One thing that differentiates CeFi from DeFi is the transaction speed and fees. While there are numerous benefits of using a blockchain over a conventional database, technology is still at very nascent stage. For example, Ethereum can currently process about 15 transactions per second. Compare that to Visa which has the capability of processing 2000 transactions per second. Yes, we do have other blockchains like Solana which can process up to 65,000 transactions but then you are compromising with decentralization aspect of blockchains.
But what is gas fee after all? Why is there so much conversation around it? Even more so, in the Ethereum ecosystem. That’s what we’re going to talk about in today’s post. Also, we’re going to check out a fun tool that would help you visualize gas fees.
What is Gas Fees?
Simply put, gas fees is the transaction fees. Just like you pay a fee for carrying out RTGS/NEFT, card transactions, gas fee is the cost of doing a transaction on the blockchain. You are sending some ETH over to your friend on his birthday? Let’s pay some gas fee to power that transaction. Minting an NFT on opensea? Gas! Lending money on Compound? Swapping tokens on Uniswap? You get the idea.
Think of it as a toll fee for using the highway (Blockchain). The authorities use this toll fee to maintain the highway.
But Whom Does Gas Fee Go To?
So as I mentioned above, Ethereum is capable of processing 15 odd transactions per second. This means if you plan to send ETH to your friend, you are competing against multiple people doing different transactions.
First real life crisis of this situation popped up back in 2017 when a dApp called ‘crypto kitties‘ became an instant hit. Everyone was doing transactions like on Ethereum blockchain to breed new cats leading to choking of the system.
Once you have fired a transaction on the Ethereum blockchain, it is stored into something called ‘Mempool‘. Mempool is nothing but short for memory pool. All transactions are queued in the mempool before putting it on the blockchain.
These transactions are put on blockchain after validators (or miners) ensure that there is no malicious data being put on the blockchain. These miners would pick a transaction from the mempool and send it in the block going to be appended to the blockchain.
What basis would they pick up these transactions? Gas Fees! Higher you are willing to pay for a transaction, greater are the chances of it being picked up by a miner to validate.
Since the demand of processing transactions is higher than ability of the network, there’s often a choke and gas fee shoots up.
How to Measure Gas Fees?
Gas fees is measured in Gwei is just .000000001 ETH. You can think of Gwei like cents, since 1 cent is .01 of a dollar. For every transaction you want to make, you must set what fee you are willing to pay for your transaction to be executed.
The maximum amount of gas units you are willing to pay for in a particular transaction is called the gas limit. In addition to there being a gas limit that needs to be specified for a transaction to execute, there is also a gas price that must be input as well.
The gas limit x gas price = gas fee, which is what you have to pay for the transaction to be executed.
How to Visualize Gas Fee?
Still confused? Do not fear when Panda is here! I have found just the tool for the occasion. To be honest I gained a lot of clarity about how gas fees works through this tool. Let’s explore:
Head over to this website called TxStreet. This website helps you visualize the gas fees for five blockchains: BTC, ETH, BCH, XMR, LTC. Let’s understand some of the key details this website can offer:
A. Think of each of these people as the individual transactions. These are the number of transactions happening on the blockchain right now.
B. On your right, there are different mempools waiting to be added to the blockchain.
C. Each block indicates the gas fee in Gwei to be a part of these pools.
D. On your left you can see the origin of these transactions. So there are protocols like Uniswap, Curve etc. There are websites like opensea and also the wallets like Metamask etc.
E. Now the faster a person is moving it means more gas fee has been pumped in for that transaction. As a result, it is getting precedence over other transactions.
F. Also, larger the person, higher is the size of the data being put in the blockchain (transaction size in BTC and gas fee in ETH)
G. Whenever the block (bus) fills completely. It goes out and leaves for blockchain.
There are some other metrics that are really handy in gauging the current gas situation:
I really like how people go that extra mile to explain some complicated web3 concepts. The website is making money by placing some advertisements. Nonetheless, it is an amazing representation of gas fee and one can clearly understand that what time he/she needs to wait for what fees.
How much have you paid in gas fees? Any guesses? Btw, did you know that you don’t have to pay gas fee while transacting on a centralized exchange like CoinDCX. But can you answer why?
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Until next time..
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