Base Fees

Gas fees are an integral part of Ethereum’s economic model. Understanding gas prices is crucial for developers and users who engage with the Ethereum network. Central to this discussion is the concept of the Base Fee, which was introduced with EIP-1559, implemented in August 2021 during the London Hard Fork. 

What is Gas?

On Ethereum, gas refers to the unit of measurement that quantifies the cost of computational effort and storage required to execute operations like transactions or smart contracts. Every operation on the Ethereum blockchain, whether it’s a simple transaction or a complex smart contract execution, requires a certain amount of gas. Users pay gas fees to incentivize miners (called Validators) to include their transactions in the blocks they mine.

EIP-1559: A Game Changer

The introduction of EIP-1559 was a watershed moment for Ethereum. Prior to this upgrade, gas fees were determined by a bid-based system, where users manually set their gas prices, leading to volatility and unpredictability. Users often had to guess the appropriate fee to include their transactions in the next block, resulting in overpayment during peak times and delays during low traffic periods. EIP-1559 restructured this system by introducing a fixed Base Fee, which is denominated in gwei (a subunit of ETH). The Base Fee is dynamically adjusted based on the demand for block space; it increases when the network is congested and decreases when there is less demand. This dynamic adjustment mechanism provides a more predictable experience for users and enables more efficient pricing. The transaction fees in this new model consist of the Base Fee and a priority fee (or tip) that users can add to incentivize miners to prioritize their transactions.

The Base Fee: Definition and Dynamics

The Base Fee is the minimum amount of gas that must be paid to include a transaction in a given block. It is not static; rather, it varies based on network demand. When the block is full and the demand for transaction processing is high, the Base Fee increases to ensure that transactions are prioritized. Conversely, during periods of low demand, the Base Fee decreases. Each block consists of a maximum of 30 million gas units and have a target size of 15 million gas units. Depending on the actual size of the previous block, the Base Fee is adjusted up or down by a certain percentage (12.5% of the previous Base Fee). For example:  

• if the gas units used are 30 million then the Base Fee increases by 12.5%
• If the gas units used are 0 then the Base Fee decreases by 12.5%
• If the gas units hit the target of 15 million then the Base Fee stays constant
• Where the gas units are between 0-30 million they are then scaled up or down in proportion to the 12.5%

‍

The dynamic nature of the Base Fee serves multiple purposes:

1. Predictability: Users can roughly gauge their expected fees based on recent network activity, reducing the likelihood of overpaying or having their transactions stalled.

2. Efficiency: Validators are more equally incentivized to include transactions without the need for intense bidding wars, creating a smoother transaction flow.

3. Burn Mechanism: Part of the fee (the Base Fee) is burned, removing it from circulation. This process helps to create deflationary pressure on Ethereum’s supply, which has stirred discussions about the long-term economic model of ETH.

The Priority Fee (Tip)

In addition to the Base Fee, users can submit a priority fee or tip that Validators can earn if they prioritize a user's transaction over others. This tip acts as an incentive for Validators to select transactions, especially when a higher priority is needed. Users who require faster transaction confirmations can increase their priority fee to ensure their transactions are processed faster, while those willing to wait can opt for the Base Fee alone.

Impact on Users and Developers

For users, the implementation of the Base Fee reduces the complexity involved in setting transaction fees. They no longer need to wrestle with fluctuating gas prices that require real-time calculation based on bid competition. Instead, they can rely on average fees and adjust their tips as necessary for priority processing. Developers also benefit from a more predictable cost structure when designing dApps. They can better estimate operational costs and create user experiences without the worry of sudden price spikes affecting usability.

The Base Fee represents a pivotal advancement in how transaction fees are managed on the Ethereum network. As the Ethereum ecosystem continues to grow, the Base Fee’s dynamic nature supports a more user-friendly and efficient environment for transaction processing. By promoting stability, predictability, and a deflationary model, it not only reframes the economic landscape of Ethereum but also paves the way for greater scalability and broader adoption.

The Base Fee is a foundational change that has transformed Ethereum, enhancing its usability and potentially impacting its value proposition in the competitive crypto landscape. As Ethereum continues to evolve and expand, understanding mechanisms like the Base Fee will be vital for anyone engaging with Ethereum.

For more on base fees, check out our realtime Base Fee prices here

‍