Why are Ethereum transaction fees so high?

Why are Ethereum transaction fees so high?
There is growing concern amongst Ethereum users over the recent increase in network transaction fees. As a matter of fact, Ethereum network transaction fees recently reached an all-time high. This may be due to an increase in users of various decentralized finance protocols and other applications. Today, we ask the question: Why are Ethereum transaction fees so high?

What is Ethereum gas?

Ethereum gas is the unit that is used to measure the amount of effort computers have to put in to perform and execute certain operations. To perform a transaction such as a smart contract or an ICO, gas is used to calculate the amount of fees that one has to pay to the network. However, these fees are paid in Ether, not in gas and is measured in “Gwei”.

Let’s compare gas with going to a petrol station to get petrol or diesel. In order to drive your vehicle, you have to fill up with petrol or diesel at a petrol station. You ask the attendant to kindly fill up your car with R1 000 for example. After paying for the petrol/diesel, you drive off to your next destination. When you want to perform a transaction on the Ethereum network like a Smart Contract (your vehicle), you need gas. The gas station can be compared to an Ethereum miner that requires payment in the form of miner fees. Gwei can be compared to the price per litre of petrol/diesel or in this case, the transaction cost. Then you can get your Smart Contract going.

Here are a few interesting facts about Ethereum gas:

  • If you want an operation to be performed faster, you may have to pay more in terms of gas price. The length of the code used in a Smart Contract also impacts the gas price.
  • The average gas price can increase during times of high network traffic. For the simple reason that there are more transactions that are competing against one another to go onto the next block. May the best one win!
  • In order to execute a specific operation, you have to specify your gas limit. This is an indication of the maximum amount of gas fees you are willing to pay for a specific transaction. Almost like a vending machine, the miners will stop when the gas runs out. You will be refunded if there is gas left.
  • There is typically a billion Wei (the smallest unit of Ether) in a Gwei.

Ethereum transaction fees go to the moon

On average over the last six months, Ethereum transaction fees have been in the area of $2. However, on 2 September 2020, transaction fees reached a high of $14.58 before retracing back to $2.67 on 9 September. Since then transaction fees have started to rise again. This is a sign that activity on the network is increasing. At this stage, it does not seem likely that transaction fees will dip below $2 any time soon.

Why are Ethereum transaction fees so high?

Whilst the price of Ether may be fluctuating, activity on the Ethereum network has not slowed down.

As you may know, the Ethereum network has gained popularity for features such as Smart Contracts, Decentralized Applications (dApps) and DeFi applications. Decentralized Financing (DeFi) is drawing in billions that provide liquidity on decentralized exchanges (DEX) and create decentralized loans.

Thus, an increase in these network activities resulted in an increase in network fees. These transactions are broadcast by Ethereum miners. In order to stabilise the network, miners that typically grant fee rewards, reduce the number of transactions on the network by raising fees.

How to calculate Ethereum transaction costs

Example Gas Transaction

Image courtesy of masterthecrypto.com

This is an example of what a transaction would look like on Etherscan. Ethereum transaction costs are calculated using the gas limit, gas used by Txn and the gas price. The gas limit is the maximum amount of gas one will pay for a specific transaction. A standard ETH transfer requires 21 000 gas. The gas used by Txn (transaction) is the actual amount of gas that was used during the execution of the transaction. The standard 21 000 gas also applies here. Gas price refers to the amount of ETH the user is willing to pay per unit of gas. In this example, the user will pay 8 Gwei per gas unit. The actual TX cost fee is the total cost of the transaction. A basic formula for determining transaction cost is:

Gas used by TXN x (multiply) Gas Price = Transaction Fees

Urgency of Ethereum 2.0

It is said that the highly anticipated Ethereum 2.0 could be the answer to the increased network fees and various other issues users experience on the Ethereum platform.

Ethereum 2.0 or “Serenity” is an upgrade to the Ethereum network that aims to improve on the platform’s speed, efficiency and scalability. This will allow the Ethereum network to perform more transaction, cut down on high transaction fees and alleviate network congestion. Ethereum 2.0 protocol’s main goals are to allow for dApps and DeFi in a transparent and open network.

However, Ethereum 2.0 is more than just lower fees and increased transactions. The protocol will also support staking nodes and allow users to earn Ethereum as a passive income. The Ethereum team announced the official launch of Ethereum 2.0 is set to take place in November 2020.

Keep an eye on AltCoinTrader for more updates on Ethereum 2.0.