Let’s say you’re standing in line at Starbucks waiting for your coffee and you notice there are maybe 4 people in front of you? Normally you’d look at this number and think about your wait time but just for the fun of it… now let’s say you’re thinking about the 4 people in correlation to both your wait time and your transaction fee now. Because in this thought experiment, the more people that are waiting for coffee, the higher the price to get your coffee. Why? Because this coffee shop works like an auction, and serves coffee to the people who will pay the highest transaction fee first.
You get up to the counter and the barista says your coffee will be $8 plus a transaction fee of $2, which would come out to $10 total..
Now let’s imagine there are 300 people standing in line for coffee because they just released their new pumpkin spice flavor. Since there are 300 people in line, the average transaction fee to get your coffee soon is $50. That’s outrageous, you think! You could pay your old $2 if you wanted to, but you would be waiting all morning, all day, all evening until the rush of pumpkin heads died down. Instead, you pay the $50 transaction fee on your $8 coffee, coming to a total of $58 for your morning cup of joe.
So what is Ethereum and what is Ethereum Gas?
Ethereum is programmable money. You can use it to do things. For example, you could add 4 + 4 and it would tell you the answer is 8, but it would cost you 3 gas. If you wanted to check your friend’s Ethereum wallet balance to know how much money he has, you might need 400 gas. And if you wanted the network to send some ether you have to your friend, you would have to pay 21,000 gas. You may be wondering “Why the heck would I pay to have Ethereum do some addition for me?” well, if you keep watching I’ll explain it at the end of this video!
And oh yeah, It’s called gas, because it’s similar to the gasoline you put into your car. It is the fuel that powers the code and computations that happen on the Ethereum network.
We have gas as a way to make sure the price of these things don’t change even if the price of Ethereum skyrockets or plummets. It should always take 3 gas to add two numbers, whether the price of Ethereum is $200 or $20,000. However, we have to convert the amount of gas to the cost of gas.
To find out how much it will truly cost, we need to multiply gas cost by the gas price. The gas cost of things doesn’t change, but the price of one gas does. There is where something weird called Gwei comes in.
What is gwei? Gwei stands for Giga Wei. A Wei is like what one penny is to a dollar… or one satoshi to a bitcoin, but for ethereum. So there are one quintillion weis in one ether. Because this is a ridiculously small amount, we instead use Gigawei, which is .000000001 ether.
Example of an Ethereum Action
I learn best by examples and seeing something in action, so to learn what Ethereum gas is, let’s go over an example.
Let’s say you want to send some money to your friend. First, we will need to know things.
The price of a transaction is 21,000 gas. This number never changes.
Right now, ethereum price is at $2000 USD. This number changes all the time.
The price of gas can be whatever you want it to be, but the higher it is, the faster it will be confirmed, and we will talk about this in a bit… but right now let’s assume the average price of gas is 100 gwei.
This means the cost of the transaction is 21,000 gas times 100 gwei.
To reduce this, we do 21,000 times .000000100 because 100 gwei is equal to that in ether.
This comes out to be .0021.
That means it costs us .0021 ether to send a transaction.
If you want to figure out how much cash that is, you just take .0021 times $2000 and you get $4.2.
This means it costs $4.2 to make that transaction.
So to find out how much something costs, you take
[Price of action] * [Cost of gas] = amount of ether to perform
And to get how much it costs in dollars, you just take
[amount of ether] * [current price of ether]
I hope this explanation was helpful!
If you’re curious what the current prices of gas is, check out ethgasstation.info
Let’s go over one more example just so you get the hang of it.
Example of a transaction when congested
Now, let’s assume the same situation as above, but for this example, the network is VERY busy and the cost of gas is high. Now the cost of one gas is 700 gwei.
So to calculate how much it would cost to send your friend some money, we have to plug in those numbers into the equation.
Remember the equation is [price of action in gas] * [cost of gas in gwei] * [ethereum price in dollars].
Price of a transaction is still 21,000 gas.
Cost of gas is now 700 gwei, which is .000000700 ether.
And the price of ethereum is still 2000.
21,000 * .0000007 * 2000 = $29.4
Since the network is congested and tons of people are wanting to do stuff on it, it will cost $29.4 to send money to your friend, and that is whether you send $5 or $5,000,000. This is the beauty and downfall of this system.
Speed of transaction
Now, earlier I said that the gas price can be different. This is where we go back to the coffee analogy. There are people standing in line for coffee, and the people willing to pay the most get their coffee first. Since ethereum miners can only include a certain number of transactions per block, they pick the ones that pay the most, since they get the fees as a reward.
So you could spend 100 gwei, or 10 gwei, or even 1000 gwei. If you spent 10 gwei, it might take a few hours to get confirmed, but if you spend 1000, it could be confirmed almost immediately. Imagine your a miner and on average you’re getting $5 to mine some transactions, and some guy gives you a $50 tip to hurry up and do his… you’re gonna be doing his very fast. However, if someone’s like “20 cents is all I got… do it when you can”, you’re only going to do it when the higher transactions are finished.
You might be wondering why we need all of this, it’s quite confusing. Gwei and Gas were implemented into the ethereum network so people had to pay for code to be ran. Imagine if you could say “I want someone to do this action for free, forever”. Without a gas limit and gwei price, they could do that.
Ethereum Improvement Plan 1559 goes live in July 2021, and will take whatever the transaction fee is for a transaction, and essentially burn it. Right now, while we are posting this video, the miners get that fee, and it can equal up to an extra $4000 per block. This makes mining very profitable, in fact Ethereum is the most profitable coin to mine right now.
However, after July 2021, these fees will be burned and gone forever. This means mining could be less profitable, which could mean less miners and less expensive GPUs due to supply and demand. It will be very interesting to see whether this gets implemented at all, and if it does, how the network and miners react to it.
Why would you want to add in Ethereum?
So, I said earlier that ethereum was programmable money. In fact, you can write entire programs and even whole functioning websites that work using ethereum. These are called Decentralized Apps, or dApps. DApps function by running code that you paid for to do certain things, and on the ethereum network, you can literally write programming code.
So Adding is really basic, but it’s the foundation of code, you can also subtract, multiply, divide, and from there you can do other logic things like if/then and for loops, it gets really complicated really quick and with enough imagination and education, you could create a whole decentralized exchange like uniswap where you can trade coins for other coins without there being a central authority like Coinbase… but that’s a video for another day.
If you enjoyed this video, please please please hit that like button and subscribe because it helps us like you can’t even imagine. We are just starting this channel and every little bit helps. We love making these videos but they take a lot of time and even money to produce, however we know they will help someone - because creating them helps us understand the topics better.
Anyways, we hope you learned something and we hope you see you in the next video!