Gas Wars

Cold, Hard Gas

If you have an individual wallet, whether an offline Ledger or a MetaMask, you have to pay gas to transact on the Ethereum Virtual Machine (EVM). The EVM still runs on the Proof of Work mechanism, which requires transaction validators to use significant computational power to verify your transaction and include it in a block to be added to the blockchain. Gas is a transaction fee that both reimburses the validators for their running costs and acts as an incentive to keep running their node. This applies to all blockchains and it is typically paid in the native token of the chain. The type of blockchain determines how fast blocks can be added and how many transactions can be included per block — this is typically represented by Transactions Per Second (TPS). As more people use the chain, throughout is limited by the time it takes to be included in a block i.e. a queue forms. As people see the wait time increasing they offer higher gas fees to persuade the validators to let them jump the queue.

Exchange is Gonna Come

If you mostly use a centralized exchange you won’t see anything called a gas fee. Instead you’ll pay an exchange fee, which might be fixed or relative depending on your transaction. They have a large pool of funds so they essentially batch people’s transactions together if they want to move coins around on chain and can optimise their gas by transacting at the right time with large amounts. You’ll pay a combined fee which covers effective gas cost plus the exchange fee, the sum of which may be cheaper than an individual transaction today (as a percentage) depending on your trading size. You’ll notice larger, fixed fees for when you want to withdraw from the exchange, because then there is an immediate gas fee required to record it on the blockchain. You can get an idea of different exchange fees here.

Gas Containment

With the arrival of DeFi, gas costs have risen significantly due to the exponential growth of volume locked in the system. The relatively gas-efficient centralized exchanges are starting to play a smaller role and network congestion is worst during a popular bull run. Imagine you’re stuck in traffic and you can take part in an auction to lift your car out of there to get you to your destination!

Chain Reaction

The Ethereum Virtual Machine can only process up to 25 TPS at the moment and there are other blockchains with higher throughputs (and lower fees!). To highlight two in particular:

  • Binance Smart Chain (BSC) has been doing more transactions than Ethereum since February 2021, and today is doing more than three times as many. It has a max TPS of ~160 and sub-dollar fees, with PancakeSwap being a popular alternative to UniSwap. However, BSC is less decentralized as significantly less validators are required to reach a consensus — hence why it’s also known as CZ chain.
  • Solana is the new kid on the block, currently running close to 2000 TPS, with a maximum planned capacity of 50,000–65,000 TPS. The fees are even lower at sub 1-cent! Migration and launch of popular apps on Solana is starting to happen and some big NFT projects are also going there.

Shards, Layers, and Bridges

There are two major advances happening with blockchain scaling right now:

  1. Layer 2 blockchain solutions: that allow computation and data to be taken off-chain, but still rely on the security and decentralisation of the underlying ‘Layer 1’ blockchain
  2. Layer 1 blockchain communication: that allow any blockchain to talk regardless of it’s foundation

Concluding Remarks

Gas is a fact of life in crypto, a lubricant to grease the wheels of computation. But if you’re a frequent trader there are ways to keep it down. Remember to keep in mind:

  • The timing of your transaction matters and you should check what the safe low gas fee is
  • Other blockchains outside of Ethereum can be much cheaper if your desired tokens are available there
  • Decentralized exchanges on Layer 2 may compete with the low fees of Centralized exchanges, and come with the benefit of you keeping the crypto in your own wallet

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