someone says that gas is currently 200 gwei, it means that you will need to pay a base fee of 0.0000002 ETH (~$0.00055).
Alright, so now that you know the unit of measurement, let’s calculate the gas fees. For that, we need to look at both the pre-London upgrade and post-London upgrade eras.
Pre-London upgrade era
Let’s say you want to send a friend 2 ETH. The gas limit is 20,000 units, and the going rate for the gas price is 300 gwei. In this case, the gas fees payable is:
20,000*300 = 6,000,000 gwei or 0.006 ETH.
Hence, the total amount that you will send in this transaction would be:
2+0.006 = 2.006 ETH
Your friend will get 2 ETH, and the miner responsible for processing this gets 0.006 ETH.
Post-London upgrade era
During the London hardfork, Ethereum implemented a proposal called EIP-1559, which attempted to make gas fees more predictable. This upgrade brought in the following changes:
- Each block has a base fee that’s calculated by the network.
- The base fees get burned.
- Each transaction now includes a “tip” for the miners.
Let’s look at the calculations now.
You want to send your friend 2 ETH. The gas limit is 20,000 units, the base fee is 200 gwei, and the tip is 20 gwei.
The new calculations are:
(Gas limit)*(Base fees + Tip)
OR
20000*(200+20) = 4,400,000 gwei = 0.0044 ETH.
Now, 2.0044 ETH will be deducted from your wallet, and your friend will receive 2 ETH. The 0.004 ETH base fees get burned and the miner gets a 0.0004 ETH tip.
Analyzing Ethereum gas fees spikes
Let’s start with the obvious one.
The average gas fee reached a staggering 475 gwei on May 1 due to the Otherdeeds NFTs. However, while the total gas fees spent may have reached the highest on May 1, there is one more interesting anomaly that we should check.
Ok… what exactly happened on June 11, 2020? Why did the mean gas fees reach 710 gwei?
No, that’s not a typo. On that day, somebody sent 0.55 ETH, paying almost $30 million in transaction fees! So, either someone felt very generous, or they made a grave mistake.
Before we wrap things up, there is one more interesting spike that we should check. Before we do that, some context.
March 12, 2020, is an infamous day in crypto, often called “Black Thursday.” A massive price crash plunged cryptos by 50-60%. As a result, the total value locked in DeFi dropped from $880 million to $550 million.
This sudden drop spread panic among investors as they looked to liquidate their assets, pushing gas fees up. So, in the gas fees chart, can you guess which spike belongs to the gas fees?
Yes! That small spike was responsible for one of the worst days in crypto, especially DeFi’s, history. When you zoom out, it really puts things into perspective!
In closing – How to spend less on Ethereum gas fees
There is a lot of debate going on regarding Ethereum gas fees. As such, it is vital to understand the nuances of this topic. If one does want to transact on Ethereum without paying too much fees, it is crucial to do so when network demand is low.
