Gas fees are the cost of doing anything on a blockchain network. When you send cryptocurrency, swap tokens on a decentralised exchange, mint an NFT or interact with any smart contract, you pay a fee to the validators who process your transaction. On Ethereum, this fee is paid in ETH and is called gas.
How gas fees work on Ethereum
Every operation on Ethereum, from a simple transfer to a complex smart contract execution, requires a certain amount of computational work, measured in units of gas. A basic ETH transfer costs 21,000 gas units. A complex DeFi interaction might cost several hundred thousand.
The total fee is calculated as: Gas units used x Gas price per unit
The gas price fluctuates with network demand. When many people are transacting simultaneously, gas prices spike because users bid higher to get their transactions processed faster.
Why gas fees vary
| Factor | Effect on fees |
|---|---|
| Network congestion | More users = higher fees |
| Transaction complexity | Smart contract interactions cost more than simple transfers |
| Gas price you set | Higher price = faster confirmation |
| Time of day | Fees tend to be lower during off-peak hours |
Layer-2 solutions
Because Ethereum gas fees can become prohibitively expensive during busy periods, Layer-2 networks like Polygon, Arbitrum and Optimism process transactions off the main chain and periodically settle them back on Ethereum. This can reduce fees by 10x to 100x while still inheriting Ethereum's security.
Gas fees on other blockchains
Different blockchains have different fee structures. Solana's fees are typically fractions of a cent. BNB Chain fees are lower than Ethereum's. The trade-off is often between fee levels and the degree of decentralisation and security.
Gas fees and India
Gas fees are paid in the blockchain's native token, not in INR. For Indian users, the effective cost in rupees depends on both the gas price and the current exchange rate. When calculating the tax basis for a transaction under Section 115BBH, gas fees paid are not deductible as a separate expense. Only the cost of acquisition of the VDA itself is allowed as a deduction.
Tips to reduce gas fees
- Transact during off-peak hours when network usage is lower.
- Use Layer-2 networks for routine transactions.
- Set a reasonable gas limit rather than the maximum.
- Batch multiple operations into a single transaction where possible.