What are Crypto Gas Fees? | The Motley Fool

However, lower fees don’t mean no fees at all. Whenever work is being done and money changes hands, someone is being compensated. Enter gas fees.

Cryptocurrencies and blockchain technology aim to shake up the status quo of money, the finance industry, and the very foundation of how business is conducted. With a decentralized structure and lower fees, crypto could help make the world a more efficient place.

What are crypto gas fees?

A gas fee is the term given to transaction fees on the Ethereum (CRYPTO:ETH) blockchain network. According to Ethereum’s developer pages, gas is “the fuel that allows the [Ethereum network] to operate, in the same way that a car needs gasoline to run.”

Other cryptocurrencies may simply call these transaction fees, miner fees, or something similar. However, since Ethereum is currently the second-largest crypto by market cap, the term “gas” is often applied when referring to the fees involved in executing work on other blockchains.

How gas fees work

Cryptos such as Ethereum operate on a blockchain, a digital ledger of transactions distributed to a large and decentralized network of computers that manage the blockchain. This is in contrast to cloud computing, which is a centrally managed computing process (usually via a company’s data center). Gas is paid to the decentralized network of computers for performing the work — in this case, the computing power — needed to execute and record operations on Ethereum.

The gas fees go to crypto miners whose computers are used to validate blocks of transactions on the Ethereum blockchain network. Gas is paid in Ethereum’s native currency, Ether, which is the actual cryptocurrency that investors trade on a crypto exchange app.

What generates a gas fee?

All transactions carry a variable gas fee that’s based on the size and complexity of the operation. A payment or transfer of Ether from one account to another (for an online purchase, or reimbursing a friend for a payment) is one of the simplest and cheapest transactions. Other operations that generate gas fees include creating a non-fungible token (NFT), or creating and executing a smart contract.

Ethereum is undergoing a switch from a proof-of-work model to a more efficient proof-of-stake model in 2022, an event referred to as “the merge.” Owners of Ether can stake their tokens and earn passive income from gas fees paid from validating transactions on the network.

Why are gas fees necessary?

A basic concept in economics is that all work requires compensation. In a blockchain network like Ethereum, computers are using electricity to compute and verify transactions taking place. Electricity — and the computer that uses it — costs money. The people who pay for the lights (and the computer) to stay on should be compensated for their efforts to keep the Ethereum network functioning properly and to prevent unauthorized tampering with the blockchain or theft.