Explaining cryptocurrencies: What is Gas?

If you’re investing or trading cryptocurrencies you are probably familiar with Ethereum and its associated crypto ether (ETH).  But what about gas? It’s a key concept necessary in understanding how the Ethereum platform works and how the ether currency is used. 

On the Ethereum blockchain protocol, gas is the cost required to perform a transaction on the platform. It’s basically a user fee. It is NOT its own cryptocurrency. 

Gas is priced in small segments of ETH called gwei. Miners operating on the platform set the price of any transaction. They can also decline them if the transaction does meet the pay threshold they set. 

Gas represents the computational cost of making transactions on Ethereum. That way, there is a separation between the cost in the computing functionality and time required to process the transaction and the value of the ether cryptocurrency. 

Think of it in terms of a transaction fee if you were moving money to a friend’s bank account. You would want to move X money to your friend, but that may cost Y in bank processing fees. In this analogy, X indicates the utility value (the cost in ether) and Y represents the cost of performing the transfer (the gas fee). 

A contract or transaction performed on Ethereum might cost 50 ether (X). The gas price of that transaction may only be 1/100,000 ether (Y).  

The type of transactions paid for in gas fees include financial agreements like options contracts, swaps or coupon-paying bonds. It can also be used to execute bets and wagers, fulfil employment contracts, and has even been used to maintain legitimate decentralised gambling facilities.  

Gas-payment related transactions and contracts are conducted using the Ethereum Virtual Machine. 

At the time of writing, there has been some dispute between those using Ethereum for transactions and the miners processing them. Miners have been purportedly setting gas fees to high, negating from projects and transactions from running on the blockchain, basically negating one of the platform’s key functions.  

Miners essentially want congestion on the chain, in order to keep fees high. This is not good for the platform in the long run, as it will potentially discourage users, which may cause a drop in the value of ether. As it stands, ether is the current most valuable cryptocurrency per unit in the world behind Bitcoin.  

There may also be potential for Ethereum to fork as was the case with Bitcoin in 2017. Bitcoin users were complaining about the 1mb limit on blocks on its chain. This meant slow transactions and a limit to the number that could be processed. A separate fork off the main blockchain was established, creating Bitcoin Cash – a newer cryptocurrency designed to be more user friendly. 

If this happens, then a rival to Ethereum maybe established, which may also influence ether prices.