NFT Army Beginners Guide to NFT’s: Volume 3
With Volumes 1 and 2 I laid out some basics of how to get started in this exciting new world of NFT’s. Starting here with volume 3 I will get more in depth on specific topics and first up is GAS. Every transaction on the Ethereum blockchain (as well as nearly all other blockchains) requires a fee to process. These fees are built into how the network operates and are integral to keep them operating. Gas fees will fluctuate quickly during times of high network activity. Fees on ETH can range from a few Gwei during average conditions to several thousand Gwei during minting of highly hyped projects. More often than not the fees in these cases far exceed the price of the actual NFT. Understanding how gas works, and how to increase the amount you are willing to pay for a transaction to process will make or break whether your transaction is successful when trying to mint a new project. This will help give you an edge in ensuring you are able to obtain the items you are trying to purchase and not miss out.
First, we need to understand why these fees exist, and the reasoning lies in the underlying blockchain technology itself and how “mining” works.
“Gas fees are payments made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain… A higher gas limit means that you must do more work to execute a transaction using ETH or a smart contract.”
Miners keep the network running, they process all transactions, and just like BTC, they are rewarded in ETH at the current rate of 2 ETH for every block completed. The chance of any 1 mining rig completing a block is low, and a large amount of money needs to be invested into the hardware, as well as the energy costs to run it. Gas was created as an additional means of compensating these miners. ETH is a Proof of Work network, just like Bitcoin. POW requires more and more computational power to be used over time to complete blocks on the chain. ETH is currently in the process of converting to a Proof of Stake method, which would eliminate substantial costs and energy usage. We will hopefully see this transition happen in 12-18 months. For reference, Polygon is a POS network whose gas fees can cost fractions of a penny.
Gas on Ethereum is price in Gwei. Gwei is a sub-unit of ETH (think Cents vs Dollars). 1 Gwei is equal to 0.000000001 ETH. Up to the second gas prices can be found here: https://etherscan.io/gastracker. All new transactions are placed into a queue to be picked up and processed by the miners. They will typically prioritize the transactions offering the highest fees first and can ignore transactions offering fees that are too low. This can result in what we call a Gas War, as buyers can increase the gas fees they are willing to pay into the Hundreds or Thousands of Gwei in order to secure their purchase. It is HIGHLY recommended to keep gas tracker, or a similar gas tracking service, open during minting of highly hyped projects. Paying too low of a gas fee can cause your transaction to become stuck in pending, and eventually fail, causing you to miss out. Paying too high of a fee, on the other hand, can cut into your profit margins.
1,000 Gwei doesn’t sound too bad, right? After all, it’s only 0.000001 ETH. Well… that is only part of the equation. The amount of Gwei spent on gas is per UNIT OF GAS. Every transaction will take varying units of gas depending on many factors: the size of the transaction, the amount of data processed, and how the Smart Contract is designed for the NFT you are purchasing. Transactions can require several hundred thousand units of gas. 1 thousand Gwei per unit of gas on a transaction that requires 200 thousand units would equate to paying 0.2 ETH just in gas fees. You will need to decide before minting how much per NFT you are realistically willing to pay in order for it to be profitable and factor gas into your final costs to determine how many you can realistically try to purchase to leave enough room to be able to increase your gas price if needed.
Refer to this guide from MetaMask on how to adjust your gas price before starting a transaction. and how to speed up a transaction after it starts. https://metamask.zendesk.com/hc/en-us/articles/360022895972
If your transaction fails, you will still be charged a small transaction fee, however since the total units of gas required for the purchase will not be used, you will not be charged to full estimated price.
Below is an Etherscan from a transaction where i minted 5 NFT’s. We can see here the ID’s of the 5 tokens i purchased. We see next to value the total cost of the NFT’s themselves were 0.3471 ETH (mint cost per items was 0.069420). Below that is the total transaction fee I paid of 0.0218224 ETH. Broken down we see I paid a gas fee of 100 Gwei per unit. MetaMask set a gas limit of 327,336 units. Next, we see that the actual units used by the transaction was only 218,224. When i accepted the transaction, i was quoted a gas price based on that 327K unit estimate, however since only 218K units were used, I was not charged the difference between them. In most cases your actual gas cost will be lower than the estimated cost. The default estimated units of gas are set by the smart contract, and it is not recommended to change it. If you manually set your gas limit to 200K, and the transaction requires 210K units, your transaction will fail due to an Out of Gas error. When this occurs, you will be charged the Full Cost of the 200K units you did use before the failure.
Putting all this together we can now calculate that the total transaction cost was 0.3689224, divided by 5 items purchased, for a cost per items of 0.07378448. You are going to want to know your cost basis for Tax purposes, as well as a guide to make sure something you may think you are selling for a small profit doesn’t turn out to be a loss due to the gas you paid.
EIP-1559 – The “London Hard Fork”
I held off on publishing this article for a time as after I originally wrote it, there was a major update to the ETH network called EIP-1559 (Ethereum Improvement Proposal), along with 4 other EIP’s known as the London Hard Fork. EIP-1559 drastically changed the way gas is charged when processing a transaction. The upgrade consisted of 3 major factors. The first being that the maximum block size has been doubled, however the target block size has been set to 50%. The reasoning here, is that the volume of blocks being created is what determines the base gas fee, the faster they are created, the higher the base fee becomes. The goal of the 50% target is to try and stabilize the speed in which blocks are created and therefore adding a buffer to how fast gas can spike.
For simplicity’s sake, lets use an example where each block can contain 100 transactions, with a target size being 50. If 90 transactions are submitted at 100 Gwei, but the next block will require 150 Gwei, then the current block can handle the additional 40 transactions at the lower gas fee, allowing them to be processed before gas increases. The network will then try to balance itself so that it can return to the 50% target for each block. In practice, however, we are seeing much higher fees during Gas Wars, and I am honestly unsure if this is due to the upgrade or simply market demand.
The 2nd change is that a deflationary mechanism was activated which “burns”, or destroys, the Base gas fee. This means that with every transaction, the base fee paid in gas is destroyed and forever lost. The amount of ETH burned is low in comparison to the amount created each day, but it will slow down the rate in which the total supply grows. This has partially had an effect on the recent rise in ETH value we have seen since EIP-1559 was implemented, among other market factors.
There was a large fear that this would cut too deep into miner revenue, essentially taking away incentive for them to keep their hardware running. Reports I have seen though is that their revenue has increased, mainly due to the amount of NFT trading activity.
But wait, you may ask, how are miners still earning revenue if the base fee is burned? Enter major change number 3, Priority Fees. Priority fees work like a tipping mechanism, with the miner processing the transaction keeping the entire priority fee. These fees are low compared to the base fee, as I look at Gas Tracker now, a fast gas cost of 120 Gwei has a Priority fee of 7 Gwei.
In this following example we see a purchase I made on OpenSea for 0.3 ETH using a total gas price of 189 Gwei. The transaction fee totaled 0.041xxx ETH. We now see EIP-1559 next to Txn type to show it complies with the London Hard Fork. Base fee was 187 Gwei, while the Priority fee was 1.88 Gwei. The interaction allowed for a maximum gas fee of 292 Gwei, but the network allowed it to process for a lower cost. A total of .04 ETH was burned. The Txn Saving reflects the difference in the maximum quoted and the fee that was actually paid.