ETHER and GAS

Ether (ETH) is the cryptocurrency used for many things on the Ethereum network. Fundamentally, it is the only acceptable form of payment for transaction fees, and after The Merge, ether is required to validate and propose blocks on Mainnet. Ether is also used as a primary form of collateral in the DeFi lending markets, as a unit of account in NFT marketplaces, as payment earned for performing services or selling real-world goods, and more.

Ethereum allows developers to create decentralized applications (dapps), which all share a pool of computing power. This shared pool is finite, so Ethereum needs a mechanism to determine who gets to use it. Otherwise, a dapp could accidentally or maliciously consume all network resources, which would block others from accessing it.

The ether cryptocurrency supports a pricing mechanism for Ethereum's computing power. When users want to make a transaction, they must pay ether to have their transaction recognized on the blockchain. These usage costs are known as gas fees, and the gas fee depends on the amount of computing power required to execute the transaction and the network-wide demand for computing power at the time.

Gas

Gas is the fuel of the Ethereum blockchain network. Gas is always paid in ether. Gas is the transaction fee paid to miners for executing and adding your transaction into the Ethereum blockchain.

For every transaction, you have to specify the value of the gas price and gas limit you want to set. Based on these values, the network calculates how much of a fee you are willing to pay for a transaction.

Every bytecode operation in EVM has fixed gas units assigned. When that operation is executed by EVM, fixed quantity of gas is consumed by the transaction.

Gas limit

The gas limit is the maximum unit of gas your transaction may take, in order to be executed on the Ethereum blockchain. If your transaction takes less gas, then the extra gas that you have provided will be refunded back to your wallet. If your transaction consumes all the gas and requires more gas to be executed, your transaction will fail, and gas will be consumed as part of the transaction fees.

Gas price

The gas price is the price per gas unit you are willing to pay for executing your transaction. The unit of gas price is always defined in gwei. According to your gas price, miners decide to process your transaction. If the transaction has a higher gas price, there is a chance that your transaction will be processed early. If your gas price is low, then your transaction might be processed after a delay or when the blockchain is free to process low gas price transactions.

Formulas

The following are some formulas to calculate the gas usage and transaction fee per transaction:

Example:

Let's take an example of a transaction where you want to transfer 0.1 ETH to your friend. The following are the values for the transaction fields you would have to fill while creating a transaction:

Field name	Value
From	0xff899af34214b0d777bcd3c230ef637b763f0b01
To	0xc4fe5518f0168da7bbafe375cd84d30f64cda491
Value	0.1 ether
Gas limit	30,000
Gas price	0.000000021 ether (21 gwei)

Once the transaction is sent and confirmed on blockchain, you can see its status on block explorer (etherscan.io) as follows:

Let's calculate the values using these formulas:

• TxFeeMax = 30,000 * 0.000000021 = 0.00063 ether

• TxFeePaid = 21,000 * 0.000000021 = 0.000441 ether

• TxFeeReturned = 0.00063 - 0.000441 = 0.000189 ether

• GasUnused = 30,000 - 21,000 = 9,000 units of gas

• BalanceRequiredAtTransactionInitiation = 0.1 + 0.00063 = 0.10063 ether

Let's go through the preceding calculations. When you initiate the preceding ether transfer transaction, it must have a balance of 0.10063 ether. If the balance in your wallet is lower than 0.10063 ether, then you will not be allowed to initiate transactions and this will be rejected by the client itself as it's an invalid transaction.

If you have sufficient balance and the transaction is initiated, then, along with your transaction, the BalanceRequiredAtTransactionInitiation amount will be locked. So, in this example, 0.10063 ether is locked.

Now, your transaction is processed, 21,000 gas has been consumed in order to execute the transaction on the EVM, and the transaction executed successfully. As it consumed only 21,000 gas, it refunds 9,000 units of gas. This means 0.000189 ether will be refunded back to your wallet and you have paid 0.000441 ether for your transaction processing.

An ether transfer requires a fixed 21,000 gas limit per transaction. If you also include data along with the ether value, it may require a greater gas limit to execute the transaction.