Why Are Gas Fees Sometimes So High?
Hello Boarders,
It's Victoria again.
I’m sure we’ve all experienced the pain of the high cost of transactions on networks like Bitcoin and Ethereum. Imagine being excited about buying a new, promising token, only to find your enthusiasm dampened by unexpected costs that make you question if it's worth buying. This scenario is very common, and I recently navigated it with a friend who is new to the crypto space.
A couple of weeks back, he reached out with a dilemma, "Victoria, I want to buy 'x' token, but it's not available on any centralized exchange yet. I was told I'd need ETH on the Ethereum network, so I bought some. First, I was surprised by how much I had to pay in withdrawal charges, but that's not even the main issue. The real problem is, I'm trying to buy the token now, and the gas fee I'm seeing is ridiculous. Is there a way around it?"
My reply was straightforward:
"No, there isn’t. You need ETH on the Ethereum network to complete your transaction."
Of course, he never completed the transaction because he could not imagine paying that much in gas fees.
This frustration is not limited to just crypto newbies.
"Gas fees" are the transaction fees paid to process your transactions on the Ethereum network. Although gas fees are mostly used interchangeably with transaction fees, they are specific to Ethereum and other EVM-compatible networks. Other networks use the term “transaction fees”.
The high gas fees on networks like Ethereum have led people to question if cryptocurrency is truly the future of finance. How do we convince someone outside the crypto community that paying high transaction fees is worthwhile for the benefits of decentralisation, security, and immutability? This argument is a tough sell and far from compelling.
Although there have been upgrades attempting to solve the gas fee problem on Ethereum, none have completely succeeded. The persistence of this issue has led to innovation around scaling solutions.
But before diving into how blockchain layers impact gas fees, let's briefly define what blockchain layers are.
The Quest for Solutions: Exploring Blockchain Layers
Blockchain layers are the different structural levels of a blockchain network that ensure its efficient operation.
Layer 0: The Infrastructure
Layer 0 refers to the infrastructure that supports the functionality of other blockchain networks. Imagine it as the essential groundwork that supports the entire structure. This includes the internet, hardware, and connections necessary for the smooth operation of Layer 1 networks.
Layer 1: The Foundation
Layer 1 is the base/implementation layer—they are like the foundation of the blockchain ecosystem upon which everything else is built. It consists of all the fundamental elements necessary for the blockchain to function. This includes the core rules, the method for reaching agreements (consensus mechanisms), and everything needed for creating blocks, validating them, carrying out transactions, and maintaining the blockchain’s security and integrity.
Ethereum, for example, has been known for its high transaction fees, particularly during periods of network congestion. This comes from its original Proof of Work (PoW) consensus mechanism, which limits the network to processing only 20-30 transactions per second (TPS)—a stark contrast to payment solutions like Visa, which can handle 24,000 TPS. So, when the network is busy, users must pay higher gas fees to prioritise their transactions.
To address scalability and high gas fees, the Ethereum network has undergone several upgrades, including the transition to Ethereum 2.0, which moves the network from a Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism. Read more about PoW and PoS here. Additionally, Ethereum has also been exploring a method called sharding. Think of it as breaking a big, unwieldy piece of blockchain into smaller, more manageable "shards." This could potentially make transactions faster and cheaper, addressing the big scalability challenge that Layer 1 faces.
However, the narrative that all Layer 1 blockchains suffer from exorbitant transaction fees is not accurate. As the blockchain ecosystem evolves, we now have Layer 1 solutions designed with scalability and efficiency in mind. In turn, they offer significantly lower transaction costs, almost negligible.
Examples include and are not limited to Solana, and BNB Smart Chain (BSC).
Solving problems around scalability, primarily gas fees, gave rise to Layer 2 solutions.
Layer 2: The Innovations
Layer 2 solutions, or scaling solutions, are an innovative layer built on top of the foundational Layer 1 blockchain network. They are specifically designed to address limitations related to scalability and gas fees of these Layer 1 protocols.
By processing transactions off the main chain, Layer 2 solutions significantly reduce congestion, thereby lowering the gas fees required to execute a transaction. These solutions can be likened to adding an extra floor or extension that integrates several innovations and upgrades to make everything more efficient. The solution includes state channels, sidechains, and rollups, which facilitate transactions at a fraction of the cost, greatly improving the blockchain's scalability and efficiency.
But how does this relate to our Layer 1 discussion? Think of Layer 1 as the foundation of a building: solid, essential, but limited by its capacity. When too many transactions occur simultaneously, it’s similar to many people trying to move through a single doorway—there's a bottleneck. Layer 2 solutions effectively open up new doors and pathways, allowing for a smoother flow of traffic. They don't replace the original structure but rather enhance it, enabling it to handle more volume and a lot more activity.
For example, rollups aggregate multiple transactions into a single transaction on the main chain, drastically reducing the gas fees per transaction. Layer 2 does not replace Layer 1 but rather enhances it by improving its functionality, making it easier to scale, and allowing it to communicate better with other systems. This is very important for handling more transactions and interactions without bogging down the main network.
Examples include the Lightning Network for Bitcoin; and Arbitrum and Optimism for Ethereum. They boost the capacity of their respective Layer 1 networks to handle transactions and interactions swiftly and cost-effectively. These Layer 2 solutions are essential for the scalability, practical use, and driving mainstream adoption of blockchain innovations.
I only use ETH on the Ethereum network if it is required; otherwise, I opt for Base, Optimism, Arbitrum and several other networks.
Conclusion
There are several technical details surrounding gas fees and blockchain layers, but constant innovation has led to continuous improvement, and more networks are solving these challenges over the years. Although this post focuses mainly on gas fees, conversations around the cost of transactions, security, and decentralisation are some of the most important topics in blockchain.
It is a common belief that blockchains can achieve only two out of these three aspects at a time. When you consider pioneer networks like Bitcoin and Ethereum, they prioritise security and decentralisation, often at the expense of scalability. This is responsible for the high cost of transactions on these networks.
This is a bit more detail than we normally share, but I hope it gives you a better understanding of some technical aspects of the blockchain ecosystem.
Talk to you soon.