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How Do Ethereum Gas Prices Work?

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Every cryptocurrency transaction needs a small feel to avoid network spamming with endless deals. The fees are paid to crypto miners for their transaction validation efforts. When you send ETH from your Ethereum wallet to a receiver’s wallet there are some charges involved. The Ethereum network facilitates apps to operate on its blockchain offering ETH transaction charges an extra utility. The ETH fees fuel the apps that operate on Ethereum, so the fees are referred to as ‘Gas’.

What’s ETH gas?

ETH gas is a measurement unit to define the computational power used for implementing specific activities on the network. Every ETH transactions use computational resources, so the transactions accompany a cost. Ethereum fees can be paid in ETH only. The denominated unit for ETH gas price is ‘gwei’

How do Ethereum Gas Prices work?

In 2021, Ethereum experienced an upgrade called London Upgrade that changed the way of calculating the ETH gas fees. Below is the way how ETH gas price was calculated with an example.

Before the London upgrade

  • Shawn has to pay Jack 1 ETH. The gas price = 200 gwei and gas limit = 22,000 units
  • Formula to calculate total fee = Gas units x Gas price/unit. 22,000 x 200 = 4,400, 000 gwei
  • 1gwei = 0.000000001 ETH, so 4,400,000 gwei = 0.0044 ETH.
  • Shawn has to transfer 1.0044 ETH [1ETH + 0.0044 gas fees] from her wallet. Jack receives 1 ETH, while a miner receives 0.0044ETH

After London Upgrade

London upgrade focused to make ETH fees predictable and offset new ETH issuance. Each block has a base fee calculated on the block space’s current demand. The base fee is burnt, so users need to include a priority fee with every transaction. A higher tip means more transactions get prioritized. The tip is an incentive to ETH miners.

  • Shawn has to pay Jack 1ETH. The base fee = 100 gwei, the Gas limit = 22,000 units, and 10 gwei is included as a tip.
  • New formula – Gas units x base fee + tip. 22,000 x 100 + 10 = 22,000 x 110 = 2,420,000 gwei.
  • 2,420,000 gwei = 0.00242 ETH.
  • Shawn has to send 1.00242 ETH from his wallet. Jack receives 1 ETH, while the miner receives a tip of 0.00022 ETH and 0.0022 ETH is burnt.

Shawn can set the maximum transaction fee. The difference between the actual and max fees will be refunded. Thus the user can set max transaction charges without concerns about overpaying. Under this new model, things are predictable, while charges can escalate under the old charging model during extreme network congestion.

Ethereum gas limit standards

Ethereum gas limit defines the max amount user can use in a transaction. The standard ETH gas limit is 21,000. However, smart contract transactions are complicated, so will need more computational energy to execute. Therefore the gas limits are higher in such transactions.

It is fine to set high gas limits as the EVM refunds the unusable units but setting very low can result in the user losing ETH from their crypto wallet and having a transaction declined. So set gas limits appropriately. Learn more about cryptocurrency, ETH gas limits, and more on ZenGo X blog!

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