Gas and payment
One very important concept in Ethereum is the concept of fees. Every computation that occurs as a result of a transaction on the Ethereum network incurs a fee — there’s no free lunch! This fee is paid in a denomination called “gas.”
Gas is the unit used to measure the fees required for a particular computation. Gas price is the amount of Ether you are willing to spend on every unit of gas, and is measured in “gwei.” “Wei” is the smallest unit of Ether, where 1⁰¹⁸ Wei represents 1 Ether. One gwei is 1,000,000,000 Wei.
With every transaction, a sender sets a gas limit and gas price. The product of gas price and gas limit represents the maximum amount of Wei that the sender is willing to pay for executing a transaction.
For example, let’s say the sender sets the gas limit to 50,000 and a gas price to 20 gwei. This implies that the sender is willing to spend at most 50,000 x 20 gwei = 1,000,000,000,000,000 Wei = 0.001 Ether to execute that transaction.
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Remember that the gas limit represents the maximum gas the sender is willing to spend money on. If they have enough Ether in their account balance to cover this maximum, they’re good to go. The sender is refunded for any unused gas at the end of the transaction, exchanged at the original rate.
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In the case that the sender does not provide the necessary gas to execute the transaction, the transaction runs “out of gas” and is considered invalid. In this case, the transaction processing aborts and any state changes that occurred are reversed, such that we end up back at the state of Ethereum prior to the transaction. Additionally, a record of the transaction failing gets recorded, showing what transaction was attempted and where it failed. And since the machine already expended effort to run the calculations before running out of gas, logically, none of the gas is refunded to the sender.
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Where exactly does this gas money go? All the money spent on gas by the sender is sent to the “beneficiary” address, which is typically the miner’s address. Since miners are expending the effort to run computations and validate transactions, miners receive the gas fee as a reward.
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Typically, the higher the gas price the sender is willing to pay, the greater the value the miner derives from the transaction. Thus, the more likely miners will be to select it. In this way, miners are free to choose which transactions they want to validate or ignore. In order to guide senders on what gas price to set, miners have the option of advertising the minimum gas price for which they will execute transactions.
There are fees for storage, too
Not only is gas used to pay for computation steps, it is also used to pay for storage usage. The total fee for storage is proportional to the smallest multiple of 32 bytes used.
Fees for storage have some nuanced aspects. For example, since increased storage increases the size of the Ethereum state database on all nodes, there’s an incentive to keep the amount of data stored small. For this reason, if a transaction has a step that clears an entry in the storage, the fee for executing that operation of is waived, AND a refund is given for freeing up storage space.
What’s the purpose of fees?
One important aspect of the way the Ethereum works is that every single operation executed by the network is simultaneously effected by every full node. However, computational steps on the Ethereum Virtual Machine are very expensive. Therefore, Ethereum smart contracts are best used for simple tasks, like running simple business logic or verifying signatures and other cryptographic objects, rather than more complex uses, like file storage, email, or machine learning, which can put a strain on the network. Imposing fees prevents users from overtaxing the network.
Ethereum is a Turing complete language. (In short, a Turing machine is a machine that can simulate any computer algorithm (for those not familiar with Turing machines, check out this and this). This allows for loops and makes Ethereum susceptible to the halting problem, a problem in which you cannot determine whether or not a program will run infinitely. If there were no fees, a malicious actor could easily try to disrupt the network by executing an infinite loop within a transaction, without any repercussions. Thus, fees protect the network from deliberate attacks.
You might be thinking, “why do we also have to pay for storage?” Well, just like computation, storage on the Ethereum network is a cost that the entire network has to take the burden of.
In other words, blockchain is a new foundational technology that uses decentralized encryption to record events publicly. The technology was conceptualized in the 1990’s, but not implemented until Satoshi applied the idea to his Bitcoin software and solved the double-spending problem, creating a scarce digital currency that relies not on governments or banks, but on encryption.
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