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January 11, 2022

What are gas fees and why are they sometimes so high?

If you’ve followed this podcast, you’ll know by now that crypto has the potential to improve the efficiency of our financial system by a lot – so why are there transaction fees, and why are they so high for some blockchains, like Ethereum?

First, let’s revisit why we will always need transaction fees, regardless of how advanced blockchain technology becomes. We need independent participants to verify transactions to ensure that none can be faked. Those people operate computers, and those computers cost money and eat energy.

Many networks pay for those validation costs with so-called “gas fees”, which is crypto talk for an extra fee on top of every transaction that those operators earn.

Ok, you say. So far, so good – pay a little money for a few seconds of some computer operating somewhere. But why does it cost over $200 sometimes to do just about anything on Ethereum for example?

There are two reasons: Blockchains like Ethereum and Bitcoin have to solve complicated puzzles in a process called proof-of-work. Check out our episode on that topic, but it means that a simple task now needs a lot more energy to compute.

But the main problem is another one... demand. The more gas fees someone is willing to pay, the faster their transaction gets validated. You can essentially pay to jump the queue. And when people are willing to pay millions of dollars for a single NFT, they don’t really care to bid a few hundred over average gas fees to get the deal done asap.

That’s why there are many projects that focus specifically on making transactions fast, and affordable.

And next time, we will talk about smart contracts and how they work.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.

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