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How Does Gas Work?

Updated: Nov 3, 2022

Let's take a look at exactly how gas works on the Binance Smart Chain, or more specifically as it's denoted in Gwei.

Before we can understand what gas actually is and its purpose, you first need to understand the different blockchain consensus mechanisms, which can be divided into 8 types:

  • Proof of Work mechanism involves miners who solve complicated mathematical puzzles to produce a new block.

  • Proof of Stake uses a randomized process to figure out who gets a chance to produce the next block.

  • Delegated Proof of Stake process, users can stake their coins and vote for a particular number of delegates to create a new block.

  • Proof of Capacity method stores solutions to complex mathematical puzzles in digital storage such as hard disks that are used to create new blocks.

  • Proof of Elapsed Time process randomly and fairly decides the producer of a new block based on their waiting time.

  • Proof of Identity is cryptographic evidence for a user's private key that is cryptographically attached to a specific transaction.

  • Proof of Authority mechanism, the identities of validators in the network are at stake.

  • Proof of Activity mechanism is a hybrid of Proof of Work and Proof of Stake

The differences between blockchain mechanisms affect the way in which the fee for gas is calculated. The exact price of the gas is calculated by consensus, supply, demand, and network capacity at the time of the transaction, the biggest factor being consensus. Here is an example of why:

Previously the Ethereum blockchain was operating on the consensus of Proof of Work which meant in order for a transaction to be approved on their blockchain, a miner had to use their own computing power to generate the next block on the chain which used massive amounts of resources. As such, prices for gas were known to be considerably higher - in some cases fees hitting a few thousand dollars. However, after the recent Merge of the Ethereum chain, the consensus was changed to Proof of Stake, which drastically cuts the computing power/resources by at least 99%. This caused its gas fees to drop considerably lower, now sitting around $10 - $20.

What is gas exactly?

Gwei (or as it's more commonly known - gas) is the fee that is required to successfully conduct a transaction or execute a contract on a blockchain. Fees are priced in tiny fractions of the cryptocurrency in most cases. However, with the evolution of the DeFi space, the development of more complex contracts are being created. This means that when a user interacts with a token that has a complex contract, they might find that the "tiny fraction" becomes a "small fraction" in gas. This is why developers are coming up with unique ways to optimize the complexity to bring it back to a "tiny fraction".


Gas isn't limited to the set factors above (consensus, supply, demand, and network capacity). There are other optional factors to consider, such as transaction speed, where the user is able to pay a little bit extra in fees to have their transaction approved faster on the blockchain. This would be something you might use if you were a day trader who operates outside an exchange, for example.


TL;DR

The gas (Gwei) is the fee that an individual must pay in order to have their transaction approved on the blockchain. There are multiple factors that go into calculating the gas fees for each transaction and there isn't such thing as a static gas price as the markets and networks are constantly active.

 

Now that you are aware of what gas is, why not check out our slippage guide:


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