By now most people have heard of Bitcoin, the first form of decentralized cryptocurrency which was created in 2009 and popularized in 2011. However, these novel tokens did not just appear out of thin air, they had to be mined. But what does this mean?
Essentially, there is a finite amount of Bitcoin, 21 million to be exact. Bitcoin miners run complex computer rigs to solve intricate and complicated puzzles in order to confirm groups of bitcoin transactions called blocks. Once a block is mined, the miner is rewarded with bitcoin.
On 3 January 2009, the bitcoin network came into existence after the founder, Satoshi Nakamoto, mined the genesis block of bitcoin (block number 0), and received a reward of 50 bitcoins. The rewards for Bitcoin mining are reduced by half roughly every four years due to its scarcity. Currently, miners are rewarded 6.25 Bitcoins for every block. Additionally, when a transaction is approved via mining, it is added to a block which is then added to the Bitcoin blockchain. A blockchain is an immutable, decentralized, and transparent computer network that acts as a publicly available ledger. For more information please reference my previous article here.
Not all tokens are mined, however, the most popular or widely used ones, Bitcoin and Ethereum are. Today, we will be focusing on the Ethereum Blockchain using ETH tokens.
Similar to Bitcoin, ETH is also mined by solving complex puzzles in order to confirm and verify blockchain transactions. However, ETH miners are paid in ETH, not bitcoin. In addition to receiving the ETH from mining, miners are also paid through transaction fees called gas.
Transaction fees are determined by a Transaction fee mechanism (TFM), a key component of blockchain protocol. However, there has yet to be an empirical study on the real-world impact of TFMs. Recently, a study out of Duke and Peking University evaluated the effect of EIP-1559, the first TFM to abandon the traditional first-price auction paradigm.
Every transaction or smart contract executed on the Ethereum blockchain requires gas. If you are unfamiliar with smart contracts please reference my previous article here.
“Gas is a unit of measurement for the amount of computational effort required to execute a specific on-network operation”
William Zhao ’23, Student researcher
However, the price of gas is constantly changing in response to how many others are trying to make transactions on the blockchain. Gas prices are typically denoted in GWEI or a billionth of an ETH ( 0.000000001 ETH). For context as of February 1st, 2022 at 1:17 ET, ETH is worth $2778.50 USD per token.
When an ETH transaction is placed it is not immediately completed and resides in a memory pool or “Mempool.” These are smaller databases of unconfirmed or pending transactions. Prior to the EIP-1559 update, the Ethereum TFM centered around the first-price auction paradigm.
Conceptually, the first-price auction paradigm is fairly simple. Essentially every time a transaction is made there is an accompanying gas bid. Crypto wallets like Metamask or Coinbase Wallet provide suggested gas bids for users but still allow them to alter the bid. This is because transaction verification priority is determined by the miner and thus given to whoever bids the most. Once a transaction is verified it is added to the miner’s block and then to the blockchain. As a result, some users would offer unnecessarily high gas fees in order for their transaction to skip the line and be quickly processed thus creating major delays for others.
There were several problems under this previous TFM including long wait times for verification, extremely high gas and unpredictable prices, as well as inefficiencies around block size and consensus security. Recent research examined the causal effect of EIP-1559 on blockchain transaction fee dynamics, transaction waiting time, and security. They found that while the transaction mechanism became even more complex it did also become more efficient.
EIP-1559 improves user experience by reducing users’ waiting times, improving fee estimation, and mitigating intra-block difference of gas price paid (which is more important for miners). However, EIP-1559 did not have a large impact on gas fee reduction or consensus security. In addition, they found that when ETH’s price is more volatile, the waiting time is significantly higher.
Ultimately, while user experience improved, scalability issues held the TFM from having a larger effect on important components like gas prices.
“If you can only hold a certain amount of transactions that’s a hard cap on development, however, high gas prices are a scalability issue not a mechanism design issue.
William Zhao ’23, student researcher
This research paper was recognized by Vitalik Buterin, one of the co-founders of Ethereum.
FAQs
In addition to receiving the ETH from mining, miners are also paid through transaction fees called gas. Transaction fees are determined by a Transaction fee mechanism (TFM), a key component of blockchain protocol. However, there has yet to be an empirical study on the real-world impact of TFMs.
What are transaction fees for Ethereum? ›
Ethereum Average Transaction Fee is at a current level of 1.404, down from 1.447 yesterday and up from 0.8596 one year ago. This is a change of -2.99% from yesterday and 63.34% from one year ago.
How is the price of ETH determined? ›
ETH's price is determined exclusively by supply and demand. If the popularity of the ethereum network continues to grow in the long term, demand for ethereum will likely grow over time.
Why are Ethereum transaction fees so high? ›
Ethereum gas fees can be high due to network congestion during periods of high demand, especially for complex transactions involving smart contracts or decentralized applications. Additionally, Ethereum's fee structure, which includes a dynamically adjusting base fee, contributes to fluctuating gas costs.
Who pays Ethereum gas fees? ›
Gas fees are the transaction fees users pay on the Ethereum blockchain to conduct transactions (like sending or swapping ETH) and execute smart contracts. Users pay this fee in ETH and the network nodes earn a fraction of fees for validating transactions via Proof of Stake (PoS).
How to lower ETH gas fees? ›
Ethereum gas fees are increasing due to various reasons. Tips to avoid high fees include optimizing transaction timing, utilizing rebate offers, and choosing transaction types wisely. Monitoring network congestion, using gas tokens, calculating fees in advance, and considering Ethereum 2.0 are other strategies.
Who sets the price of Ethereum? ›
Accordingly, its price is not affected by the decisions taken by central banks. All this is to say that it is the market, and the market alone, that determines the price of ETH. When demand rises, the price of Ether goes up; when demand softens, the price decreases.
What is the fee for buying Ethereum? ›
Every cryptocurrency has transaction fees built into their basic operating structure. Bitcoin (BTC -0.72%) calls it a network fee, Ethereum (ETH -1.26%) transactions result in gas fees, and the Solana (SOL -1.07%) platform simply refers to processing costs as transaction fees.
What controls Ethereum price? ›
Investment Demand: As a popular cryptocurrency, Ethereum is often in demand as an investment asset. This demand can drive up its price, making it a potentially profitable investment.
What time of day is ETH gas cheapest? ›
Ethereum gas prices vary a lot, even from one hour to another. Statistically, it's been shown that the lowest gas prices can be found in the mornings and on the weekends.
You can use Blocktrade as a cheap, secure, and global exchange to buy ETH. You don't need to pay any trading fee while using Blocktrade exchange. Sign up for free, create an account, and purchase ETH with a few clicks.
What is the most expensive transaction on Ethereum? ›
Today, crypto exchange Bitfinex paid USD 23.5m (ETH 7,676.61) in transaction fees for a transfer of close to USD 100,000 in tether (USDT) via the Ethereum (ETH) network, according to public transaction data on Etherscan.
What is the transaction fee for Ethereum? ›
Ethereum Average Transaction Fee is at a current level of 0.0003, down from 0.0004 yesterday and down from 0.0005 one year ago. This is a change of -25.00% from yesterday and -40.00% from one year ago.
How is transaction fee calculated? ›
Transaction fees are typically calculated based on a percentage of your transaction amount or a flat fee per transaction. The exact fee structure depends on the payment service provider and the type of transaction you're doing.
Will Ethereum fees ever go down? ›
As a result of more blobs, the costs for these layer-2 networks to stash data on Ethereum will be significantly cheaper, and the reduction is likely to trickle down to users in the form of lower fees. But how exactly it will all shake out is still ambiguous, according to many Ethereum experts.
What is the Ethereum gas fee now? ›
Ethereum Average Gas Price is at a current level of 10.51, down from 12.65 yesterday and down from 23.49 one year ago. This is a change of -16.90% from yesterday and -55.25% from one year ago.
Is it cheaper to send ETH or BTC? ›
Ethereum fees have tended to be higher than those for Bitcoin. But before you complete a trade or transaction for either, it can be good to look at the network fees to see if they're running higher than usual. If it's not a time-sensitive transaction, you can sometimes save money by waiting for fees to go down.
What is the transaction amount of Ethereum? ›
Basic Info. Ethereum Transactions Per Day is at a current level of 1.147M, up from 1.143M yesterday and up from 1.046M one year ago. This is a change of 0.37% from yesterday and 9.66% from one year ago. Ethereum Transactions Per Day reflects the daily number of transactions completed on the Ethereum network.
What time are ETH gas fees lowest? ›
When are the Ethereum gas fees the lowest? Between 2 and 6 PM UTC, Ethereum transaction fees are the highest. The best times to do Ethereum transactions are early in the morning, between 1:00 and 2:00 UTC, or late at night, between 9:00 and 11:00 UTC.
