Heavy and continued usage of Ethereum based decentralized finance applications over the last 12 months for activities such as token swapping, yield farming, and trading has caused congestion. Congestion means slower transaction times and increasing costs as the Ethereum network comes under stress.
Each Ethereum transaction requires computer resources to execute, each transaction requires a fee. In this way, Ethereum gas fees refer to the fee required to successfully conduct a transaction. In essence, gas fees are paid in Ethereum’s native currency, ETH, and prices are denoted in Gwei, which itself is a denomination of ETH – each Gwei is equal to 0.000000001 ETH (10-9 ETH). For example, instead of saying that your gas costs 0.000000001 Ether, you can say your gas costs 1 Gwei. In short, gas fees help to keep the Ethereum network secure by requiring a fee for every computation executed on the network and removing bad actors.
Cryptocurrency token swaps are becoming more and more commonplace as regular investors playing with smaller pots of money look to enter the cryptocurrency arena. But, something many don’t know from the get-go is that swapping tokens, say for example from ETH to BTC incurs fees. These are gas fees plus the normal fees for using a swapping platform. Ether or ETH is the currency of choice when you wish to operate on these Ethereum exchanges and is needed to make fee payments.
At a time when people are rushing to invest in cryptocurrencies we’re seeing a backlash against the fees. Until recently these fees were just sucked up by whale investors, who are moving large amounts of money. After all, a $120 fee on a $100,000 transfer is a pretty good deal, while a $120 fee on a $500 transfer is not.
That’s the situation many would-be investors find themselves in. For those just getting involved in cryptocurrencies or just not tried token swaps before, this guide can explain to you what to expect in terms of the fees on the leading Ethereum exchange Uniswap. The process of using an Ethereum exchange like Uniswap for a low-level investor would look something like this.
Using Ethereum Exchanges
Adam buys $1000 worth of Ethereum with his METAMASK Wallet and incurs a purchase fee of around $20. Adam now holds $980 worth of Ethereum in his Metamask wallet.
Adam then opens the Ethereum exchange Uniswap and connects his Metamask Wallet which shows Adam that he can use his $980 in the application.
Adam has heard about a new token for a project he likes the sound of and to add clarity to the explanation we will use a real-world token called NIOX. Right now it’s trading at $0.38 and Adam wants to purchase 0.4 ETH worth of it, or about $788.
From the drop-down menu, Adam now selects NIOX. In the ETH box, he enters 0.4. Looking at recent Uniswap Transactions within the last 24-hours on Etherscan we see that the one highlighted below matches our example.
In this example, the cost of swapping 0.4 ETH to NIOX was $39.69 plus the 0.3% Uniswap fee which works out to around $25. Adam hits proceed but he’s not entirely happy. Of his original $1000 almost $85 has been eaten by fees.
Also, another one-time fee that would apply if Adam was a new user would be paying to add permission to allow Uniswap to use his ETH. A transaction that costs around $20. So if that applied then Adam’s total cost of purchasing escalates to $105.
It’s worth noting that these charges fluctuate depending on network usage so by using tools such as Gas Buddy traders can identify the best possible time to use gas – whether that lines up with the best possible time to buy a token in regards to price is another story. So generally investors just suck up the fees as they want the token at its current price.
So that’s an average transaction on the leading Ethereum exchange Uniswap. Adam got his tokens but he spent $105 on fees in the process. Importantly, whether Adam moved $10,000 or $1,000 the gas fee would remain the same.
It should be clearer now why Ethereum exchange gas fees are pricing out smaller investors and why those looking to make investments in the hundreds are looking at layer-2 exchanges that offer much cheaper but almost identical services. Those interested in using layer-2 solutions to make cheaper and faster transactions can check out our guide to setting up Metamask on Layer-2 and then explore 10 Ethereum DeFi alternatives.
Useful Links
- How to setup Metamask for Layer-2
- Ethereum DeFi Alternatives
- DappRadar Industry Report Q1 2021
