Cryptocurrency gas essentially determines the fees for completing a crypto transaction. The gas measures the computational effort needed to validate and confirm transactions and other operations.
So, how does cryptocurrency gas work, and how does it impact your crypto investments? Here is what you should know.
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What Is Gas In Crypto?
Cryptocurrency gas refers to a unit that measures the computational resources needed to execute a transaction.
It was created for the Ethereum network and the ether (ETH) cryptocurrency. However, crypto investors may also refer to the transaction fees on other crypto networks as gas.
Ethereum developers implemented gas fees to help keep the network secure. Requiring a fee for each transaction prevents malicious individuals from spamming the network and reduces the risk of computational wastage.
Cryptocurrencies operate using a distributed network of individual computers running the same software. Each instance of the software is called a node.
When you send or receive cryptocurrency, the connected nodes verify the transaction and update the network. Gas fees are used to compensate the individuals running nodes on their computers.
How Are Gas Fees Determined?
On the Ethereum network, gas fees are paid using its native currency – ether (ETH).
The gas fees for an Ethereum transaction are based on the gas limit and the current price per gas unit. Gas prices are measured in “GWEI.”
One GWEI is the equivalent of 0.000000001 ETH. The gas price reached a high of 538.01 GWEI in September 2020 and settled below 50 GWEI in May 2021.
As GWEI is a unit of ETH, the gas price increases and decreases based on the supply and demand of the native currency. If ETH is valued at $2,000 then 1 GWEI is equal to $0.000002.
The gas price is multiplied by the gas limit to determine the fee for the transaction. The gas limit is the maximum amount of gas that you are willing to use.
A standard transaction requires a gas limit of 21,000 units. For example, you want to transfer 1 ETH to a friend. The current gas price is 30 GWEI and the gas limit is 21,000 units.
The gas fee for the transaction would be 0.00063 ETH. 21,000 times 30 = 630,000 GWEI (0.00063 ETH). In this example, you would transfer 1.00063 ETH from your account.
1 ETH would go to your friend and 0.00063 ETH would be distributed to the nodes running the network.
Why Do Cryptocurrency Gas Fees Rise?
The gas fees increase based on demand. Increased demand for a cryptocurrency requires more computational power to handle the increase in transactions.
The extra resources required to process transactions result in higher prices per unit of gas. The value of each unit also increases, as it is connected to the value of the currency.
For example, the gas price for ETH may increase from 30 GWEI to 50 GWEI due to demand for cryptocurrency. At the same time, the value of 1 GWEI may increase, which adds to the total cost of the transaction.
In the end, gas fees are a mandatory part of conducting transactions on cryptocurrency networks. You cannot avoid them, but you can pay attention to them to limit the cost of trading crypto.