Now Integrate MaxelPay with WooCommerce on WordPress
Blog
The world of cryptocurrencies and blockchain technology is changing the process of our payment handling, running the business, and managing financial transactions. We all know that Blockchain is a decentralized system that brings with it transparency and removes all the need for intermediaries to reduce the additional costs.
However, one essential concept creates confusion between the beginners and the expert users i.e. Gas Fee. There is no denying the fact that crypto transactions are more cost-effective than traditional financial systems. Perhaps, crypto transactions are also not entirely free and gas fees play an important role in ensuring the functionality and security of the decentralized networks.
In the blog, we will discuss what gas fees are, why they are important, and how it has an impact on cryptocurrency payment processing.
Gas Fees are the payments that users make to cover the computational energy so the payment can be processed and transactions get validated on the blockchain network. Every time when a user sends cryptocurrency or executes a smart contract, gas fees are collected.
These gas fees are the remunerations for the miners and validators who confirm and secure the transactions of the user on the network.
However, gas fees are not fixed, unlike traditional banking fees. Gas fees fluctuate on various factors like network congestion and the complexity of the transaction. For example, if the blockchain is busy or the transaction includes multiple steps then gas fees will rise automatically to reflect the additional work it requires.
Gas Fees play an essential role in blockchain systems. We have listed those below:
We are aware of online spamming, so to protect that gas fees act as a deterrent against spamming the network. If there were no fee structure, bad actors would have flooded the blockchain networks and millions of meaningless transactions would have happened. Further, clogging the systems. To prevent all these things and prevent legitimate transactions, a certain cost is included in every transaction to ensure users perform authentic transactions.
Blockchain networks like Bitcoin, Ethereum, and Binance Smart Chain rely on the miners or the validators to confirm the transactions. So, this gas fee acts as a remuneration for their computational work, ensuring the transactions are processed correctly and securely. When you pay the gas fee, you are paying for someone who validates your transactions and includes that in a block.
Gas fees regulate the flow of transactions. When the users try to make transactions during peak times, the gas fees will also increase. It allows the network to prioritize the transactions that are more urgent and incentivizes the users to wait until the network is less congested.
It is important to note that gas fees are not for intermediaries like crypto wallets or Crypto exchanges. In fact, the gas fees are paid directly to the miners or validators who are operating the blockchain.
There are two factors that determine the gas fees i.e. Gas Limit and Gas Price.
Gas Limit: This refers to the maximum amount of computational work that the user expects a validator will require to perform for a transaction. Every action in the blockchain, whether transferring cryptocurrency or starting a smart contract will require a certain amount of computational price. When you set a gas limit, you define the amount you will pay for the computational work. If the limit is too low, the transaction might fail or not be processed.
Gas Price: This refers to the amount of the cryptocurrency that the user will pay for each unit for the computational work. This price is measured in Gwei (for Ethereum), a small fraction of the cryptocurrency token. If the gas price is set to be higher, the chances of your transaction being processed faster because miners or validators will prioritize your transaction over the other gas fees.
The total cost of transactions is calculated as the gas limit multiplied by the gas price. Moreover, the users can add a tip to the gas price to further prioritize the transactions when the network is congested.
Units of Gas Used * (Base Fee + Priority Fee)
Gas Fees are the natives of the Ethereum blockchain. It is a term used to describe the transaction fees on most blockchain transactions, especially for those that are similar to Ethereum. Each network has a unique way of calculating gas fees, influenced by its architecture and transaction volume. Below, we have made a comparison of gas fees across popular blockchains.
Binance Smart Chain is a more cost-effective alternative to Ethereum. Although BSC also uses the Ethereum Virtual Machine (EVM) to process transactions, its gas fees are much lower. 1BNB = 1 billion gwei and 1 gwei = 0.000000001 BNB.
Bitcoin doesn't have "gas fees" in the same way Ethereum does, but it still charges transaction fees based on the size of the transaction in bytes, not on the value of the bitcoins sent.
Avalanche is another blockchain that uses the EVM and has a similar gas fee structure to Ethereum. It is built to resolve the trilemma of decentralization, security, and scalability. The transaction fee calculation is almost similar to the Ethereum gas fee.
However, Avalanche offers lower fees thanks to its high throughput and scalability. Gas fees are measured in nAVAX, and they typically range between 25–27 nAVAX, making it a more affordable alternative to Ethereum.
Polygon is a Layer 2 solution designed to help scale Ethereum. It offers significantly lower gas fees, with average fees ranging between $0.0005 to $0.20, depending on the transaction type. This makes Polygon an attractive option for those who want the security of Ethereum without the high fees.
Known for its ultra-low transaction fees, Solana has emerged as a competitive alternative to Ethereum. Solana’s transaction fees typically fall below $0.01, making it one of the most cost-effective blockchains for both users and developers.
Network Congestion: Like any service, the Blockchain network also has a capacity limit. When it experiences network congestion, the gas fee rises. This is because more people are trying to make the transaction validate. Further, this leads to higher gas fees.
Transaction Complexity: When there are complex transactions it will require more computational work. For example, a simple cryptocurrency transaction will have less gas fee as compared to a complex smart contract which consists of multiple steps and conditions. When the complexity increases, so does the gas fee to execute it.
Gas Limit and Gas Price: While making a transaction, users have the option to set the gas limit (amount of gas used for the transaction) and the gas price (amount of cryptocurrency willing to pay per unit of gas). If the user sets the gas price higher to make the transaction more appealing for the miners during the network congestion, it will potentially speed up the process as compared to a lower gas price.
Yes! Layer 2 solutions are designed to help reduce gas fees by processing transactions off-chain before settling them on the main blockchain. Examples include:
Polygon: A Layer 2 solution for Ethereum with significantly lower gas fees.
Optimism and Arbitrum: These solutions enable faster and cheaper Ethereum transactions by batching them off-chain and then sending them to Ethereum's mainnet in bundles, reducing gas costs.
Dapps can use services like Biconomy to provide zero gas fees to their users so that it seems that the transaction was gas-free but in reality, it is being paid by the platform on the user's behalf.
Users that accept cryptocurrency payments or are interacting with the blockchain network, gas fees are important and need consideration. These gas fees add up in the transaction during the high network congestion. When you understand how Gas fee works and compare it fees on different networks, then businesses can make better decisions while selecting the best blockchain ensuring it has minimum cost.
For example, users who engage in high-volume transactions might opt for blockchains like Polygon, and Binance Smart Chain where the gas fee is low. Meanwhile, users who are dealing with complex transactions requiring smart contracts will prefer Ethereum despite the higher costs due to its widespread adoption and ecosystem.
On the basis of the above information, we can conclude that gas fees are an integral part of cryptocurrency payment processing ensuring the efficiency, security, and proper functioning of the blockchain networks. When you understand what gas fees are, why they matter, and how they are calculated, users and businesses can make smarter decisions while navigating the world of cryptocurrencies.
With the rise in blockchain technology, we might see improvements in the gas fee structures including scalable and affordable solutions. Until then, it is important to understand how gas fees can affect your transaction, whether you’re sending the cryptocurrency or interacting with any decentralized applications.
