Gas is a unit of account or a pricing mechanism used in blockchain, especially on networks like Ethereum, to quantify the amount of computing power needed to carry out operations and process transactions. In essence, it serves as the “fuel” required for blockchain processing.
What is Gas in Blockchain?
The cost of transactions on a blockchain is defined by gas. It is a gauge of the cost of conducting business on the blockchain. Gas is necessary for every operation on Ethereum, including smart contracts and transactions. Similar to how a car needs fuel to run, it is essential for the blockchain’s peer-to-peer (P2P) network, allowing it to carry out operations.
Purpose and Importance of Gas Fees
Gas Fees provide several essential functions:
- Controlling Network Activity: Anyone with an internet connection can access public blockchains, which are open networks. A cryptocurrency-based fee is assessed for operations in order to regulate activity and stop abuse. Similar to this, gas is frequently used by private and permissioned blockchain networks to manage access, however this isn’t always required because of access restrictions.
- Network Security and Spam Prevention: Gas fees keep the network free of unwanted activity, such Denial of Service (DoS) assaults or infinite loops, and clutter. Gas deters “evil performers” from flooding the network by attaching a cost to each operation. The network won’t be forever stalled if a program goes into an endless loop since it will eventually run out of gas and stop running.
- Transaction Prioritization and Fair Market: Gas guarantees that customers can order their purchases according to the gas price they are prepared to pay. In order to speed up transaction processing, particularly during times of high network activity, users might pay higher Gas prices. Users benefit from a fair market as a result.
- Compensation for Validators/Miners: In the old Proof of Work scheme, validators (or miners) were paid by fuel fees for processing and securing transactions. By compensating them for their efforts, this encourages network users to verify and safeguard the blockchain.
How Gas Works on Ethereum
Ether (ETH), the native cryptocurrency of the Ethereum network, is inextricably related to gas. Although Gas is not a cryptocurrency in and of itself, it is exchanged for ETH in order to cover its expenses.
- Units of Measurement: To handle the minuscule figures involved, Gas prices are stated in small denominations.
- Wei: The smallest ether unit is this one. 10^18 Wei is equivalent to 1 Ether. Wei Dai, the man behind b-money, is the inspiration behind the name Wei.
- Gwei: This is a widely used unit of measurement for Gas pricing. 10^-9 ETH, or 0.000000001 ETH, is equivalent to 1 Gwei. The definition of “gwei” is “giga-wei,” or 1,000,000,000 Wei.
Components of Gas Calculation:
In the beginning, gas prices were determined by multiplying the gas limit by the gas price. Ethereum, however, modified its calculations to incorporate a basic cost and a priority fee following an upgrade (EIP-1559).
- The gas limit is the most that a user is prepared to pay for a transaction or the execution of a smart contract. In order to avoid using network resources excessively, it serves as a budget. The user is shielded against overspending on complicated or buggy transactions by setting a Gas limit.
- The price per unit of computation that the consumer is willing to pay is known as the “gas price.” Faster processing results from validators prioritizing and including the transaction in the following block when Gas prices are higher. The demand and congestion on the network affect Gas prices.
- Base charge: The base charge, which is the lowest price per unit of Gas for inclusion in that block, was introduced with the EIP-1559 upgrade. When the block is mined, it is burned, or taken out of circulation, and the network estimates it depending on demand. If the intended block size is exceeded, the base charge may increase by up to 12.5% per block.
- Users can include a Priority Fee (Tip) as an extra charge to encourage miners and validators to add their transaction to a block. It makes it more profitable for miners to include a transaction, particularly if they could mine cleared (empty) blocks instead. A transaction may have a higher chance of appearing in the next block if the tip is larger.
- Max Fee: In order to complete their transaction, users can specify the highest amount they are ready to pay. The maximum charge must be more than the sum of the base and priority fees in order for a transaction to be processed. The sender receives a reimbursement for any Gas that is not used, which is the difference between the maximum fee and the total of the base fee plus tip.
Calculating Gas Fees:
These elements are used to determine the transaction’s overall cost.
- Before EIP-1559: Total fee costs = Gas units (limit) * Gas price per unit.
- After EIP-1559 (upgradation): Total fee = Gas units (limit) * (Base fee + Tip).
For instance, the total charge following the upgrade would be 21,000 * (100 + 10) = 2,310,000 Gwei (or 0.00231 ETH) if a transaction had a Gas limit of 21,000 units, a basic fee of 100 Gwei, and a tip of 10 Gwei.
Factors Affecting Gas Consumption and Fees
Because of Ethereum’s popularity and network demand, Gas prices can rise significantly. Among the factors are:
- Complexity of Operations: Gas consumption is higher for more complicated activities than for simpler ones. Transferring cryptocurrency, for example, is inexpensive, but implementing a new smart contract might be highly costly. The cost of writing to contract storage is much higher than that of a straightforward arithmetic statement.
- Data Storage: Gas per byte makes it costly to store data on the Ethereum blockchain, which incentivises optimised coding.
- Looping: If smart contracts are not optimized, the cost of Gas increases as the number of loop counters increases.
- Demand/Network Congestion: Gas costs are typically higher in busy or congested networks. In order to outbid other users’ transactions and expedite processing, consumers must provide a larger gratuity.
- Function Calls: Since view and pure functions don’t change the blockchain state, they usually don’t cost gas when called directly. There will be a Gas expense involved, though, if they are called from another function that actually alter the state.
Gas for Failed Transactions
All modifications made to the blockchain will be reversed if a transaction fails because it ran out of gas (i.e., the gas limit was too low). However, as all of the gas will have been used up during the calculation process, none of it will be sent back to the sender. Additionally, if you set a low gas limit, the transaction may be removed from mempools or remain pending indefinitely.
Evolution of Gas and Future Outlook (Ethereum 2.0 / Proof of Stake)
High Gas costs were not the main reason behind Ethereum’s switch to Ethereum 2.0 (now called the Merge), which switched from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus architecture. But eventually, the PoS architecture and future efficiency improvements should handle some of the Gas cost problems, possibly enabling the network to handle hundreds of transactions per second. Staking ETH and taking part in validation are rewarded with a fraction of the Gas fee in the PoS scheme. By regulating Gas consumption by fiscal responsibility rather than computational effort, the objective is to lessen increased control consumption and dependency on technical gear.
Strategies to Reduce Gas Costs
There are various tactics that users can use to lower their Gas expenses:
- Timing Transactions: Select periods of time when there is less traffic on the network. Real-time, high, low, and average Gas prices are displayed via tools such as Etherscan.
- Layer 2 Solutions and dApps: Fees can be greatly reduced by utilizing Layer 2 solutions or decentralized applications (dApps) that run off the main chain.
- Setting Advice: To show the crucial transaction status, users can choose a direction. Transactions that propose a larger tip per gas will be preferred by miners.
- Automated Wallets: To make things easier for users, wallets that support the EIP-1559 update can automatically set a proposed transaction charge (base fee + suggested priority fee).
Analogy and Tools
In a common comparison, Gas is like Gas or diesel for a car: For the automobile (smart contract code) to drive on the highway (blockchain), it needs fuel (gas), which is bought with money (ether). Similar to how internal mechanics, weather, and driving style affect a car’s fuel consumption, a number of factors influence mileage (or code efficiency).
Solc-gas and Ethereum nodes’ estimateGas function are two examples of tools that developers can use to estimate gas usage. Before deploying to the mainnet, developers can test gas prices for free using testnets (like Ropsten) and IDEs (like Remix IDE). Users can also view gas related to transactions in the additional information view of the Chainlens Block Explorer.
Priority Gas Auctions (PGAs)
Blockchain networks employ a process called Priority Gas Auctions (PGAs) to decide which transactions should be included in a block and then carried out in that order. In essence, they are a competition amongst network users to process their transactions more quickly by paying higher transaction costs, or “gas.”
A more thorough explanation of priority gas auctions can be found here:
Definition and Mechanism
- In order to guarantee that their transactions are prioritized and included in a block, users engage in a practice known as PGAs, where they bid up transaction costs, or gas. This frequently happens when several individuals wish to take advantage of a potentially lucrative opportunity, such an arbitrage.
- The sequence of transactions within a block can be chosen by miners in certain blockchain networks. Miners can favour transactions that offer larger Gas fees using this discretion, making sure those transactions appear first or in a particular sequence.
- In order to find possibilities, users take part in PGAs by keeping an eye on the mempool, a transaction waiting area. In an attempt to have their transaction processed first, they then submit their transactions with greater Gas fees than the other transactions that are currently in progress. Everyone’s Gas price goes higher as a result of the bidding war for block space created by this procedure.
- In PGAs, bots frequently bid up transaction costs to compete with one another, particularly when pure arbitrage opportunities provide unrestricted income.
Relationship with Maximal Extractable Value (MEV)
- PGAs and the idea of Maximal Extractable Value (MEV) are closely associated. The maximum value that can be retrieved from a block by adding, removing, or rearranging transactions is known as MEV.
- Miners may be able to extract more MEV from the transaction process by taking use of their discretion over transaction ordering. To take advantage of price fluctuations or arbitrage opportunities, miners can, for instance, front-run transactions by prioritizing their own transactions over others. The method by which miners can maximize the value they obtain from transaction ordering is represented by PGAs.
- PGAs are the result of users competing to get their transactions included first when a possible MEV opportunity, such an arbitrage, presents up.
Consequences
- Higher transaction fees for all users may result from PGAs, particularly in situations where block space is highly competitive.
- Additionally, they draw attention to the possibility of front-running and other forms of criminal activity, in which users might alter the sequencing of transactions to their advantage.
Examples
The use of PGA in arbitrage opportunities on decentralized exchanges (DEXs) is a typical example. A bot that recognizes an arbitrage opportunity will raise the price of Gas to guarantee that its transaction is completed before others’, possibly making money off of the difference in price.
Mitigation
Numerous strategies are being investigated to lessen the adverse effects of PGAs, such as:
- Front-running protection: Methods intended to randomise transaction sequencing or hide transaction data.
- Putting limits on the number of transactions coming from a single address is known as rate limiting.
- Off-chain order relays: Matching deals using off-chain mechanisms before batching them on-chain.
- Time-lock contracts: Setting specific time constraints on transactions.