Concepts & Definitions - Gas Fees
Topics that will be covered in this guide:
How gas fees are being calculated
What gas fees are used for and why they're needed
Why SOL is needed in your wallet to perform transactions
Ethereum vs. Solana gas prices
How the transaction cost go to validators
What is a Gas fee?
Whenever we want to carry out any transaction on the blockchain there is always a pop-up of payment of network fee which is mostly charged based on the congestion of the network at the time. These network fees are what is termed “Crypto Gas Fees”
Gas fees act similarly to transaction fees in traditional financial systems but they are specifically designed for blockchain networks. Whenever you want to send cryptocurrency or perform any action, on a blockchain you're required to pay a fee using the network's cryptocurrency. This fee, referred to as a "gas fee " serves as compensation for the validators or miners who diligently process and secure transactions within the network.
Network fee on Solana
WHY SOL IS NEEDED IN YOUR WALLET TO PERFORM TRANSACTIONS
On the Solana blockchain, SOL is the native cryptocurrency used to power transactions and interactions with the network. When you want to send SOL or use decentralized applications (dApps) on Solana, you need to have some SOL tokens in your wallet to cover the associated gas fees. This requirement ensures that users have a stake in the network and helps prevent abuse.
HOW GAS FEES ARE BEING CALCULATED
The crypto calculation of gas fees is based on the resources needed to execute a transaction or smart contract on the blockchain. More intricate actions necessitate power resulting in higher gas fees. Additionally, these fees can vary depending on the network's level of activity; especially during periods when there is increased demand for transaction processing, it will lead to higher fees.
How transaction fees work on a Blockchain
WHAT GAS FEES ARE USED FOR AND WHY THEY’RE NEEDED IN BLOCKCHAIN
Gas fees fulfill the following purposes within a blockchain system;
Resource Allocation; They ensure that computational resources are fairly distributed among users so that those who consume resources also contribute more towards covering these expenses.
Network Security; Gas fees serve as a deterrent against actors attempting to flood the network with low-value transactions.
Economic incentives; play a role, in motivating miners or validators to include transactions, in blocks ensuring network maintenance and security.
Gas fees are primarily used to reward miners or validators who contribute their computing power and resources to process and validate transactions on the blockchain. These fees act as an incentive for network participants to continue performing their vital role in maintaining the blockchain's integrity and functionality.
PRIORITY FEES ON SOLANA
Priority fees allows users to add an additional(optional) fee on top of the base transaction fee which helps to boost how transactions are being prioritized against the others. I.e: it gives transactions a higher priority in the leader's queue
An added benefit could be the element, in high-traffic situations like a window of opportunity for arbitrage, in crypto trading or the race to obtain a highly sought after hyped NFT mint when it is first launched.
Transaction fees can experience a rise, in areas of the network when there is heavy traffic, such as during a highly sought after NFT mint or liquidation event on futures platforms. This surge in fees serves as a deterrent to discourage automated bots from flooding the network with low value transactions. It effectively makes it costlier than Solana’s average <$.01 fees for bots to send a mass volume of transactions as a means to deter them. This fee is commonly referred to as neighborhood fee.
ETHEREUM VS. SOLANA GAS PRICE
Solana: Solana aims to provide a more cost-effective experience with low and predictable gas fees even during high network usage.
At the time of this article, the average gas price of Solana is 0.0001 SOL which is < $0.01. This predictability makes it easier for users to estimate transaction costs and plan their interactions on the network.
Ethereum: Ethereum has historically faced high and variable gas prices, at the time of this article Ethereum gas price is $14 on average, And users may need to pay significantly more especially during periods of heavy network congestion to ensure their transactions get processed.
HOW GAS FEES GO TO VALIDATORS
When you pay a gas fee to perform a transaction on a blockchain, part of the gas fee users pay is burned on both Solana and Ethereum. This means that a portion of the fee is permanently removed from circulation, which can affect the overall supply and, consequently, the token's value. The remaining portion of the fee is collected and distributed to the validators in proof-of-stake systems who validate and add your transaction to the blockchain. These validators receive these fees as compensation for their efforts in maintaining the network, verifying transactions, and ensuring the security and integrity of the blockchain. This system incentivizes individuals and organizations to participate in the blockchain's operation.
Gas fees are costs associated with blockchain transactions. They serve as compensation for network participants who process and validate these transactions. The calculation of gas fees takes into account the complexity and demand of the transaction allowing for prioritization and security within the network. These fees play a role in maintaining the functioning of blockchain operations. In Solana you need SOL tokens in your wallet to cover gas fees and interactions. The fees paid by users are distributed among validators who verify and incorporate transactions into blocks encouraging their involvement in securing the blockchain. This system ensures the integrity and security of networks.