High Network Fees Explained

High Network Fees Explained

By Guarda Wallet | Guarda Wallet Blog | 23 Oct 2020


What is Gas?

Gas, Satoshi, Should I refuel my car with Asian fuel?

Not quite so. If you are a little familiar with the vast world of the ecosystem built by the Ethereum Foundation, the word “gas” will not cause you anxiety attacks. Just like satoshi in the Bitcoin ecosystem.

If you are not familiar with it, then for you, “gas” is bubbles in soda or even a way to refuel your car (and do not forget that in all cases, you are right).

Today we’ll explain and show you the concept on the example of Ethereum because due to the DeFi frenzy, commissions in the network have grown significantly in recent months.

First of all, we should clarify that Ethereum works through EVM (Ethereum Virtual Machine). EVM – could easily be considered a giant computer that controls a vast inner world, but it is not entirely true. Ethereum is all of us. Every computer connected to the Ethereum network is Ethereum and is part of the Ethereum Virtual Machine (EVM).

Simply speaking, a vast number of computers that are connected via the Internet. And this Ethereum virtual machine has the function of executing specified programs, which are called smart contracts. The whole EVM spreads on many computers and makes them part of the ETH network, naming them nodes.

 

Why Maintain ETH Network?

The answer is quite simple at first glance, but a little more complicated if you look at the second. A computer that is part of an EVM doesn’t have to work because it is a must. It also has to eat somehow (the owner to plug it in), rest (it always solves complex algorithmic problems). To not make it feel cheated, Ethereum developed a gas system that allows thanking each EVM network node.

Gas is the cost of operating or a set of operations in an Ethereum network. Gas is a unit of measurement that reflects the amount of work done within a network. In the same way, as in our physical world, we pour in the best gasoline and pay more for it, in Ethereum, some tasks cost higher prices than others if the operation we want to perform requires greater use of resources by the nodes that make up the platform, it will also increase Gas and vice versa.

 

What is Gas for?

Gas exists within the Ethereum blockchain for three reasons:

  • Financial
  • Theoretical
  • Computational

The financial motive is to encourage the miners to invest time and energy in executing transactions. More complex operations require more computing power and, therefore, more Gas. If a user wants his transaction to prioritize, he must offer a higher gas price to convince the miners to process it sooner.

The theoretical reason indicates that Gas serves to align the incentives of network participants. Much of the blockchain theory is concerned with how to combat malicious agents in an environment where there is no central authority to be trusted. Gas partially solves this problem by aligning economic incentives among users. Miners have an incentive to work on the network. Users have a disincentive to write flawed or malicious code because they are putting their Ether (in the form of Gas) into the market.

The computational motive behind the Gas responds to an old problem in computer theory: the halting problem. The halting problem tries to determine whether an arbitrary program will stop running at some point or run forever, just by looking at its description and input values. In 1936, Alan Turing determined that a machine can’t solve the halting problem. In ISM, this means that a miner can never start processing a transaction with complete certainty that the transaction will stop at some point. Because of the gas limit, each transaction is associated with a finite amount of Gas. Even if a miner starts processing a transaction scheduled to go on indefinitely (due to a bug or a network attack), the Gas will eventually run out, the transaction will end, and the miner will be compensated.

 

Why are network fees so high sometimes?

Ethereum fees are determined by network activity. Miners process blockchain transactions with limited capacity. Therefore, when there is an increase in activity, transactions go up together because there is no capacity to process all the transactions, and those with higher rates are chosen first by the nodes. This gives the nodes an incentive to add more processing capacity in the form of higher fee rewards while also theoretically reducing the number of transactions transmitted from users who are not willing to pay higher fees.

Continued activity is supported by DeFi applications that move billions to use for credit and liquidity provision to exchange tokens on decentralized exchanges. DeFi’s recent activity on Ethereum has been so intense that economic activity measured by the value of networked tokens has exceeded Bitcoin’s activity for the first time in years.

 

Will it always be like this?

There is hope for a new protocol to be implemented. EIP-1559 simplifying software needs and improving cost-efficiency The change proposed by Buterin and his team will replace the “first-price auction” bid model with a mechanism regulating the prime rate depending on the network demand.

This mechanism will increase the network capacity to 16 million Gas, with the fee price increasing once demand reaches the 10 million mark. It will also allow users to advise the miner, while the prime rate will be burned not to manipulate the rates.

According to the supply, this change will be implemented in two stages. The first phase will consist of gradually reducing the existing Gas and increasing the amount of new Gas. In contrast, the second phase will consist of refusing to accept any previous transactions by the network.

 

Ethereum vs. Bitcoin fees

According to The Block analyst Larry Cermack, in August, the size of transaction commissions in the Ethereum network was $115.3 million. In the Bitcoin Block – $39.2 million on August 31, this discrepancy was 7.5 times more significant, August 30 – 9.5 times.


Guarda Wallet
Guarda Wallet

Guarda is a custody-free multi-platform cryptocurrency wallet with a user-friendly interface designed to store, buy, stake, and exchange crypto assets. https://guarda.com


Guarda Wallet Blog
Guarda Wallet Blog

Guarda is a custody-free multi-platform cryptocurrency wallet with a user-friendly interface designed to store, buy, stake, and exchange crypto assets. https://guarda.com

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