This article explores the economics behindEthereum’sgasfees,explaining why they fluctuate and what factors influence theirpricing.
Points
- Ethereumgasfeesareinfluencedbysupplyanddemand.
- Differenttransactiontypesaffectgasprices.
- MasseventslikeNFTmintingcansignificantlyincreasegasfees.
In thisarticle,we will explore the economics behind the price ofgas,using Ethereum as anexample.We will also exploreEthereum’spolicy behind its gas fee and understand its impact on thesame.
WhyIstheGasFeeNotFixed?
Gas fees on Ethereum are not fixed because they are influenced by variousfactors,primarily supply anddemand.When there is higher demand fortransactions,the gas priceincreases,and when demand islower,the pricedeclines.This mechanism operates according to the law of supply anddemand.
LawofDemandandSupplyinEthereum
Gas is treated like a commodity in Ethereum and almost all otherblockchains.The price is fixed as per its demand andsupply.If there is a higherdemand,the price getsraised,and if there is a lowerdemand,its pricedeclines.This mechanism operates as per the law of demand andsupply.
According to thelaw,if at constantsupply,the demand of a commodityincreases,its price will alsoincrease,and if the demand fallsdown,so will theprice.This is exactly whathappens.Gas price is measured in terms ofETH,so if at a giventime,the gas price is2Gwei,it means it will consume0.000000002ETH.
“Ethereum’sscalability is essential for itslong-termviability.Layer-2advancements are a beacon ofhope,offering a future where security and affordabilitycoexist!”-FerozLakhani,Ankr
You may now be wondering that if the supply of ETH is notfixed,then how can the law of demand and supply be applied to gas which is measured inETH?The reason is that for the application of the law of demand andsupply,we are considering the supply of ETH as aconstraint;rather,the number of transactions in a block is theconstraint.At any giventime,a block can only contain a certain number oftransactions.Since Ethereum places a time limit perblock,the number of users trying to include their transaction in the block aim to get it done by buying moregas.This is what actually increases the price of gas at a certaintime.
WhatFactorsAffecttheDemandofGasFee?
The factors that control the demand for gas in Ethereum are the type oftransactions,the quantum of change inEthereum’sstate,and mass events like NFTminting.
TypeofTransactions
The type of transactions has the highest impact on the price ofgas.An NFT mint would be more expensive than a cryptoswap,which again would be more expensive than bridgingcrypto.The least expensive transaction would be an ordinary cryptotransaction.Below are thereal-lifefigures for performing these actions and the indicative transaction costs forthem.
QuantumofChangeIntroduced
Ethereum charges you basically to change itsstate.This change in state could be an NFT（alargechange）or a smallpeer-to-peertransaction（asmallerchange）.A user is charged accordingly by the quantum of the change they introduce to theblockchain.Forexample,if anyone wishes to send3ETH to3addresses,they would be charged more than someone trying to send3ETH to1address.
MassEvents
Large events like NFT minting of popularprojects,largeairdrops,and other such events greatly impact gasprices.This is because users compete with each other to get their transactions processed inpriority.To dothat,they try to pay more than eachother,ultimately raising the gasprice.Such competitive bidding for gas is known as a gaswar.
Ethereum’sMonetaryPolicy
Unlike traditional monetary systems and even the opposite of many cryptocurrencies beforeit,Ethereum decided to have a floating token supply but with a tightly controlled release of tokens so that it does not destabilizeever.
“Likeit or not but this is what along-termsustainable monetary policy lookslike.Any chain with monetary ambition will copy cat it（yeahevenbtc）.#Ethereumhas reinventedmoney.$ETHissci-fimoney”-@nextalphaa
This allowed it to mint tokens to pay the validators irrespective of the feerevenue.Even though protocol fees are an important source of revenue for Ethereumvalidators,Ethereum does not entirely depend onthem.
Another aspect ofEthereum’smonetary policy is its control overinflation.The cryptocurrency tries to balance the token supply by burning a portion of the fees and controlling the new tokens that enter thesupply.
Since itscreation,Ethereum’smonetary policy had an expansionarypolicy.However,since the end of the crypto winter around September2022,its token supply has almoststabilized.
This wasbecause,beforethat,thepriceofEthereumwasnothighenoughtosaveitfromexploits.Note:Ifthetokenpricefallsbelowacertainthresholdinaproof-of-stakeblockchain,itcanbehijackedwithflashloans,andattackerscanthendrainallthefunds.
Conclusion
Gas prices in Ethereum obey the law of supply and demand like any traditionalcommodity.During phases of highdemand,the pricesinflate,and their value cools down during phases of lowdemand.In addition to demand andsupply,gas prices also depend on the type oftransactions,as larger transactions consume more gas than smallerones.
解説
- GasfeesonEthereumfluctuatebasedonsupplyanddemandprinciples.
- Transactiontypesandmasseventssignificantlyimpactgasprices.
- Ethereum’smonetarypolicyincludesafloatingtokensupplyandinflationcontrol.
- Understandingthesefactorshelpsinanticipatinggasfeechangesandmakinginformeddecisions.