A Beginner’s Guide
What are Gas Fees in Crypto?
In this guide I’ll explain what crypto “gas fees” are in non-technical terms so you can avoid them and save money on your crypto investments.
What are gas fees in Crypto?
Gas fees in crypto can be a bit confusing, but they’re actually quite simple. The reason most people get confused by the term “gas fee” is because they try to relate it to gas in the real world, like the kind you put in your car.
The truth is that a crypto gas fee is not anything like what it sounds.
A gas fee in crypto refers to the fee you have to pay in order to make a change to the blockchain. (See my simple explainer to “What is a blockchain” here).
Every time you want to make a change to the blockchain, a ton of computers have to record that change and share it with each other (these are called validators). These computers (and the people who run them) aren’t going to do this for free. This means that we need to pay them a fee for helping us record that change of information. This is what’s called a “gas fee”.
When do I need to pay gas fees?
Whenever you want to make a permanent change to the blockchain, such as on Ethereum, you’ll need to pay a gas fee. Types of changes you might want to make:
- Buying some Ethereum (or other crypto)
- Selling some Ethereum (or other crypto)
- Buying an NFT
- Selling an NFT
- Changing ownership of an NFT
- Burning (destroying) an NFT
How are gas fees calculated?
Gas fees work on an auction system. The fee is calculated based on how busy the network is and how many computers (validators) are available to record those transactions.
Here’s a simple example:
5 people want to make a change to the blockchain at the same time and there are 5 validators who can crunch the numbers to record that transaction. In this situation the validators might set the price at $3.
Now imagine that 100 people log on and want to make changes to the blockchain all at the same time.
How do the 5 validators choose whose transaction to record first? This is where the auction comes into play.
The validators essentially say, “whoever is willing to pay the most will get their transaction recorded first.”
The price may go from $3 to say $300 because someone is willing to pay that much to make their transaction happen.
Now, where there’s money to be made, there tends to be an influx of people wanting to get a piece of the pie.
When gas prices rise, more people turn their machines/computers into validators. This is when the reverse happens.
If the number of validators goes from 5 to say 50, a reverse bidding war begins. Those 50 validators will undercut each other on price in order to get your business. They essentially say, “Instead of charging you $300, I’ll only charge you $280.”
This is why gas fees rise and fall depending on how many people are using the blockchain at a time.
Why are Ethereum gas fees so high?
One of the biggest strengths of the Ethereum blockchain is that it’s incredibly secure. This is because the blockchain only allows for a few transactions to be written to it at a time. This helps the validators keep up with the transactions and prevents any “funny business” from sneaking through.
The downside of this is that every time a change is made, those validators need to re-record it on their copy of the blockchain. Because Ethereum has become such a popular blockchain, it currently has a lot more users than validators and this makes the gas fees on Ethereum high.
This is also why it’s important to be careful what kind of transactions you do on Ethereum. If you want to buy some ETH (Ethereum’s proprietary coin) you need to make sure you’re buying enough of it to make it worthwhile.
For example, if you buy $30 of ETH, you might be charged $100 in gas fees to record that transaction. This means that you’ve actually spent more money to buy ETH than your ETH is worth.
It’s important to note that the size of your transaction does not change the amount of gas you are charged.
This means that if you bought $3,000 worth of ETH, your gas fee would still be $100. This is why it’s important to make sure you know what your gas fee will be before making your purchase.
But don’t worry, most exchanges and interfaces will show you what the gas fee will be and allow you to back out before you confirm the transaction. TK
How to avoid gas fees?
There are several ways that you can avoid gas fees in crypto. Here are the 3 main ways:
- Use a cryptocurrency that has lower gas fees
- Use an exchange that has lower gas fees
- Make your transaction at less busy time of the day
Which crypto has the lowest gas fees?
One way to avoid gas fees is by using a cryptocurrency that is more efficient. Cryptocurrencies such as Solana, Avalanche, and Polygon were created to be more efficient than Ethereum and thus charge lower gas fees.
These alternative cryptocurrencies gain this efficiency in several ways. Some cryptocurrencies use less frequent validation, meaning they’ll batch several transactions together before recording them onto the blockchain.
Other cryptocurrencies will use alternative ways of validating the transactions, such as “proof of work” or “proof of stake.” TK
Solana, for example, uses a “proof of history” mechanism, which allows it to record 50,000 transactions per second. This is a huge speed improvement compared to Ethereum’s current 45 transactions per second.
Every advantage, however, has its disadvantages. What Solana, Avalanche, and Polygon gain in speed, they sacrifice in security. This shouldn’t, however, stop you from using them.
If you’re making a purchase of $200, for example, Solana/Avalanche/Polygon is a perfectly good chain to use as it’s super rare that anything will go wrong.
If, on the other hand, you’re making a purchase of $4,500,000, you’re better off using Ethereum for the added peace of mind and security.
Which crypto exchanges have the lowest gas fees?
Many crypto exchanges (places where you can buy/sell crypto) will reduce your gas fees by batching your transaction with other people’s.
Let’s say that you and 9 other people all want to buy some ETH. Instead of each of you buying it and each paying a $100 gas fee, an exchange (such as Coinbase), will batch all of those 10 transactions together and then ask the validators to record all 10 transactions at once.
The validator will still charge the $100 gas fee, but now that fee will be divided by all 10 of you so you’ll each only pay $10.
Some exchanges will go even further and not record your transaction to the blockchain at all. Instead, they’ll simply record that you paid for that crypto locally and only send you the crypto if you request it (this is how Robinhood avoids charging you gas fees for example).
Some popular exchanges that can reduce your gas fees are:
- Coinbase
- FTX (my personal favorite because of low fees)
- Gemini
- BlockFi
- Crypto.com
The downside of exchanges is again security. If you keep your crypto on an exchange, it’s far more susceptible to hackers than if you kept it offline.
While this was a bigger concern in the past, nowadays most exchanges will insure your crypto in case it gets stolen. I personally keep most of my crypto on exchanges and have never had it stolen, but make sure you do some research before keeping serious amounts of money on an exchange.
Best times of day to avoid gas fees
The final way to avoid gas fees is by making your transactions at less busy times of the day.
As I mentioned earlier, gas fees vary throughout the day and week depending on how many people want to make changes to the blockchain and how many validators are available.
In many ways you can think of this strategy like planning a vacation. Fancy a visit to Rome? It will probably be cheaper to fly during the winter than the summer.
Want to visit Brazil? It will probably be cheaper not to go during the World Cup.
In this chart you can see the cheapest time of day for gas fees on Ethereum:
To see an up to date chart click here: Ethereum Gas Fees Chart
Takeaways & Resources
Gas fees are definitely a flaw in cryptocurrencies, but they’ll largely be solved over time. There are already chains that are trying to solve this problem such as Solana, Avalanche, and Polygon, which will provide new opportunities to those who invest in them early.