It can be frustrating to pay hundreds of dollars in fees when creating transactions on the Ethereum network, and for some, it is not only a mystery of why we pay such high fees but why we pay fees in the first place.
As we have previously explained, Ethereum is a blockchain network that processes transactions and executes smart contracts. These transactions are confirmed by so-called nodes, which are operated by a group of users called miners.
To confirm transactions, and therefore support the Ethereum network, miners have to spend excessive computing power, which incurs enormous electric bills. Since they are not incentivized to work without a reward, miners have to charge fees.
These fees are called gas, and they are priced in the native Ether cryptocurrency. The smallest unit of gas is called ‘gwei,’ and it is used to assign value to a task, like transferring tokens, checking balances, or calling a smart contract function.
Since Ethereum can process only so many tasks at a single time, gas is used as a limitation that prevents the network from being overloaded. Naturally, complex tasks that spend more computing power require extra gas, while simple tasks require less.
If a user wants to complete a transaction faster, he can pay more gas. By doing so, the transaction’s priority is increased. It is also possible to set a gas limit in order to decide the maximum amount of gas willing to be spent for a particular transaction. Note that if the limit is too low, miners will ignore the transaction.
Gas fees are extremely important for the Ethereum network as it helps with funding miners, regulating transactions and setting priorities. If we decided not to pay gas fees, Ethereum would not function at all as miners would stop processing transactions.
Despite the fact that Ethereum has a well-thought-out design for processing and prioritizing transactions, that does not mean that the network works flawlessly in practice.
Gas fees fluctuate with supply and demand for processing power. If Ethereum faces a surge in demand but does not have enough miners to support more transactions, it experiences an effect that we call network congestion.
Network congestion makes gas fees skyrocket since some users are willing to pay more gas to increase their transaction’s priority. As a result, the average transaction fee increases, and users must pay more money than usual.
Gas fees return to normal only once demand drops since it is unlikely to see an event in which the number of miners suddenly increases to meet the new demand. Fees can maintain a high price for weeks, if not months, and it is common for Ethereum to experience network congestion during bull runs.
In 2020 there were cases where traders had to pay hundreds of dollars for a simple transaction no matter how much money they were transferring. Obviously enough, this makes the network infeasible for real-life use cases as no one would pay $100 to send $50.
Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. And joining them is easy.
After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes.
Whether you create your own rebalancing strategy or completely custom automation, the ability to walk your own path belongs in the hands of every crypto investor.