WHAT IS GWEI?

In cryptography, transactions and contracts in Ethereum network need gas fee to be executed. This fee is paid with Ether (ETH). However, the amount of fee mostly small to charge by Ether, so Ether is denominated in Gwei.

Gwei, so called gigawei (Wei is named after Wei Dai, a prominent figure in cryptography and it is the smallest fraction of gas fees) is like cents to the dollar. 1 Gwei is equal to 0.000000001 ETH (one billionth of an Ether). Gwei's primary purpose is to provide granularity and flexibility in pricing.

As the payment for using the Ethereum network, Gwei allows users to adjust their gas prices based on network conditions and their urgency. Higher Gwei bids can get transactions processed faster during high demand. Also, Gas prices are often quoted in Gwei, helping users understand the cost of their transactions more clearly.

This article is a deep look into Gwei currency and its usages in blockchain network.

Gwei, the Smaller Part of the Ethereum

Gwei is used on the Ethereum network. Just as a dollar is divided into 100 cents, 1 ETH is divided into 1 billion Gwei. Also, a Gwei is equal to one billion Wei which is the smallest unit of ETH.

This means that:

1 ETH = 1,000,000,000 Gwei

1 Gwei = 0.000000001 ETH

For instance, a transaction fee of 0.000021 ETH can be expressed more conveniently as 21,000 Gwei. This makes it easier for users to understand and calculate transaction costs.

Gas is a unit of measurement used to quantify the computational effort required to execute these actions on the Ethereum network.

Think of it like fuel for a car:

• The car is the Ethereum network.
• The fuel is gas.
• Driving the car (executing transactions) requires burning fuel (consuming gas).
• The more complex the driving (transaction), the more fuel (gas) is needed.

The other point is that users pay gas fees for their transactions in order to incentivize miners or validators (the ones who secure and process transactions). Think of it like bidding for faster service at a restaurant; a higher gas price often means your transaction will be processed quicker, especially during times of high network congestion. Likewise, higher gas prices attract miners/validators faster, leading to quicker transaction confirmation. Lower gas prices may result in slower processing, especially during periods of high network demand. Users can adjust their gas price based on their urgency and the current network congestion. This makes it more likely to be included in the next block, resulting in faster confirmation times.

How to Calculate Ideal Amount of Gas Fee?

During periods of high network congestion, when many transactions are vying to be included in the next block, miners/validators naturally gravitate towards transactions with the highest gas prices. By setting a higher gas price, it effectively increases the chances of the transaction getting processed quickly, even during peak times.

However, it's important to strike a balance between speed and cost. While a high gas price can ensure quick confirmation, it can also lead to paying more than necessary. Conversely, a very low gas price might save money, but the transaction could languish in the mempool (short for “memory pool” / the waiting area for pending transactions) for a long time.

The formula to calculate gas fees is quite straightforward:

Gas Units * Gas Price = Gas Fee (in Gwei)

Gas Units: The computational effort required to execute your transaction (fixed for a given type of transaction).

Gas Price: The bid per unit of gas, measured in Gwei.

Gas Fee: The total cost of the transaction, calculated by multiplying the gas units by the gas price.

Example:

Let's say a simple Ethereum transaction requires 21,000 gas units, and you set a gas price of 50 Gwei. The gas fee would be:

21,000 gas units * 50 Gwei/gas unit = 1,050,000 Gwei

This translates to 0.00105 ETH (since 1 ETH = 1 billion Gwei).

Tools and Tips

To help setting an appropriate gas price, several tools and resources are available:

Gas Trackers: Websites like Etherscan Gas Tracker and Blocknative Gas Estimator provide real-time information on current gas prices and recommended ranges.

Wallet Gas Estimation: Many Ethereum wallets, such as MetaMask, offer built-in gas estimation features, suggesting appropriate gas prices based on network conditions.

Resources:

Ethereum Gas Tracker: Provides real-time gas price estimates and historical data.

MetaMask Gas Fee Estimation: The MetaMask wallet offers built-in gas fee estimation tools

Etherscan Gas Tracker: Another popular tool for tracking gas prices and estimating fees.

Blocknative Gas Estimator: Offers real-time gas estimation and simulation tools for developers

Choosing the Strategy

Ethereum gas fees can be a major consideration for users, especially during periods of high network activity. However, there are several strategies can be employed to strike a balance between transaction speed and cost:

First, network congestion often peaks during specific times of day or during major events like token launches. Better to schedule the transactions for off-peak hours when gas prices tend to be lower. Also, using tools like Etherscan Gas Tracker or Ethereum Gas Station to monitor real-time gas prices and historical trends are alternative. This will help you identify periods of lower congestion and potentially save on fees. Second, start with a moderate gas price and gradually increase it if your transaction isn't getting confirmed quickly. Gas estimators can be used to gauge appropriate prices based on the desired transaction speed. Most wallets allow to set a maximum fee that is desired to pay. This ensures not to overspend on gas if prices unexpectedly surge. Moreover, Layer 2 (any off-chain network, system, or technology built on top of a blockchain) solutions like Arbitrum, Optimism, or Polygon offer faster and cheaper transactions by processing them off the main Ethereum blockchain. Consider using these platforms for smaller or less urgent transactions. Then, if performing multiple transactions is needed, consider batching them together into a single transaction. This can help reduce overall gas costs. Last but not least, if the transaction isn't time-sensitive, waiting for periods of lower network congestion may be considered when gas prices naturally decrease.

Additional Tips:

· Larger transactions (e.g., those involving complex smart contracts) generally require more gas.

· Some wallets offer features like gas fee optimization to help to save on costs.

· Keep up with Ethereum news and updates to understand how network upgrades may impact gas fees.

Ethereum Improvement Proposal (EIP) 1559

Ethereum Improvement Proposal (EIP) 1559, implemented in August 2021, brought a significant overhaul to the way gas fees work on the Ethereum network. Its primary goal was to make gas fees more predictable and less volatile.

The most significant change introduced by EIP-1559 is the concept of a base fee. Unlike the previous model where users set gas prices in a bidding war, the base fee is determined by the network itself. It dynamically adjusts based on the demand for block space:

High demand: When the previous block is more than 50% full, the base fee increases for the next block.

Low demand: When the previous block is less than 50% full, the base fee decreases for the next block.

This mechanism helps stabilize gas prices by incentivizing users to submit transactions during periods of lower congestion. The goal is to keep block sizes around 50% full, creating a more predictable fee market.

Moreover, a unique aspect of EIP-1559 is that the base fee is not paid to miners/validators; instead, it's burned, meaning it's permanently removed from circulation. This deflationary

mechanism helps offset the issuance of new Ether and potentially increase the value of existing ETH.

Another point is that under EIP-1559, users no longer set a single gas price. Instead, they provide two values:

Max Fee: The maximum amount they are willing to pay per unit of gas, including the base fee and a priority fee (tip).

Priority Fee: A tip paid directly to the miner/validator to incentivize them to prioritize the transaction.

The base fee is automatically included in the total gas fee, and users only pay the max fee if the network is highly congested. If the base fee drops after the transaction is submitted, the user receives a refund of the difference.

Overall, EIP-1559 has brought more predictability and stability to Ethereum gas fees. While fees can still fluctuate, the base fee mechanism helps to smooth out extreme spikes and provide a more predictable experience for users.

Gwei in Different Types of DeFi Activities

In the world of Decentralized Finance (DeFi), Gwei plays a pivotal role, particularly in activities like yield farming and liquidity provision. These strategies involve frequent interactions with smart contracts, each of which incurs a gas fee.

Yield Farming:

Yield farming, also known as liquidity mining, is a popular strategy in the world of decentralized finance (DeFi) where users lock up their cryptocurrencies in various DeFi protocols to earn rewards. These rewards can come in the form of additional tokens, interest, or other incentives. Yield farmers constantly move their assets between different DeFi protocols in search of the highest returns. Each transaction, whether it's depositing, withdrawing, or claiming rewards, requires gas. The gas fees can quickly accumulate, significantly impacting the overall profitability of yield farming strategies.

How it works:

Depositing Assets: Users deposit their cryptocurrencies into liquidity pools or lending platforms within DeFi protocols.

Earning Rewards: In return for providing liquidity or lending their assets, users earn rewards. These rewards are often in the form of the protocol's native token, but can also include other tokens or even a share of the fees generated by the platform.

Compounding Returns: Users can often reinvest their earned rewards back into the protocol to increase their holdings and earn even more rewards. This compounding effect can lead to significant growth over time.

Different Yield Farming Strategies:

· Liquidity Provision: Users provide liquidity to decentralized exchanges (DEXs) by depositing two cryptocurrencies into a liquidity pool. They earn a share of the trading fees generated by the pool.

· Lending: Users lend their cryptocurrencies to other users or protocols and earn interest on their loans.

· Staking: Users lock up their cryptocurrencies to support the operation of a blockchain network and earn rewards for their participation.

Risks and Considerations:

· Smart Contract Risks: DeFi protocols rely on smart contracts, which can be vulnerable to bugs or exploits.

· Impermanent Loss: Liquidity providers may experience impermanent loss if the price of the deposited assets changes significantly.

· Volatility: The cryptocurrency market is highly volatile, and yields can fluctuate dramatically.

· Regulatory Uncertainty: The regulatory landscape for DeFi is still evolving, and there may be potential risks or restrictions.

Liquidity Provision:

Liquidity provision is a core activity in DeFi where users, known as liquidity providers (LPs), deposit their cryptocurrency assets into liquidity pools. These pools are smart contracts that facilitate trading on decentralized exchanges (DEXs). These activities also involve multiple transactions, such as adding or removing liquidity, which all consume gas. High gas fees can eat into the profits earned from providing liquidity.

LPs can earn a steady stream of passive income from trading fees. Also, many DeFi protocols offer additional rewards, such as their native tokens, to incentivize liquidity provision. This is known as yield farming. More, LPs play a crucial role in enabling decentralized trading and supporting the growth of DeFi platforms. Despite liquidity provision serves several advantages, there are some risks. The primary risk is impermanent loss, which occurs when the price ratio of the deposited assets changes significantly compared to when they were deposited. This can lead to a lower overall value of the LP's holdings than if they had simply held the assets outside the pool. Another risk is that as with all DeFi protocols, there's always the risk of smart contract bugs or vulnerabilities that could lead to loss of funds. Lastly, the cryptocurrency market is highly volatile, which can affect the value of the deposited assets and the trading fees earned.

How it Works:

Depositing Assets: LPs deposit a pair of tokens (e.g., ETH and a stablecoin like USDC) into a liquidity pool at a predetermined ratio.

Facilitating Trading: These deposited assets are then used to provide liquidity for traders who want to swap between the two tokens in the pool. LPs essentially act as automated market makers.

Earning Rewards: In return for providing liquidity, LPs earn a share of the trading fees generated by the pool. These fees are typically a percentage of the transaction value and are distributed proportionally based on the LP's share of the pool.

Maximizing Returns in DeFi:

Understanding and managing gas fees is crucial for maximizing returns in DeFi. Because:

1. Cost Optimization: By strategically timing transactions during periods of lower network congestion, users can significantly reduce gas fees.

2. Profitability Calculation: Accurately factoring in gas costs is essential for calculating the actual profitability of DeFi strategies. A seemingly high yield might be negated by excessive gas fees.

3. Risk Management: High gas fees can lead to unexpected losses, especially when executing complex transactions or during periods of market volatility.

4. Competitive Advantage: DeFi users who are adept at managing gas fees can gain a competitive edge by optimizing their strategies and maximizing their returns.

Strategies for Managing Gas Fees in DeFi:

· Batch Transactions: Combine multiple transactions into a single one to save on gas.

· Use Gas Tokens: Gas tokens like CHI or GST2 can help reduce gas costs by allowing you to pre-purchase gas at a lower price.

· Consider Layer 2 Solutions: Layer 2 solutions like Arbitrum, Optimism, or Polygon offer significantly lower gas fees compared to the Ethereum mainnet.

· Monitor Gas Prices: Use gas trackers to monitor gas prices and identify optimal times for transactions.

By mastering the art of gas fee management, DeFi users can enhance their profitability and navigate the decentralized financial landscape more effectively.

The other point is that gas fees on Ethereum can significantly impact the overall cost of buying, selling, or minting NFTs. These fees are incurred for every transaction on the blockchain, including those related to NFTs.

Here's how gas fees can affect NFT transactions:

· Buying NFTs: When you purchase an NFT from a marketplace or directly from a creator, you'll incur gas fees to execute the transaction and transfer ownership of the NFT to your wallet.

· Selling NFTs: Listing an NFT for sale, accepting an offer, or canceling a listing all require gas fees to interact with the marketplace's smart contracts.

· Minting NFTs: Creating a new NFT involves minting it on the blockchain, which also consumes gas. The complexity of the NFT's metadata and the chosen minting method can influence the gas fee amount.

Strategies for Reducing Gas Fees with NFTs:

Timing:

o Avoid Peak Hours: Transact during periods of lower network congestion when gas prices are typically lower. This could be during off-peak hours or on weekends.

o Monitor Gas Trackers: Use tools like Etherscan Gas Tracker or GasNow to track real-time gas prices and choose the optimal time to execute your transaction.

Layer 2 Solutions:

o Lower Fees: Consider using Layer 2 scaling solutions like Arbitrum, Optimism, or Polygon. These platforms offer significantly lower gas fees compared to the Ethereum mainnet, making NFT transactions more affordable.

o NFT Bridges: Many NFT marketplaces and projects are integrating with Layer 2 solutions, allowing you to bridge your NFTs between Layer 1 and Layer 2 to take advantage of lower fees.

Lazy Minting:

o Deferring Costs: This method defers the minting process until the NFT is purchased. The buyer then pays the gas fees for minting and transferring the NFT, reducing the upfront costs for creators.

Batch Minting:

o Bundling NFTs: If you're minting multiple NFTs, consider batch minting, which combines multiple NFTs into a single transaction. This can often result in lower overall gas fees compared to minting each NFT individually.

Gas-Efficient Marketplaces:

o Optimized Contracts: Some NFT marketplaces have optimized their smart contracts to be more gas-efficient, reducing the gas fees associated with buying and selling NFTs.

By implementing these strategies, you can mitigate the impact of gas fees on your NFT activities and potentially save a significant amount of money.

In conclusion, Gwei is a fundamental unit within the Ethereum ecosystem, acting as the "small change" for Ether. Its role is crucial in facilitating various activities on the network, from simple transactions to complex DeFi interactions like yield farming and NFT trading.

By understanding Gwei and its relationship with gas fees, users can make informed decisions about their transactions, optimize their costs, and maximize their potential returns in the DeFi space. Whether you're a casual user or a seasoned DeFi enthusiast, grasping the concept of Gwei is essential for navigating the Ethereum landscape effectively and efficiently.

As Ethereum continues to evolve and expand its use cases, Gwei will likely remain a critical element in ensuring the smooth functioning and accessibility of this decentralized network. By staying informed about gas prices and leveraging available tools and strategies, you can confidently participate in the Ethereum ecosystem and take advantage of the opportunities it offers.