Gas fee: the “Fuel” of Blockchain

What is GAS?

GAS is the fee for computational resources required to execute operations on blockchain networks, particularly on smart contract platforms like Ethereum. Every transaction or smart contract execution consumes a certain amount of computational power, and the GAS fee measures the cost of using these resources.

The Role of Gas

1. Prevent network abuse: Without GAS fees, users could execute complex calculations without limitations, leading to network congestion.

2. Incentivize miners/validators: GAS fees are paid as rewards to miners or validators who bundle transactions into blocks.

3. Resource allocation: During network congestion, GAS fees increase to ensure that important or urgent transactions are processed with priority.

The calculation method for GAS

Ethereum

Ethereum is one of the first blockchains to introduce the concept of gas fees. In Ethereum, gas fees are paid in Gwei, a unit of its native currency ETH. Gas fees consist of two components:

• Gas Limit: Represents the maximum amount of computational resources required for a transaction.

• Gas Price: The price per unit of gas, typically measured in Gwei.

Total Cost = Gas Limit × Gas Price. The Ethereum network allows users to adjust the Gas Price themselves. A higher Gas Price increases the chances of miners prioritizing the transaction, especially during network congestion. This flexibility allows users to balance cost and transaction confirmation speed based on urgency.

Solana

Solana uses a simplified fee structure distinct from Ethereum’s:

• Solana operates on a fixed fee model, where each transaction’s base fee remains relatively stable.

• Fees are calculated based on the number of signatures and the complexity of instructions in the transaction.

• Payments are made in SOL, Solana’s native token.

• A key advantage of Solana is its low transaction fees, typically just a few cents or around $1, which has contributed to its popularity in the meme coin trend.

• Unlike Ethereum, Solana does not allow users to adjust Gas prices; all transaction fees are determined by the network.

BNB Smart Chain (BSC)

The gas fee calculation method on BSC is similar to Ethereum, but at a significantly lower cost:

• Gas Limit: Represents the upper limit of computational resources required for the transaction.

• Gas Price: The price per unit of gas, measured in Gwei, but generally much lower than Ethereum’s.

• Fees are paid in BNB, BSC’s native token.

• BSC’s EVM compatibility allows it to use a similar calculation method to Ethereum, but its use of a proof-of-stake (PoS) consensus mechanism and more centralized validation nodes leads to much lower transaction fees.

• Gas fees on the BSC platform experience relatively small fluctuations, making it an ideal choice for small transactions and new users.

Priority Fee (Bribe): “Tip” for skipping the queue

What is the Priority Fee?

Priority Fee, sometimes humorously called a “bribe,” is the extra fee users pay to expedite the processing of their transactions. Following the implementation of EIP-1559 (Ethereum Improvement Proposal), Ethereum transaction fees are split into a base fee and a priority fee.

The Role of Priority Fees

1. To accelerate transactions: When the network is congested, transactions with high priority fees will be prioritized for packing.

2. To incentivize validators: Unlike base fees (which are burned), priority fees are paid directly to validators as an incentive for them to prioritize certain transactions.

3. To set market-based pricing: Priority fees reflect users’ real-time demand for transaction speed, forming a bidding market.

Priority Fee and Network Health

An appropriate fee priority mechanism can improve network efficiency, but if designed improperly, it may also lead to unfair competition, allowing users with more wealth to gain excessive advantages.

Slippage: the gap between expectation and reality

What is Slippage?

Slippage refers to the difference between the expected price and the actual execution price of a trade. This phenomenon is especially common in decentralized exchanges (DEXs), where prices can fluctuate between the time a trade is submitted and when it is actually executed.

Causes of Slippage

1. Market Volatility: The cryptocurrency market is highly volatile, with prices potentially changing significantly in a short amount of time.

2. Trade Delay: Blockchain confirmations take time, and during this delay, prices may shift.

3. Insufficient Liquidity: In markets with shallow liquidity pools, large trades can have a substantial impact on prices.

Slippage Settings and Risk Control

Users can typically set the maximum acceptable slippage percentage. Setting it too low may result in transaction failure, while setting it too high could lead to unnecessary losses. Finding the right balance is a skill that every trader must master.

MEV (Maximum Extractable Value): The ‘Black Box Operation’ of Blockchain

What is MEV?

MEV (Maximal Extractable Value) refers to the additional revenue that block producers (miners/validators) can obtain by reordering, inserting, or deleting transactions in a block.

Common forms of MEV

1. Sandwich Attack: Validators insert their own transactions before and after a user’s large transaction to profit from price fluctuations.

2. Arbitrage Opportunity: Taking advantage of price differences between different exchanges or liquidity pools.

3. Liquidation Opportunity: Act in advance to liquidate operations in the lending agreement to obtain rewards.

The Impact of MEV on the Network

MEV activities have both positive and negative aspects:

Positive Impact:

• Enhances market efficiency and price discovery.

• Helps correct market pricing discrepancies.

Negative Impact:

• Increases trading costs for regular users.

• Contributes to network congestion.

• Can lead to blockchain reorganization and security issues.

These aspects are interconnected and form a complex relationship

These concepts form a complex and interconnected system:

1. Gas fees and priority fees: During periods of high gas prices, users may increase priority fees to ensure their transactions are processed, creating a dynamic balance between the two.

2. Priority fee and MEV: The more profitable MEV opportunities are, the more willing miners/validators become to accept higher priority fees in order to reorder transactions.

3. MEV and slippage: MEV activities, such as sandwich attacks, directly lead to an increase in slippage for user transactions.

4. Slippage and gas: To reduce slippage, users may set higher gas prices to accelerate transaction confirmation.

User Protection Strategies

As a user, you can take the following measures to protect yourself:

1. Use MEV protection tools: such as Flashbots or other MEV protection solutions.

2. Set reasonable slippage: adjust the acceptable slippage range based on market volatility.

3. Avoid congested periods: Non-urgent transactions can be executed when network fees are lower.

4. Use premium trading aggregators: they generally offer better price discovery and MEV protection mechanisms.

Conclusion

Understanding the concepts of GAS fees, priority fees, slippage, and MEV is essential for anyone looking to trade safely and efficiently within the blockchain network. While these mechanisms can sometimes seem complex and technical, together they form the foundation of the blockchain economy, allowing decentralized networks to function securely and efficiently.

As blockchain technology continues to evolve, these mechanisms will also develop, with the goal of creating a fairer and more efficient financial system. As a user, grasping these concepts will empower you to make more informed trading decisions and remain competitive in this fast-paced, ever-changing landscape.