Ether: The Fuel That Powers the Ethereum Blockchain
Whether creating a digital collectible or collateralizing a crypto loan, you pay for Ethereum network usage fees with ether, or “gas.”
Updated April 6, 2021 • 4 min read
Ethereum was designed to be a decentralized global supercomputer impervious to third-party control or censorship. Given that every single operation that takes place on the Ethereum network requires some amount of computational power, this emphasis on decentralization requires an alternative model for facilitating on-chain transactions and incentivizing network use. In order to address these challenges, the developers of Ethereum created ether (ETH), the blockchain’s native coin, to power the network.
Ethereum is a decentralized blockchain platform that enables users to transfer and exchange value and data without a third-party intermediary. This is made possible through Ethereum’s smart contracts, which are hard-coded rules of engagement that automatically execute within the network once certain pre-set conditions are met. While this setup obviates the need for centralized validators, it has resulted in a unique new challenge, i.e., determining how to pay for the costs of processing on-chain transactions in an equitable, yet trustless fashion. The solution is ether (ETH), the Ethereum platform’s native coin.
What Is Ether (ETH)?
As the second largest blockchain by market cap, Ethereum hosts an ever-expanding ecosystem of decentralized applications (dApps) that facilitate peer-to-peer user interactions. Every action in the Ethereum network — whether you’re creating a digital collectible or collateralizing a crypto loan — involves a transaction, and each of these transactions requires a certain amount of computing power. These transactions are paid for with ETH.
The ETH fees that result from transacting on the Ethereum blockchain are referred to as gas. In this sense, ETH is the fuel that powers the Ethereum network. This provides a continued demand for ETH, as both service providers and end users on the Ethereum network must continually purchase and spend ETH in order to interact with one another via the network’s smart contract protocols.
Among Ethereum users, gas costs are denoted in gwei, a denomination of ether equal to 0.000000001 ETH. The exact size of this cost per on-chain operation depends on the computational effort required to complete that action, and can therefore be influenced by how congested the network traffic is at the time the action is initiated. For the sake of transparency, approximated gas fees are typically communicated to a user before they are prompted to initiate a transaction, and many services built on Ethereum allow users to pay a higher gas fee than is recommended in order to expedite their transaction or increase the likelihood that it will be successfully executed by the network.
Alternatively, since gas fees can fluctuate in accordance with network usage volatility, Ethereum users who want to avoid paying excessive ether transaction fees can set a gas limit for their transaction, which means that their proposed transaction will not be executed if the involved cost surpasses a certain value. ETH gas fees also act as a spam mitigation tool in the sense that nefarious actors who might otherwise attempt to disrupt the system via a cascade of low-quality transactions are financially deterred by the prospect of paying ETH gas fees.
ETH Fees: Who Receives Them?
Ethereum currently utilizes a Proof-of-Work (PoW) consensus algorithm that relies on miners — users who allocate computing power to the process of verifying and recording blockchain transactions in exchange for newly minted ETH coins. This is the only way new ETH can be minted. Within the Ethereum network, miners create new blocks every 12 to 15 seconds; they are historically rewarded two ETH coins per successfully validated block, in addition to the accrued gas fees associated with the transactions that took place within that block.
The gas fees depend on what the transaction initiator is willing to pay, as well as what the miner is willing to accept. Since there are multiple transactors and miners at any given moment, the network’s gas fees naturally adjust in accordance with the dynamic conditions of on-chain usage and demand. This reward system is necessary in order to incentivize miners to participate on the Ethereum network and power the system’s decentralized processes. Generally speaking, the more miners a network has, the more secure and efficient the network is, so a healthy economy between miners and transactors is arguably essential for a thriving network.
Multifunctional ETH: The Lifeblood of the Ethereum Ecosystem
In addition to being used to compensate miners and pay transaction fees, ETH has also demonstrated its utility as an effective medium of exchange within the Ethereum ecosystem. Transacting with ETH can be significantly faster and potentially cheaper than traditional payment services, and given Ethereum’s decentralized architecture, the network’s transactions are also censorship-resistant. This means that third-party authorities are unable to intercept or prevent on-chain transactions. ETH is also integral to the functioning of the rapidly expanding decentralized finance (DeFi) ecosystem, in which ETH is commonly used as collateral to take out crypto loans and earn interest. Reports estimate that upwards of $22 billion dollars of ETH was locked in DeFi platforms as of January 2021.
Due to the exploding interest in Ethereum’s distributed computational technology, Ethereum has experienced scalability challenges and higher gas fees, particularly as a result of the recent rise of DeFi platforms. In response, and in accordance with the original vision of the network set forth by its creator, Vitalik Buterin, Ethereum’s developers are transitioning the network to a Proof-of-Stake (PoS) consensus algorithm with the Ethereum 2.0 upgrade. ETH 2.0 will see ether used as collateral on the network, allowing users to stake ETH coins to validate new blocks in return for newly minted ETH and gas fees. This next stage of Ethereum’s development is expected to increase the scalability of the Ethereum blockchain while keeping the utility of ETH intact.
As Ethereum continues to evolve and enable novel use cases, ether will continue to play a central role in the network’s operational success. With its growing use, thanks in part to the DeFi explosion, ETH will likely continue to be one of the world’s most used, trusted, and valued digital assets.
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