There are layers to how cryptocurrency transactions work. We’re now living in a world where making a transaction can easily be done through a digital system, so it makes sense that the way in which we purchase and sell things has taken a turn for the technological. There’s a term that is used to help illustrate how this works – primarily for the Ethereum blockchain – and it is called ‘gas.’
What is it?
‘Gas’ is the name given to an integral unit that is used in Ethereum. It refers to the pricing value that is required in order to successfully administer a transaction or carry out a smart contract on the Ethereum blockchain. Ethereum is a decentralized platform that prides itself on running smart contracts, so it’s a given that crypto gas would play a big role in its system.
As a side note, ‘smart contracts’ are defined as being self-executing contracts that have the terms and conditions of an agreement between the buyer and the seller being written directly into the lines of code. Investopedia editor, Jake Frankenfield, explains the function of smart contracts by saying that:
“Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible.”
The primary function of gas is it measures how much ‘work’ an action or a set of actions it takes to perform. Pretty much every operation that can be accomplished by a transaction or contract on the Ethereum platform costs a specific amount of gas, with procedures that need more computational resources that cost more gas than the operations that usually require very few computational resources.
The main purpose of gas
The most notable reason as to why gas is an important component in the Ethereum blockchain is because it aids in guaranteeing an appropriate fee is being paid by transactions that are submitted to the network. By making it a rule that a transaction must pay for each operation that is performed (or causes a contract to perform), it ensures that the network does not become bogged down with executing a load of intensive work that isn’t really valuable to anyone.
This is a particularly different strategy from the transaction fee that is used for Bitcoin, which is based solely on the size of a transaction in kilobytes. Seeing as how Ethereum allows ‘arbitrary complex’ (i.e. ‘Turing completeness’) computer code to be run, a short length of code can actually lead to an abundance of computational work being done. With that in mind, it is important to measure the work that is done as soon as possible rather than just choosing a fee that derives from the length of a transaction or contract.
To create an analogy that further illustrates how gas functions, let’s use a hypothetical situation that was conceived by the previously mentioned – and sourced – Jake Frankenfield, which utilizes a running vehicle as an example. When driving it for X miles, you might eventually need Y gallons of fuel, or transmit X amount of money from your bank account to your friend’s credit card account. Obviously, this will cost you Y dollars in a processing fee and in both cases, X signifies the utility value, whereas Y indicates the cost for carrying out the process of the car trip or the financial transaction.
Likewise, a contract or transaction on the Ethereum platform might be worth 50 Ether (the X value) and the price of gas used to process this transaction at that specific time may be something like 1/100,000 (the Y value).
So how do you go about paying for something that is essentially a transaction fee?
Well, despite the fact that crypto gas is a unit that things can be measured in, there actually isn’t a token for gas (you can’t necessarily own 2,000 gas). In lieu of this, gas exists exclusively within the Ethereum Virtual Machine (EVM) as a tool to keep track of how much work is being carried out.
Now, when it comes to paying for the gas, the transaction fee is charged as a specified number of Ether, which if you did not already know is the token built into the Ethereum network and the token that is given to miners as rewards for successfully producing blocks. The reason as to why operations do not have a cost that is directly measured in Ether is because Ether, much like Bitcoin, possesses a market price that changes rapidly.
Regardless, the cost of calculation does not go up or down simply because the price of Ether changes. With that in mind, it becomes apparent that it is a beneficial move to separate the price of the computation from the price of the Ether token.
Cost & Price
Operations that are executed in the EVM have gas cost, however, gas in and of itself also has a gas price measured based on Ether. Each transaction determines the gas price that it is willing to pay in Ether for every unit of gas, which will allow the market to decide the relationship between the Ether price and the total cost of computing operations (as it is measured in gas).
To sum up, it is a mixture of the two – the total gas used multiplied by the paid gas price – that results in the overall fee being paid by the transaction.
Understanding this particular distinction is important because one of the more confusing things about Ethereum transactions is that there is a dissimilarity between your transaction running out of gas and your transaction not obtaining a fee that is high enough. If the set gas price in the transaction is too low, then no one will bother to run that transaction and it will not be added to the blockchain by the miners.
That being said, if an acceptable gas price is provided, then the transaction will result in a lot of computational work that will make the combined gas costs go past the amount that was attached as a fee and that gas will count as ‘spent’, meaning it will not be given. The miner will immediately stop processing the transaction and revert any alterations that were made, but will still include it in the blockchain identified as a ‘failed transaction’ and collect the fees for it.
Another distinct difference pertaining to this subject is the dissimilarity between providing too big of a fee and providing way too much Ether. By establishing a high gas price, you will inevitably end up paying a large amount of Ether for only a handful of operations, much like setting an incredibly high transaction fee in Bitcoin. You will undoubtedly be seen as a top priority and moved to the front of the line (so to speak), but your currency will be gone. Now, if you supply a more normal gas price and you linked more Ether than was required to pay for the gas that your transaction consumed, the excess amount will be returned directly back to you. Additionally, the miners will only charge you for the work that they do.
In a way, you can just as easily view the gas price as something akin to an hourly wage for the miner and the cost of the gas is essentially their timesheet of the work that has been performed.
There is so much that can be said about crypto gas, but what has been explored in this article are the more fundamental aspects that act as jumping off points for those who wish to do more digging into the concept. Overall, gas is the mechanism that is responsible for making the Ethereum blockchain system as safe as it is.