Gas on a blockchain network like Ethereum refers to the unit of measurement for the computational effort required to execute specific actions. It’s not a cryptocurrency itself, but rather a way to quantify the resources needed to process a transaction.
Imagine a busy highway where cars (transactions) compete for a limited number of lanes. To get through the traffic faster, you can either wait patiently in a free lane or opt for the express lane by paying a toll. Blockchain technology works similarly. Gas acts as the fuel that powers transactions on a blockchain network. Just like the express lane toll, gas fees incentivize miners or validators to prioritize your transaction and process it swiftly. Let’s delve deeper into how gas functions and how it keeps the wheels of blockchain networks turning smoothly.
How do Service Providers Charge Customers to Run Their Operations?
Service providers, whether in the physical or digital realm, charge customers to cover the costs of their logistics and operations. This includes everything from the cost of raw materials to the overhead associated with maintaining a service infrastructure.
Transaction Fees vs. Service Fees
While seemingly unrelated, the concept of gas fees in blockchain can be compared to how service providers cover their operational costs.Â
Transaction fees on a blockchain network incentivize miners or validators to secure the network and process transactions efficiently. Similarly, service providers need to charge fees to maintain their infrastructure, staff, and resources, ultimately ensuring they can continue to deliver their services to customers.
Take a First-Hand Example of a Restaurant and Food Delivery Service
To illustrate this concept, consider a restaurant offering a popular dish. The costs involved in running such an establishment are multifaceted, including:
- Cost of ingredients
- Cost of creating a pleasant dining environment (lighting, AC, entertainment)
- Waitstaff salaries
Food delivery services often charge extra fees for services beyond just delivering food. These could include:
- Maintaining food temperature during transit
- Handling special requests
- Delivering to hard-to-reach locations
These additional fees ensure the delivery service can operate efficiently and provide a valuable service.
The Digital Service Provider Landscape
Monetization in the Digital World
In the digital world, internet services often appear to be free to users. Platforms like search engines and YouTube provide services without direct charges to the end user. However, there are hidden costs involved in maintaining and operating these platforms.
The Creator Economy
Internet service providers and digital platforms have mastered the creator economy by facilitating transactions between consumers and producers. These platforms monetize through:
- Ads
- Subscriptions
- Data analytics
Consumers pay for premium content or subscriptions, while producers monetize their content through ads or direct payments. This relationship sustains the digital ecosystem.
Information as a Commodity: Market Analysts and Data Brokers
Firms that turn raw information into valuable insights, such as market analysts or data brokers, charge fees for their services. These firms process large volumes of data to provide actionable insights to their clients.
Value-Added Services
Consider a car broker who analyzes numerous listings on a platform like OLX to find the best deals for their clients. They charge fees for this service, leveraging their expertise to add value for the customer.
Most Service Providers Are Aggregators, Matchmakers
Many service providers act as aggregators or matchmakers, connecting buyers and sellers or service providers and consumers. They charge fees for facilitating these connections. Examples include:
- Online marketplaces connecting buyers and sellers
- Ride-hailing apps connecting passengers and drivers
- Task management platforms connecting clients with freelancers
Now Take the Example of Banks’ ATM: How Do They Charge Fees on Withdrawal
Banks charge fees for ATM withdrawals to cover the costs associated with maintaining the ATM network and to deter excessive usage. These fees help manage operational expenses and prevent spam transactions.
How Do They Price: Two-Fold Benefits in Charging ATM Fees
ATM fees serve a dual purpose
- Logistics Cost Coverage: They cover the costs of maintaining the ATM network (infrastructure, security, cash replenishment).
- Anti-Spam Protection: They deter excessive or unnecessary withdrawals, ensuring the network remains efficient.
How Do Blockchains Charge Fees?
In blockchain networks, transaction fees, often called gas fees, are crucial for maintaining the network. These fees compensate miners or validators for their work in processing and validating transactions.
In March 2024, Coinbase paid a staggering $4 million in gas fees. This highlights the significant costs associated with blockchain transactions, particularly on popular networks like Ethereum.
If we compare it with other tradFi service providers, the gas fees on blockchain networks is considerably high. This presents a challenge for widespread adoption, as high fees can deter users.
Ethereum Is in a Dilemma of Solving Gas Fee
Ethereum faces a dilemma with its gas fees. While these fees provide revenue for stakers (those who maintain the network), they also pose a barrier to user adoption. Balancing these conflicting needs is a key challenge for Ethereum’s future development.
High gas fees generate revenue for stakers who validate transactions, but they also make it expensive for users to transact on the network. This trade-off is a central issue for Ethereum’s future development. A rollup-centric future for Ethereum envisions batching transactions at Layer 2, reducing individual transaction fees. This approach could balance the need for revenue and affordability.
Now Take the Example of Different Blockchains
Different blockchains have varying fee structures. For instance, Binance Smart Chain (BSC) and Ethereum’s Layer 2 solutions, both running the same EVM, charge different fees due to their network architectures.
The question that arises it why do they have different costs?
The cost differences arise from network overheads. Ethereum’s large number of validators (16,000) compared to BSC’s 21 validators results in higher operational costs, which are reflected in the fees.
In addition to the basic network costs, other maintenance overheads by validators also contribute to the overall fee structure. These costs are necessary to keep the network secure and operational.
Node operators, who run the infrastructure for blockchain networks, pass their operational costs onto users in the form of transaction fees. This creates a market-driven fee structure.
EOS Charges Fees in Three Different Angles: Bandwidth, Storage, and Compute Cost
EOS, for example, charges fees based on bandwidth, storage, and compute costs. This multifaceted approach ensures that all aspects of network usage are covered.
AWS Has Mastered This Costing: Even AWS Charges Very High Fees
Amazon Web Services (AWS) has a sophisticated pricing model that covers various aspects of cloud computing. These fees can be quite high, reflecting the comprehensive services provided.
Like Disney Paid $1.2 Million Monthly to AWS as Infrastructure Cost
Large companies like Disney reportedly pay substantial amounts, around $1.2 million monthly to AWS for their infrastructure needs, highlighting the high cost of robust cloud services.
AWS When Compared with Ethereum Miners When Moving to ETH PoS, Mining Hardware Has to Be Used as General-Purpose Computing
When Ethereum transitions to Proof of Stake (PoS), the mining hardware used previously becomes less relevant. The cost model shifts to reflect the new consensus mechanism.
When Compute Fee Was Analyzed, It Yielded 1000x Cheaper
Analysis shows that the compute fees in a PoS model can be significantly cheaper—up to 1000 times less—than the traditional mining costs in a Proof of Work (PoW) system.
So Ethereum Is a Hot Target: How Ethereum Ecosystem Can Solve This Problem
Given the high costs and ongoing challenges, Ethereum is a focal point for innovation. The ecosystem is exploring various solutions to reduce gas fees and improve usability.
First: Separating the Mempool from Ethereum Core and Introducing Mempool as a Service
One proposed solution is to separate the mempool – the space where pending transactions are stored – from the Ethereum core and offer it as a service. This could streamline transaction processing.
Since MEV Is Revenue for Stakers, but Stakers Have to Run Very Sophisticated Infra to Extract Value, Flashbots Has Solved It by Democratizing the MEV, making it accessible to more participants.
By democratizing MEV, stakers can still earn revenue without needing to invest heavily in infrastructure. This cost-benefit analysis shows that stakers can be more profitable with reduced expenses.
Second: PBS Model (Proposer-Builder Separation): Creating an Adjacent Market for Block Space
The Proposer-Builder Separation (PBS) model creates a separate market for block space, allowing independent builders to profit from toxic order flows and potentially lower transaction fees.
This model focuses on block space rather than the mempool, enabling independent builders to earn profits by managing toxic order flows effectively. With additional revenue streams from managing order flows, block builders can afford to lower transaction fees, making the network more accessible for users.
Third: Block Space Pricing Currently Relies on Auctions, Although It Can Be Done Algorithmically Like EIP-1559 Attempted to Do So
Currently, block space pricing relies on auctions, but there are proposals to price it algorithmically. EIP-1559 attempted to implement such a model, providing a more predictable and stable fee structure. Block space pricing can also consider factors like storage costs, validation costs, and network overhead costs, creating a comprehensive and fair fee model.
To derive a block pricing model, we can draw parallels from AWS, ISPs, and storage providers.Â
Here’s a simplified formula incorporating these elements:
Block Price = Storage Cost + Validation Cost + Network Overhead Cost
- Storage Cost: Based on the amount of data stored on the blockchain.
- Validation Cost: Related to the computational effort required to validate transactions.
- Network Overhead Cost: Includes the costs of maintaining the network infrastructure.
Conclusion
Gas fees in blockchain networks serve a crucial role in maintaining network security and efficiency by compensating validators for their work. However, high fees can be a barrier to user adoption. As blockchain technology evolves, adopting models that streamline transaction processing, such as the separation of the mempool and the implementation of proposer-builder separation, will be vital.
The goal is to ensure that blockchain networks remain secure and operational while making transactions affordable for users. This delicate balance will be key to the continued growth and adoption of blockchain technology.
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