June 24, 2024

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Gas 101: Everything You Need to Know About Blockchain’s Value Layer

The concept of gas came to light in the first smart contract blockchain, Ethereum, and it has since deepened its roots in DeFi. However, as the network grew and there was a higher demand for transactions, the gas cost for conducting transactions on Ethereum-based DeFi protocols has become extremely high.

But what is gas exactly, and why do we need it?

The Gas Mechanics

Gas fees are similar to toll charges. We pay a toll fee for using highways to go from one place to another. Similarly, to transfer funds between wallets on the blockchain, we must pay a fee for using the network. This fee is the gas. Okay! But why should you pay a fee for using the network? 

Simply because performing any action using a blockchain network requires computational power. Gas is the unit that represents the computational efforts required to complete different transactions on the blockchain. To better understand it, let’s look at the gas mechanics of the Ethereum network. 

Every transaction conducted on the Ethereum blockchain has an associated gas cost. For instance, adding two numbers costs three units, and sending funds from one wallet to another costs 21,000 units. The higher the complexity of the transaction, the higher the computational power required and the higher the gas units, just as the toll rates for four-wheelers are different from the toll rates for 18 wheelers.  

However, these gas units are not the same as gas fees. Multiplying gas units with the gas price gives us the gas fee. The gas price is determined by a variety of factors like network traffic and the availability of miners. For the Ethereum network, these gas prices are denoted in GWEI, a unit of ETH, much like the cent is for the U.S. dollar. 1 GWEI = 0.000000001 ETH. 

We know it’s all confusing. But, this example should clarify it for you. 

Imagine that John wants to send 2 ETH to his friend James. Now, the gas units required for this transaction are 21,000 as mentioned before. And based on the network traffic, the gas price is determined to be 200 GWEI. We know that

Gas fee = Gas Units x Gas Price 

So now, for this transaction:

Gas fees = 21000 x 200 = 4,200,000 GWEI = 0.0042 ETH. 

To complete this transaction, 2.0042 ETH would be deducted from John’s account and James would see 2 ETH reflected in his account. 

Now, these are the gas mechanics of the Ethereum network. The gas fees are different for different networks depending on the underlying technology, consensus used, number of network users, and many other factors. 

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Rewarding the Keepers of the Blockchain Network

So now we’ve calculated gas and how it varies. But what does the network do with all gas fees collected? 

Well, the network distributes the gas fees to its miners. In decentralized blockchain networks, miners provide computational power, verify transactions, add them to the blockchain, and secure the network. When a user conducts a transaction using the blockchain, it gets stored in a transaction pool called mempool. Miners of the network pick transactions from this mempool, verify their authenticity, and then add them to the blockchain. Their work is invaluable to the network, and the network rewards them with gas fees. 

So, if you consider the above example, the gas fee of 0.0042 ETH is given to the miner.

But, the number of miners on a network is limited, and it might take a considerable amount of time to get picked up from the mempool and be finalized. The Ethereum network came up with a solution for this with its recent London upgrade. 

The network now allows users to pay a tip or a priority fee for faster transaction verification. This extra tip entices miners to pick their transaction from the pool and verify it faster. So now:  

Gas fee = Gas units x (Gas price + tip) 

So, if John needs to pay a tip of 10 GWEI to complete the transaction in a minute then, 

Gas fees = 21000 x (200 +10) = 4,410,000 GWEI = 0.00441 ETH. 

How Gas Hinders DeFi’s Potential

So, if you’ve understood the mechanics of gas, it wouldn’t take long for you to realize the flaw in the plan. The design of these mechanics makes the gas fee skyrocket every time the demand for the network increases. More people wanting to transact in a shorter time makes people willing to pay higher fees to miners get in front of the line.

This is what happened during the DeFi boom of 2020. In September, the average gas fee for a simple transaction was around $15.13 for the Ethereum network, touching $40 at peak hours. Now, this is problematic on so many levels even if we do not consider the hundreds of dollars of fees users may pay for transactions such as minting NFTs, staking/unstaking assets, and so on.

For starters, it is heavy on the users’ pockets and discourages them from using the blockchain network and even DeFi altogether. Along with this, projects launching on the network might have difficulty inculcating payments into their operations because of the high gas. In simple terms, high gas fees make it impossible for DeFi to reach its full potential. 

Over the years, we’ve seen the emergence of many low gas blockchain networks, but gas still exists at the end of the day. Now, however, there might be a chance for gasless transactions to enter DeFi. 

Are Gasless Transactions the Future of Blockchain?

Gasless transactions seem impossible at first glance but DeFi lending protocol EasyFi Network is actively making them possible. The protocol makes use of meta transactions to pull this off. Nothing changes for meta transactions from the users’ end, and they initiate a transaction as usual. But, instead of the mempool on the mainnet, transactions are sent to a relayer. 

Now, a relayer is someone who is willing to pay gas fees on behalf of the user. The relayer could be a service or a DeFi project looking to onboard users. They pay the gas fee on behalf of the user using a smart proxy contract, and a base contract ensures that the original user is tied back to the transaction. 

The relayers then make their money back by charging the recipients. This process allows users to make completely gasless transactions.  

If implemented well, this could be a huge jump from the high gas fee of today, opening new dimensions for users, relayers, and business owners in DeFi.

Picture of By Corey Noles

By Corey Noles

Corey Noles is the Managing Editor for Innovation & Tech Today. In more than two decades as a journalist, he has covered crime, MLB, business, healthcare, politics and anything else that could snag a headline.

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