How Does Gas Work for NFTs and Crypto?

Interest in crypto and NFTs fluctuates from time to time, but it's safe to say that adoption is trending upwards in the long run. We have no doubt that web3 and blockchain technology are the way of the future, but we're also patient as people onboard at their own pace. Setting up a wallet and making transactions on the blockchain can be a little foreign at first, but you'll get the hang of it with a bit of practice. For example, transferring NFTs or sending crypto to a wallet usually comes with a slight expense — a gas fee. This guide will help you understand how "gas" is used in NFT and crypto transactions on the Ethereum blockchain.

Overall, the goal of cryptocurrencies is to evolve how we conduct transactions in a frictionless, decentralized manner. As a result, interacting with some blockchains requires a certain fee to maintain the integrity of these transactions. If you are familiar with the crypto space, you have likely heard this cost referred to as a "gas fee." As the name suggests, gas fees proverbially fuel crypto transactions on the blockchain.

Gas fees are a way to incentivize miners to maintain the integrity of crypto transactions. When minting or transferring an NFT, you'll notice a small fee added to the sale price. This is a gas fee. For example, suppose you paid 1.00135 ETH, and the mint price for that NFT was 1 ETH. The remaining 0.00135 ETH does not go to the artist; it goes to the validator of that transaction. This fee helps maintain the integrity of all the transfers during minting, buying, selling, or transferring NFTs and cryptocurrencies.

Gas prices, while amazing in some aspects, are troubling in others. For example, paying a gas fee every time you buy an NFT can get quite annoying. Let's dive in more to understand why gas fees are necessary, how they work, and how to avoid high gas prices.

People who perform lots of crypto transactions might view gas fees as a nuisance. But when looking under the hood, it's important to recognize that a transaction fee system is essential to keep the transactions secure.

Many transactions involving popular NFT collections occur on the Ethereum blockchain, which uses a proof-of-work mechanism (PoW). How proof-of-work consensus works is that certain validators (or miners) solve algorithmic problems that require tons of computational power. Setting up such a system and powering it can be costly. Without incentives in place to power these validations, miners wouldn't expand their computational power to run smart contract operations.

Moreover, gas fees act as a barrier to those who make transactions carelessly or nefariously. If there were no such barriers, hackers could flood the blockchain with unlimited fake transactions. But with gas fees present, it would cost billions of dollars for an attack of this nature to be made.

Just as in any other service, gas fees depend mostly on the demand and traffic on the network. Gas fees also fluctuate due to various factors, including block size, chain congestion, transaction speed, etc. In volatile times, gas fees can vary from mere pennies to hundreds of dollars.

Because so many NFTs run on the Ethereum blockchain, it is difficult to discuss gas fees without mentioning Ethereum. Other chains like Solana and Tezos also use gas to process transactions, but none use it as prominently as Ethereum, and the other chains have much lower gas fees.

Ethereum works on a Proof-of-Work mechanism (as of now) which requires a lot of computational power to function, and in return, requires high gas fees. In an NFT marketplace like OpenSea, which primarily relies on Ethereum, you have to pay a gas fee for most activities, which sometimes makes it a nuisance.

Gas price is determined in terms of "Gwei" which is a smaller and hence a more usable unit.

And gas fees on Ethereum are determined by a simple formula:

The "Gas limit" here refers to the limit you are offering for the transaction — which is set at 21000 Gwei for normal transactions. However, it is higher for NFTs and smart contracts due to their increased complexity.

"Base fee" here depends on network congestion and is assigned to each block. A certain amount of the base fee is burned, or even discarded, at the completion of a transaction to compensate for the new crypto or NFT having a certain crypto value mined. It keeps the Ethereum economy in check by avoiding inflation.

A "tip" is a fee you can pay to prioritize the transaction. It is a way you can incentivize the validator to expedite your transaction. A wallet like MetaMask lets you choose all the three parameters.

To minimize volatility risk, you can choose the Gas limit you are willing to pay for a transaction. The higher the limit, the faster the transaction will take place. It works like a priority system — a higher Gas limit generally means that your transaction has priority over those who submitted a lower Gas limit. You have the ability to manually adjust gas in crypto wallets like MetaMask, but make sure you take your time and know exactly what you're doing. A "." in the wrong place could cost you big $$$.

Just because you can set the Gas limit of the transaction does not mean you decide the gas fees. Ethereum is programmed in a way that will use the exact amount of gas to process the transaction. If you set the limit higher than the required gas, any difference between your Gas limit and the actual amount of Gas needed is refunded to your wallet once the transaction is completed. But setting your Gas limit too low will likely cause your transactions to fail, resulting in wasted gas fees that can never be recovered. The moral of the story? If you want a successful transaction to take place faster, you will have to pay a higher Gas fee.

Alternatively, you can always check gas fees in real-time on online websites like etherscan. Savvy investors choose the right gas limit and maximize their chances of getting transactions completed.

While calculations and tools can make gas fees more predictable, they are still difficult to accurately determine due to the unpredictable nature of network congestion. Things are going to change as Ethereum shifts from a Proof-of-Work consensus mechanism to a Proof-of-Stake one.

High gas prices are one of crypto (and NFTs) biggest obstacles to mass adoption. Gas fees will need to be made more transparent and understandable in the future if we want to make web3 more accessible.

Here are the best ways to avoid high gas fees:

Layer-2 protocols are a secondary framework built on top of an already existing blockchain. They provide improved mechanisms for transactions allowing for lower gas fees. Optimism and Arbitrum are two of the more popular Ethereum layer-2 protocols.

These are basically off-chain transactions. A Sidechain is a separate blockchain that is branched from a parent chain. Using smart contracts, sidechains can transfer tokens securely back and forth between blockchains. Despite being connected to the main blockchain (mainnet), sidechains operate under their own consensus mechanisms. Polygon is the go-to sidechain for Ethereum whereas Rootstock is the preferred sidechain for Bitcoin.

Think of it this way, a transaction on Ethereum can be anything from data to currency. So, instead of adding each currency transaction to a block, rollups are about storing multiple transactions in a set of data and deploying that piece of data on the Ethereum chain (or any chain that allows data to be deployed on it). Two of the popular rollups include Optimistic rollups and Zero-knowledge proofs (zk proofs). It is a secure scalable solution to perform transactions.

When network congestion is low, the base fee is also low, which means cheaper gas fees.

As we know, gas fees are paid in crypto. So, if we make our transaction when the crypto price is lower, you can enjoy the benefit of "cheaper" gas fees.

Some exchanges such as FTX subsidize gas fees on NFTs.

If you are not in a hurry, you can keep the gas limit low and wait for the transaction to occur. Just don't keep it too low or your transaction will fail.

The NFT market has got everyone's eyes on it. People these days are all the more excited to dive feet first into crypto and acquire digital assets without the basic knowledge of gas fees. While gas fees can be a nuisance, they are vital to a functioning crypto market. By now it's clear that paying gas fees is inevitable, but as we mentioned, there are ways to navigate around and secure the NFT of your dreams!