Ethereum's adoption is accelerating rapidly, fueled by the expansion of decentralized finance (DeFi), global stablecoin adoption, and the growing popularity of non-fungible tokens (NFTs). While increased network usage signals strong long-term potential, it has also led to significant short-term challenges—most notably, soaring transaction fees.
In early 2021, Ethereum transaction fees reached unprecedented levels. To put this in perspective, the average fee during the 2017–2018 bull market peaked at $5.70. Since January 18th, 2021, the average fee has consistently exceeded that amount, with median fees often surpassing $10.
Several factors contribute to these high fees, including the rising price of ETH and increased network congestion. Furthermore, Ethereum’s fee structure is poised for a major change with the implementation of Ethereum Improvement Proposal (EIP) 1559, scheduled for the London hard fork.
This article breaks down how Ethereum gas fees work, what’s driving the increases, and how EIP-1559 aims to improve the user experience.
What Is Ethereum Gas?
To execute transactions or interact with decentralized applications (dapps) on the Ethereum network, users must pay a fee—commonly referred to as "gas." Much like a vehicle requires fuel to operate, Ethereum operations require gas to be processed.
Gas measures the computational effort needed to perform an action on the blockchain. Complex operations, such as executing smart contracts, require more gas than simpler transactions like transferring tokens. All gas fees are paid in ETH and denominated in GWEI, where 1 GWEI equals 0.000000001 ETH.
Two main components determine transaction fees: gas cost and gas price.
Gas Cost Explained
Different transactions consume varying amounts of gas based on their complexity. A standard ETH transfer uses 21,000 gas, while a trade on a decentralized exchange might require 100,000 gas or more.
Users set a "gas limit"—the maximum amount of gas they are willing to use for a transaction. This serves as a safety measure against unexpectedly high consumption. Unused gas is refunded, but if the limit is too low, the transaction fails—and the user still incurs a cost.
Interestingly, since January 2020, the average gas used per transaction has decreased. This indicates that rising fees are not due to increased transaction complexity but rather other network factors.
The Role of Gas Price
Gas price refers to the amount a user pays per unit of gas. Users can choose their gas price, which directly influences how quickly their transaction is processed.
Gas prices fluctuate based on network demand. During periods of high activity—such as DeFi surges or token launches—users compete for block space by offering higher gas prices, driving up costs for everyone.
For example, average gas prices peaked above 500 GWEI in September 2020 during the UNI token airdrop. Similar spikes occurred in 2021 as DeFi activity intensified and ETH’s price attracted new traders.
How Gas Prices Are Determined
Ethereum blocks are mined approximately every 15 seconds, with each block having a maximum capacity of 12.5 million gas (as of July 2020). This limit restricts how many transactions can be included per block—typically between 160 and 200.
Miners prioritize transactions with the highest gas prices because they earn these fees as revenue. When blocks are consistently full, users engage in a competitive bidding war, further escalating prices.
Since mid-2020, blocks have consistently operated at 95–98% capacity. This congestion intensifies competition, resulting in higher fees and slower confirmation times for transactions with lower gas prices.
While increasing the block size could temporarily ease congestion, it would also accelerate blockchain growth, demanding more resources from node operators and potentially centralizing the network.
Case Study: The UNI Airdrop
The UNI token airdrop in September 2020 illustrates how sudden demand spikes can disrupt the network. When Uniswap announced the airdrop, thousands of users rushed to claim and trade UNI tokens on decentralized exchanges.
Because decentralized exchanges like Uniswap process all trades on-chain, each transaction requires gas. This sudden surge in activity caused gas prices to skyrocket, with median fees temporarily exceeding $12.
Events like this highlight a key challenge: users who submitted transactions with moderate gas prices before the surge faced significant delays, as miners prioritized higher-paying transactions.
Beyond token launches, on-chain arbitrage trading also contributes to fee volatility. Automated bots compete to execute trades quickly, often driving up gas prices in the process.
Introduction to EIP-1559
EIP-1559 is a major upgrade aimed at overhauling Ethereum’s fee mechanism. Instead of users manually setting gas prices, the protocol will automatically calculate a "base fee" based on network demand.
Target Block Size
EIP-1559 replaces the fixed block size with a target size of 12.5 million gas—aiming for 50% capacity. The maximum block size will double to 25 million gas, but the system will adjust fees to maintain the target.
How the Base Fee Works
The base fee is algorithmically adjusted based on previous block occupancy. If blocks exceed the target size, the base fee increases; if they fall below, it decreases. This mechanism helps stabilize congestion and makes fees more predictable.
Critically, the base fee is burned—permanently removing ETH from circulation. This reduces overall supply inflation and could even make ETH deflationary under high-demand conditions.
Understanding Tips
Users can still incentivize miners by including a "tip" with their transaction. Tips are paid directly to miners and can speed up processing during congested periods.
Users set a "fee cap"—the maximum they are willing to pay (base fee + tip). If the base fee exceeds the cap, the transaction fails. Otherwise, the tip is paid to the miner.
Will EIP-1559 Lower Gas Fees?
EIP-1559 is not a scalability solution. While it improves fee predictability and user experience, it does not directly increase transaction throughput. High fees will persist as long as demand for block space exceeds supply.
Long-term solutions rely on layer-2 scaling technologies—such as Optimism and Loopring—and the full rollout of Ethereum 2.0. These advancements will enhance transaction capacity and reduce costs over time.
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Frequently Asked Questions
What is gas in Ethereum?
Gas is the unit that measures the computational effort required to execute operations on the Ethereum blockchain. Users pay gas fees in ETH to process transactions or interact with smart contracts.
Why are Ethereum fees so high?
High fees result from network congestion and limited block space. When demand exceeds capacity, users bid higher gas prices to prioritize their transactions, driving up costs for everyone.
How does EIP-1559 change gas fees?
EIP-1559 introduces a base fee that adjusts automatically based on network demand. This makes fees more predictable and burns a portion of the ETH paid, potentially reducing supply inflation.
Will EIP-1559 reduce transaction costs?
Not directly. While EIP-1559 improves fee estimation, it doesn’t increase network capacity. Lower fees require scaling solutions like layer-2 protocols or Ethereum 2.0.
What are tips in EIP-1559?
Tips are optional payments users can add to the base fee to incentivize miners. During congestion, higher tips can help transactions confirm faster.
How can I avoid high gas fees?
You can reduce costs by transacting during off-peak hours, using layer-2 solutions, or adjusting gas limits based on current network conditions.
Conclusion
Ethereum’s gas fees reflect both its success and its scalability challenges. While EIP-1559 represents a meaningful step toward better fee mechanics, lasting solutions depend on broader scaling efforts. As layer-2 technologies and Ethereum 2.0 develop, users can expect improved efficiency and lower costs across the network.