If you want to understand how the Ethereum blockchain works, then you need to understand gas: the fuel that powers the Ethereum virtual machine.
Like all decentralized blockchains, the Ethereum (ETH) network is upheld by a community of nodes, which are independent computers owned by the community and placed all over the world. Each of these nodes runs a platform called the Ethereum virtual machine (EVM), also known as the World Computer, that is similar to a cloud-based service. The EVM works by seeding mathematical problems, which are then sent to nodes to be solved. In doing so, nodes help secure the network. As a result, the EVM is then able to record successful transactions on the Ethereum blockchain.
Like all machines, the EVM needs fuel in order to be powered. We’ve previously covered the concept of mining, predominantly through the lens of bitcoin. We spoke about the idea of how confirming a transaction could become more or less difficult based on the computational power committed to the network versus the number of transactions attempting to be confirmed at any given time. The more difficult the confirmation, the greater the transaction fees as more effort needs to be put in by the miners.
How Ethereum differs from bitcoin
Ethereum uses a different metric for measuring this difficulty, called gas. Each operation that needs to be confirmed on the EVM costs a certain amount of gas to be completed. If this is a simple transfer, the amount of gas required is low. But if it’s a complex smart contract, the amount required can be much higher. Effectively, gas is the fee charged by the network to make that change.
When you set about executing a change on the Ethereum network, you set the amount of gas you’re willing to spend on getting it confirmed. In short, how much are you willing to reward Ethereum miners for solving the mathematical problem? This is referred to as the gas limit. Think of it like setting your highest bid price on eBay. The final price may not end up at that big amount, but you’re willing to spend that much to get there.
Sadly, if you underestimate how much gas you need – that is, if you set the gas limit too low – the transaction will not be completed and the money you’ve spent on that gas will be lost. However, if you overestimate it, you receive a refund of the remaining amount. The purpose of setting the gas limit at the time of a transaction is to establish your “fold” position where you’re not comfortable throwing any more money on the table to get the job done.
Adding to what is already a confusing system, the gas itself has no specific monetary value. It’s just a non-specific unit that shares a relationship to the number of units required to fill a block. However, you do nominate an ETH price in gwei (which is the term given to fractions of an ETH coin – think of it as cents to ETH’s dollar) that you are willing to pay for each unit of gas at the time of requesting the transaction. This gives the gas – your fee for the transaction – a value that can be passed on to the miner.
What impacts the Ethereum gas price?
This gets us to the second part of this equation; if we know that the units of gas represent the computational power required to solve the transaction, what then about the gas price? This is also set by the sender and is effectively a bid you make in order to encourage miners to confirm the transaction.
Set it too low and you’ll be waiting a long time to find miners willing to add you to the blockchain. Set it high and you can get it verified very quickly.
Thankfully, the price of gas and the amount of gas required to trade in ETH – as opposed to using the network for a third-party dapp functionality – isn’t too volatile. There are multiple portals online that track the average price in the market so you can best predict what you need to do. Fees for a standard trade transaction as of the start of 2018 usually hover around the four-cent mark.
Token sale events during initial coin offerings (ICOs) typically lead to higher gas requirements across the network. During these events, when participants in an ICO have the chance to purchase tokens by sending ETH to an address with a smart contract, the network becomes congested due to the large amount of traffic generated by users trying to rapidly purchase tokens before they run out. ICOs will generally stipulate a recommended gas limit to help users, although if this amount is high, users should be wary that despite setting a high gas limit, it’s still possible that the transaction will not be confirmed and the spent gas will be lost.
If you’re wondering why this gas system is used at all, it’s to stop the riff-raff from bogging down the Ethereum network with ridiculously huge computational problems to solve. It creates a scenario where it’s in the best interest of a dapp creator to get the gas cost down, which in turn keeps the EVM running efficiently. This is a problem not faced by bitcoin given it deals with only financial transactions – relatively simple mathematical problems to solve – and not smart contracts.
Plus, since a transaction has a limit, and that limit relates to the maximum number of transactions that can be stored on a block, hackers can’t set the network’s nodes into an infinite loop and crash the system by tendering unsolvable mathematical problems. As soon as the problem reaches a certain gas requirement, it becomes too big to be appended to the blockchain and can, therefore, be ignored.