Why Does Ethereum Have Such High Fees?

Why Does Ethereum Have Such High Fees?

Why are gas fees so high, and how that's a good thing?

Domenico Procopio's photo
Domenico Procopio
·Jun 9, 2022·

5 min read

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In the last year or two, everybody who has once used the Ethereum network noticed transaction fees are pretty high. These days, a simple ETH transfer can cost more than $10, and back in the bull run mania, it would've cost you hundreds or even thousands of dollars for just one transaction.

But why is that? Why is Ethereum so poorly scalable? Other layer 1s like Avalanche, Fantom, and BNB chain do the same, but their fees are orders of magnitude lower. How so?

First of all, let's explain what gas fees are and how they're determined.

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What is Gas?

Gas is the unit to measure computational complexity (i.e., how much it costs a computer to execute a particular operation) in the Ethereum Virtual Machine (EVM).

Ethereum uses the EVM to run its transactions, and so do all EVM-compatible chains (Fantom, BNB chain, Avalanche C-chain, Harmony, etc.).

The more complex the transaction, the more gas it requires. But that's not the whole story.

When users send a transaction, they must purchase the gas to execute it. They have to buy gas with a chain's native token (Ether in the case of Ethereum); this is where the gas price comes into play.

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When you hear that gas price is 20 Giga Wei (GWei), it means that each unit of gas costs 20 GWei (1 gwei is 10^-9 Ether or, better said, each Ether contains a billion GWei). A simple ETH transfer costs 21,000 gas so at 20 GWei you end up spending 21,000 * 20 = 420,000 GWei or 0.00042 ETH. If the gas price doubles, so do your transaction fee, regardless of its complexity.

Who Sets the Gas Price?

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Gas price has a market of its own. When more people want to purchase gas (i.e., want to transact on the chain), it gets more expensive since there's a limited supply on each block.

Each Ethereum block can spend at most 30 million gas (the average is 15), so when you want to send a transaction, you compete with all the other users that want to do so, and those who pay more get their transaction through quicker.

That's it. It's just supply and demand, nothing more. (Actually, with EIP-1559, it's the protocol itself setting a base gas price according to network demand, on top of which users can tip more to get their transaction included faster, but the point stays the same). Now that you know what gas is and what it represents, we can move on to the core topic:

Why is Ethereum Gas More Expensive than Other Chains?

It's more expensive for just two easy reasons:

  1. There's less of it available
  2. People want it badly

Let's break down each point:

Ethereum Block Space is Scarce

As I've said, there's a cap on how much gas users can spend on each Ethereum block. And that is for a specific reason: the more gas used in a block, the more transactions (and more complex ones) the network has to handle, and the more resources are required for Ethereum nodes. If requirements to run a node are too high, fewer and fewer people will do so, and the network centralizes.

People Want it Badly

There's a lot of demand for transacting on Ethereum. It is currently the most decentralized and secure smart-contract blockchain, and it also has a huge network effect, so people want to use it and are willing to pay to do so.

Competitors

The other EVM chains have lower fees because of the inverse of the previous statements. Their blocks allow for more transactions, so they're inevitably more centralized, have less demand, or even both.

There are no "technical" reasons; Ethereum is not using "worse tech" (in fact, most of those chains are just forks of the Ethereum client get); it's just more popular and cares more about decentralization.

High Gas Fees Mean the Network is Healthy

I know it can seem like the contrary is true, like high gas fees mean that the network is always congested, stuck, or unusable, but that's not the case. Ethereum block space is saturated, but it's because there's demand for it and, most importantly, people are willing to pay a lot for it; they're getting value from transactions.

Fees Bring a Monetary Premium to ETH

image.png The majority of Ether spent on gas is burned. That Ether is taken away from the circulation forever.

This correlates the value of ETH to the usage of the network, and it also makes Ethereum more secure. Since its migration to PoS is now imminent, a higher price for ETH means a higher price for any external entity that wants to attack the network: to attack it, this hostile entity would have to acquire 51% of the total ETH staked. Hence the more ETH costs, the more economically infeasible this becomes.

What About User Experience?

High fees may be suitable for all the reasons outlined above, but I'm sure end users don't like paying hundreds of dollars to get their transaction through. Well, they don't have to.

Ethereum base layer (also referred to as mainnet or layer 1) is not, ultimately, for end-users.

End users will use layer 2 chains like rollups: we already can see a bunch of projects live (Optimism, Arbitrum, zkSync, etc.), which, despite still being in their infancy and not featuring all the security features necessary to be a complete decentralized layer 2, give us a taste of what the user experience will be on Ethereum in the future. Sooner or later, Ethereum layer 1 will just be used by layer 2 to settle on. If you want to dive deeper into this last topic, I suggest reading the Ethereum's rollup centric-roadmap.

Summary

So no, Ethereum does not have inferior tech like many would like us to believe; it just prioritizes decentralization of the base layer more than scalability, planning to achieve the latter through layer 2 technology. If you enjoyed this reading and would like to see more related content, you can follow me on Twitter at @pdomenico4

 
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