Have you seen the Ethereum network fees recently? They say that using a DeFi protocol nowadays will cost you about $50 thanks to the through-the-roof commissions. Now, how is this fair? And what’s going on with the network fees lately?

We talked to our users and it turns out that not all of us understand how the network fees work. And that’s ok because this issue – just like many other blockchain-related issues – can get really confusing. Some people might think that their wallet has started charging them extra fees these days, but that’s not the case. The reason behind the high fees is the network overload: the more transactions in the system waiting for confirmation, the more expensive it gets to execute them.

Still sounds confusing?

I decided to step up and tell you everything I know about the network fees. 

What’s Going On with the Ethereum Fees?

Gas fee prices are breaking records and the crypto community is getting frustrated. Gas is the pricing value you need in order to process transactions or execute smart contracts within any platform powered by the Ethereum blockchain.

Nowadays, if you want to send your Ether to a friend, play a crypto game, use a DeFi (a popular crypto trend “Decentralized Finance” that aims to challenge traditional finance system) protocol to lend crypto or exchange your ERC20, you have to dip into your pocket. 

In fact, Ethereum’s gas fees depend not only on the network’s load, but also on what transaction you are trying to execute. It will cost you less to send Ether to somebody compared to transferring ERC20. Trading tokens on DEXs (decentralized exchange where the trade is conducted from person to person, bypassing any third parties) is going to be the most expensive deal as the transactions that power smart contracts cost you more. 

But let’s start from the beginning. 

What Are Network Fees?

Blockchains like Ethereum or Bitcoin are based on the Proof of Work consensus algorithm. They depend on miners to verify transactions and keep the data in the chain in order. There are no third parties such as banks to verify how much money every person has, but there’s a huge database (distributed ledger) that is protected and organized by a group of people called miners. 

Miners compete to validate new blocks in hopes of receiving a reward for their work. The reward comes in the form of cryptocurrency be it Ether or BTC. 

How is the Network Fee Calculated?

On the Ethereum network, gas fees are paid in Gwei. Basically, gas is calculated according to the computational efforts miners put into processing a transaction. 

Network fees are always different. They depend on market demand and network load. Before sending the transaction to the network you need to set the gas limit (the maximum amount of Gwei you’re willing to contribute) manually. The logic is simple: the more you pay, the faster your transaction will be finalized as miners always choose higher rated transactions first. On the contrary, if the gas limit you set is too low, your transaction might get stuck in the network for a while. Besides, if your transaction fails (and this sometimes happens due to various reasons) your fee will be deducted from your balance anyway. How so?

Unlike Bitcoin, Ethereum’s network is powered by smart contracts, and to make these contracts work you need to pay a fee. Every dApp, every single DeFi protocol, even your cute little game that’s based on the Ethereum network requires gas to function. Just like your car that won’t move without gas, transactions on the Ethereum network won’t work either. And if your car takes you to the wrong place because your navigator is broken, you still are using gas to drive. 

Typically, the gas price stays around 20 Gwei but things change when the network load is high. The more transactions waiting for confirmation, the more expensive it becomes to process them.

Why Are the Fees So High Now?

As I mentioned before, different types of transactions would cost you differently. At the moment, the suspected reasons behind these ridiculously high prices could be Tether transfers, the rising activity on some DEXs, extensive dApp usage, as well as a shady project people got engaged with recently (stay tuned, we’re going to tell all about it in our next article).  

The Bottom Line

Until the underlying concept of the Ethereum network is fixed, we’ll have to deal with events like this. If you don’t need to process any transactions immediately, you can try to wait until the network load is lower. Otherwise, you’ll have to pay a little extra. 

Follow Lumi Wallet on Twitter, Telegram, Facebook or Reddit for more crypto knowledge and news. Or you can connect with us on LinkedIn.