The crypto market is pretty hot (and brutal) right now.
Away from prices, it’s best to understand the underlying technology and certain special jargon in blockchain and crypto.
By now, you might know that Ethereum is the pioneer smart contracting network. By this, I mean that Ethereum is the first platform to demonstrate the execution of smart contracts.
Smart contracts? Yes, those self-executing contracts that Ethereum hardliners say will replace lawyers, auditors, and any form of arbiters.
Indeed, the birth of Ethereum ushered in a new disruptive era. The platform is still making baby steps, with most people yet to understand how it works fully.
Still, in their experimentation, everyone using Ethereum must pay ‘Gas.’
Gas, like what you get at a Gas station when filling up your gas tank? Or is it the kind that you pass after a spicy meal?
Naah, it is in the context of Ethereum. Gas can be thought of like a toll—a ‘ticket’ for using the Ethereum network.
In the above example, every turn of your car keys or a press of that start button requires ‘Gas.’ Without it, you get stalled until you refill your ‘Gas’ tank.
It fits Ethereum because the network, while it uses the same consensus algorithm as Bitcoin—at least for now—, is quite differentiated.
Ethereum is designed to be much more than just a transactional layer. Instead, it is more of a dApp deployment arena—that’s currently dense with activity.
Accordingly, Gas can be thought of as being fuel.
You ‘burn’ them to get access to the network.
No ‘Gas’ means no usage. Simple as that.
Need to send ETH to your bestie? Pay Gas
Need to deploy a dApp? You need Gas
You want to buy an #NFT? Gaaaassss
Want to exit your Yearn Finance self-compounding vault? Even more Gas.
Gas is denoted in Gwei—the smallest denomination of ETH at 0.000000001 ETH.
Whenever you want to post a transaction in the Ethereum network, you must estimate the amount of Gwei you have to pay at any given time.
Toll fees fluctuate in lock-step with demand.
A congested network means more demand and, therefore, more Gwei for transaction confirmation.
The maximum amount of Gas you will be willing to pay for every transaction is called the Gas limit.
All transactions that are yet to be confirmed go to a memory pool (Mempool). Here, all transactions will wait in a queue, ranked on Gas fees, waiting for confirmation.
You may be wondering how? And why does this process flow?
Well, this arrangement might be inconvenient but is actually foundational. It is how, from the onset, Vitalik Buterin and his team designed Ethereum to be.
The concept of Gas, or transaction fee, stems from the nature of the operation of all public ledgers.
As the name points out, they are all “public.”
Therefore, they need public participation.
And this is important because a vibrant community, especially of miners, is critical for network security.
Miners have to use their resources to set up mining rigs, treating mining as #investments. Because of channeling computing power to sustain the public chain, herein called Ethereum, the creators of the public ledger set up an incentivization mechanism.
Here’s how it works.
For every block a miner confirms, the network automatically rewards them with 3 ETH and all transaction fees associated with that block.
In Ethereum, the network churns out a block every 13 seconds. Therefore, in an hour, the network will produce roughly 276 ETH and more ETH from transaction fees or Gas (Gas is paid in ETH).
3 ETHs may seem like a small figure. Still, at current market rates where each ETH coin is trading at over $2.6k, the Ethereum network is generally dishing out roughly $8k as network rewards exclusive of transaction fees every 13 seconds. Crazy!
The problem is, that Ethereum has a scalability challenge—a choice the designing team deliberately made on launch. At optimum #cryptomarket conditions, Ethereum can only process 15 transactions per second (TPS). Far from Visa that can process over 2,000 TPS.
What’s more? As expected, Ethereum is benefiting from a Network Effect. The ingenuity of smart contracts, tokenization, and all the innovation anchoring eliminating the middleman has catalyzed a wave of demand.
Consequently, Ethereum appears overwhelmed.
According to statistics from Etherscan, Ethereum’s block utilization capacity stands at over 99 percent.
It means that at any given point in time, every confirmed Ethereum block is ‘full.’
The resulting demand translates to fierce competition among senders of transactions for their payments to be processed faster.
The more demand there is, the first-come auction mechanism of Gas bidding pushes Gas rates higher since Ethereum miners, faced with a deluge of transactions, will automatically—and naturally–opt to only confirm transactions tagged with higher Gas.
A combination of high network demand and low scalability has, in recent times, seen Gas fees skyrocket to ridiculous levels.
As of May 12, the cost of Gas in Ethereum stood at $69.
Here’s what this means:
One would have to pay $69 to send $5…absurd, right?
But it gets worse.
Heard of Uniswap and #DeFi? All those operations require multiple operations to execute. The more complex a smart contract (that is, series of executions), the more fees the network demands.
The NFT scene wasn’t spared either.
Gas matters in Ethereum.
The higher it is, the harder the user experience is impacted, making the network attractive.
For this, developers are working on several intervening solutions to keep Gas low for network growth and adoption.