Cryptocurrency & Blockchain Gas Fees

When you’re new to the blockchain, cryptocurrency, and NFT space, gas and transaction fees can come as quite a shock. While at first, they may seem a massive inconvenience – and they can be sometimes, what you’ll come to realize is the ecosystem couldn’t function without them.

In this article, you’ll learn what blockchain gas fees are, what they pay for, how they’re calculated, and how you could potentially make money from them.

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What Are Crypto Gas Fees?

Gas fees is a term often used to describe the cost of completing a transaction on any blockchain. It is interchangeably used with the term transaction fees because different blockchains use different terms.

Ethereum and Polygon are prime examples of Blockchains that refer to it as gas while Bitcoin and Solana simply use transaction fees.

As you might have guessed, using the word gas in replacement of transaction refers to running a vehicle. The blockchain is the vehicle, and users need to fill it with gas for it to run efficiently.

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What Do Blockchain Transaction Fees Pay For?

Any action taking place on the blockchain, whether you’re buying an NFT, initiating a smart contract, or swapping crypto from one blockchain to another – you’ll be charged gas fees.

All of these actions require validators around the world to approve the transaction’s validity and add it to the blockchain.

Most blockchains use either proof of stake or proof of work model.

Bitcoin, for example, uses a proof of work model, which requires miners to solve mathematical equations to validate transactions. The transaction fees are used to maintain the validity and security of Bitcoin and as an incentive for miners to continue their work.

Recently, the Ethereum merger took place. The second largest blockchain switched from a proof of work consensus protocol to proof of stake. There are no miners in this process. Validators are individuals who have put up a portion or all of their Ethereum to be used to validate new transactions. As a reward, validators receive a percentage yield on their staked crypto.

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How Are Gas Fees In Crypto Calculated?

Gas fees in crypto and blockchain transactions can be highly unpredictable. Essentially, blockchain transaction fees fluctuate based on the traffic attempting to complete transactions at that specific time. So, the more transactions being attempted, the higher the transaction fee. Each chain uses its own formula for calculating the specifics, but supply and demand dictate the fluctuations in price.

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How Can I Reduce Cryptocurrency Transaction Fees?

If you encounter a high gas price, it is best to wait until a time of day when blockchain traffic is at its lowest. Between 12:00 am - 4:00 am are notorious for lower gas fees. The majority of Asia, North America, and South America are offline, while Europe and Africa are just beginning the day.

Often, you won’t know the gas fee until you go to complete the transaction, which can be time-consuming and frustrating. To avoid this, you can use a gas fee calculation tool that alerts you when blockchain gas fees are at an acceptable price.

Additionally, layer-2 platforms tend to see preferential fees and speeds. A layer-2 platform is built in addition to the layer-1 blockchain. For example, the Lightning Network is a layer-2 platform for Bitcoin.

The purpose of a layer-2 platform is to complete transactions off-chain, taking the pressure off the Blockchain and allowing it to function efficiently.

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How Can I Earn Money From Crypto Gas Fees?

As mentioned, gas fees are used to compensate miners and stakers – which anyone can get involved in. This means you can take advantage and start earning additional crypto. However, there are some barriers to entry, such as the cost of equipment or minimum stake.

Mining

Mining Bitcoin requires specialized computer equipment. As an individual miner, you’re competing with warehouses full of machines, each racing one another to complete equations, meaning it can be incredibly difficult to generate a sizable return.

One option for individual miners is to join a Bitcoin mining pool. A mining pool is a decentralized group of miners who combine their processing power to validate transactions together. Rewards payments are then distributed to each miner based on their contribution to the mining efforts.

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Staking

Staking is much simpler than mining and requires no equipment or effort. However, the barrier to entry here is minimum stakes. When Ethereum switched to proof of stake, it was announced that the minimum stake would be 32 ETH (around $40,500 at the time of writing).

This is only for Ethereum – other blockchains and cryptocurrencies offer minimum stakes that are accessible to all users.

To earn a return from staking, you have to lock in a specified amount of cryptocurrency for a prolonged time period. Your funds are then used to validate transactions, and you will receive a predetermined APY based on the staked amount.

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In Summary

Blockchain gas fees are what enable all blockchains to continue functioning efficiently and securely. While they can be pricey and frustrating, if you take advantage of layer-2 platforms and plan your transactions to execute them during low-traffic hours, you’ll see favorable fees.

Furthermore, you can use gas fees to your advantage by staking or mining and receive validator's rewards, enabling you to grow your crypto portfolio.

Without transaction fees, the blockchain model doesn’t work. Over time they will improve, but you must understand the positives they bring to appreciate why we must pay them.