UNDERSTANDING GAS FEES: HOW THEY WORK AND WHY THEY CHANGE

What Are Gas Fees?

In blockchain networks—particularly those using the Ethereum Virtual Machine (EVM)—gas fees refer to payments made by users to compensate for the computational effort required to execute transactions and smart contracts. Gas is measured in gwei, which is a denomination of the native Ethereum token, ETH. One gwei equals 0.000000001 ETH.

Essentially, gas fees act as the lifeblood that allows decentralised applications (dApps) and smart contracts to run efficiently while preventing spam and malicious activity. These fees are incentives for miners (or validators) to include transactions in a block and secure the network’s operations.

The cost of a transaction on Ethereum or other EVM-compatible networks is calculated as:

Transaction Fee = Gas Units Used × Gas Price

Here’s what each component means:

• Gas Units: The amount of computational work required to perform an operation. For instance, a simple ETH transfer typically consumes 21,000 gas units.
• Gas Price: The amount one is willing to pay per unit of gas, usually denominated in gwei. A higher gas price can expedite transaction processing.

Not all operations cost the same. More complex tasks—like interacting with a smart contract, swapping tokens on a decentralised exchange, or minting NFTs—consume significantly more gas units, leading to higher fees.

When a user sends a transaction, they must specify both the gas limit and a max fee per gas. The gas limit defines the maximum amount of gas they are willing to allocate. If the transaction exceeds this limit, it is reverted, but the gas is not refunded. Ethereum’s London Upgrade in 2021 introduced a base fee mechanism to standardise part of the gas cost, making fees more predictable.

This update also added a burn mechanism: the base fee is destroyed rather than given to miners, effectively reducing ETH supply over time and acting as a deflationary force.

While Ethereum is the most well-known EVM network, others such as Binance Smart Chain (BSC), Polygon, and Avalanche also employ gas fees. However, these networks often offer lower fees due to different consensus mechanisms and network architectures.

To summarise, gas fees serve as a critical component in upholding the integrity, security, and efficiency of blockchain ecosystems. They compensate validators, deter spam, and ensure that computational resources are allocated fairly across competing transactions.

Why Gas Fees Fluctuate

Gas fees are subject to change due to multiple dynamic factors, primarily involving network conditions, demand for transaction processing, and individual users’ willingness to pay.

One of the primary drivers is network congestion. When there is a surge in demand—such as during periods of heavy trading, NFT minting events, or DeFi protocol launches—the available block space becomes highly competitive. Validators prioritise transactions that offer higher gas prices, causing an upward spiral in fees.

At such times, even simple transactions like ETH transfers may become prohibitively expensive, a phenomenon seen during bull markets or rapid dApp adoption. Conversely, when activity subsides, fees decline as the urgency to process transactions falls.

Another layer to fee volatility is introduced by Ethereum’s dynamic fee mechanism. Following the London Upgrade (EIP-1559), the fee structure includes a base fee—that adjusts based on block utilisation—and a priority tip paid to incentivise miners or validators. Here’s how each plays a role:

• Base Fee: Automatically calculated by the protocol, it increases when network utilisation exceeds a target of 50% and decreases when usage is lower. This makes fees partially predictable but still sensitive to network demand.
• Priority Tip: An optional value users can offer to expedite their transaction. In times of heavy activity, tipping more can secure faster confirmation.

Moreover, gas prices vary with layer 1 vs layer 2 solutions. Layer 2 networks such as Arbitrum, Optimism, and zkSync aim to reduce gas fees by processing many transactions off-chain and settling them later on the main Ethereum chain. These networks maintain the trustless nature of blockchain while offering a fraction of the gas cost.

External triggers such as market speculation, global events, protocol upgrades, or security vulnerabilities can also lead to erratic gas behaviour. For example, fear of hacks might prompt mass token withdrawals, spiking demand and fees.

DApp architecture can also influence gas usage. Poorly optimised smart contracts consume more computational steps, inflating gas requirements. Protocol developers frequently revisit contract logic to improve gas efficiency and reduce user costs.

Additionally, EVM-compatible chains like Binance Smart Chain or Fantom can maintain more stable and lower fees than Ethereum due to higher throughput or different transaction prioritisation models. Nonetheless, their fee models are still influenced by validator incentives, overall usage rates, and network upgrades.

Many users monitor gas fees through tools such as Etherscan gas trackers or block explorers, which provide live pricing suggestions. Strategic timing—such as transacting during off-peak hours—can also lead to significant savings.

In short, gas fee fluctuations reflect the ongoing balancing act between demand, block space, and validator motivation. While upgrades like EIP-1559 introduced stability, the ecosystem remains fluid, responding dynamically to both internal and external stimuli.

Managing and Reducing Gas Fees

Given the volatility of gas fees, users and developers have implemented various strategies to reduce costs across Ethereum and other EVM-compatible networks.

1. Timing Transactions Wisely: Gas prices often vary with global activity. Fees are typically lower during weekends and late-night UTC hours. Using analytics platforms like Gas Now or ETH Gas Station helps users identify optimal windows for cheaper transactions.

2. Utilising Layer 2 Networks: Ethereum scaling solutions continue to gain traction as viable alternatives to high Layer 1 gas fees. Here are some notable examples:

• Arbitrum: An optimistic rollup that reduces costs by executing transactions off-chain and submitting batch proofs to Ethereum.
• Optimism: Another optimistic rollup with broader ecosystem integration and fast transaction finality.
• zkSync and StarkNet: Zero-knowledge rollups using advanced cryptography to slash gas fees without compromising on security.

Using dApps built on these platforms can reduce transactional costs up to 90% compared to Ethereum mainnet.

3. Combining Transactions: For interactions involving multiple steps, like staking, swapping, or bridging, some platforms allow bundling operations into a single transaction. This consolidation reduces gas usage per action.

4. Choosing Gas-Efficient dApps: Not all decentralised applications are equal in how they utilise gas. Selecting well-audited and optimised smart contracts minimises unnecessary computations and cost overheads.

5. Setting Custom Gas Fees: Wallets like MetaMask and Rabby allow users to manually set gas prices and limits. Opting for lower priorities might result in slower confirmations but can be economical during lower network congestion.

6. Taking Advantage of Gas Fee Refunds: Some Ethereum protocols like Gelato or Gas DAO once experimented with partial gas refunds or incentives. Though not widespread, such models could gain adoption as user experience becomes more central.

7. Use of Alternative EVM Networks: Lower-cost chains such as Binance Smart Chain, Avalanche C-Chain, or Polygon PoS offer cheaper transaction alternatives. While they may compromise slightly on decentralisation or validator set variance, the reduced costs are appealing for high-frequency traders or microtransactions.

8. Smart Contract Optimisation for Developers: Developers can reduce network-wide gas costs by writing efficient code. Using optimised data storage, batch processing, and minimising state variables are a few techniques to reduce the gas demanded by each contract interaction.

9. Monitoring Tools and Alerts: Gas-watching services allow users to receive notifications on optimal fee levels. APIs can also integrate with trading bots or dApps to automate execution during favourable conditions.

While Ethereum 2.0 and future improvements like Danksharding and Proto-Danksharding (EIP-4844) aim to reduce base-level gas costs further, user-oriented solutions remain the most practical tools for gas management today.

Understanding the nuances of gas fees—and leveraging optimisation techniques—enables individuals and organisations to make cost-effective decisions without sacrificing functionality or speed on the blockchain.