In the world of cryptocurrency, and Web3 more broadly, imperfect metaphors abound. Ethereum is a “dark forest,” and the right-click button on a computer mouse is now a stand-in for an entire mindset. Add “gas” to the growing list. Gas fees don’t denote actual liquid fuel consumption or environmental impact, they’re more like a “tip” that you’d slide a bouncer to cut the line for a club. In this analogy, the bouncer is an Ethereum miner, the club is a completed block of transactions, and the line is a bunch of eager nerds hoping to get in before Snoop Dogg comes on.
The volatile nature of gas fees became news to normies after a group of over 17,000 people called ConstitutionDAO joined together to crowdfund an effort to buy a copy of the US Constitution. Though the DAO (short for decentralized autonomous organization) raised over $40 million, their bid failed. Organizers were left to refund contributions “minus gas fees.” Members spent more than an estimated $1 million on gas fees to retrieve their donations. (Disclosure: Morning Brew previously sold a sweatshirt with “ConstitutionDAO” written across the chest.)
Though some ConstitutionDAO members might have been surprised by the high cost of gas fees, they’re an increasingly standard feature in the Ethereum network. It currently uses a proof-of-work consensus protocol, in which computers on the network attempt to solve complex math problems in order for a reward of Ethereum (ETH). (In part due to increased transaction fees, co-founder of Ethereum, Vitalik Buterin, has written about moving Ethereum to a proof-of-stake system in 2022, which Ethereum developers see as less cost- and energy intensive.) Unprocessed orders for ethereum sit in a “mempool” (memory + pool) where miners can see how much additional “gas” (also called a “tip” or “priority fee”) an individual is willing to pay to have their order prioritized, on top of a base fee automatically generated by the network, which factors in current demand.
As Garrick Hileman, the head of research at Blockchain.com, explained to Morning Brew, there are two main incentives for miners on the Ethereum network: one is to mine ethereum to get paid in newly minted ETH; the other is to extract fees (paid in ETH) from users on the network by processing their transactions.
Gas fees are measured in gwei, which denotes a “giga-wei.” One gwei is 0.000000001 ETH. When submitting an order, users must indicate a “gas limit,” which is the maximum amount they’re willing to pay to have their transaction added to the blockchain. When the number of users conducting transactions on the network goes up, the price of gas goes up. According to ConstitutionDAO, 17,437 people invested in the project, with a median donation of about $200. For some people, the gas fees required for a refund exceeded their contribution, which meant they had to walk away without the Constitution or their money.
As Hileman noted, there is some confusion how gas fees actually work, in part because of the name. “I think the word ‘gas’ is problematic,” Hileman said. “I think actually just dropping the term ‘gas’ would be helpful, because gasoline is not involved with what’s happening here,” he said with a laugh. He suggested just “fee” as a helpful alternative.
“ …A user of the Ethereum blockchain can specify how much fee you’re willing to pay,” Hileman explained. “There are services that will tell you what the average fee is. They’ll look at what other people using the blockchain at that moment are willing to pay.” Hileman said analysis from Blockchain.com found that waking hours in North America often have higher fees than other times of the day. Weekends tend to have fewer transactions, he noted.
Whether gas fees are necessary for Bitcoin or Ethereum is a “theoretical question,” Hileman said, that “we won’t know the answer to [that] probably for another 100 years.”
The concept of gas fees highlights a major difference between cryptocurrency transactions and those in “classic markets,” Anthony Lee Zhang, assistant professor of finance at the University of Chicago Booth School of Business, told Morning Brew. Stock market orders are prioritized by the time they are placed, while miners on the Ethereum network are incentivized to prioritize orders based on gas.
There are ways to minimize the gas fees, but that requires extra steps and education. Zhang, like Hileman, identified a lack of knowledge that some users may have about these fees. “You don’t even have to write code, really,” he said. “But you just have to click a lot of buttons and read a lot of complicated documentation. Admittedly, it’s pretty impenetrable.”
ConstitutionDAO, to Zhang, looked like an interesting endeavor. He described it as “a flash mob to do something kind of ridiculous but fun.” The organizational structure, to him, appeared to be “Kickstarter without the platform.” Zhang personally contributed to the DAO, and his contribution to the project required $140 in gas fees overall. which he jokingly estimated added a microscopic fractional cost to Ken Griffin’s winning $42 million bid.
While Ethereum enjoys a first-mover advantage, “the gas fees are basically untenable for really doing anything,” Zhang said. They don’t scale with transaction value, either, so high fees favor making large trades. If the DAO had used another blockchain, or a Layer 2 Ethereum technology, gas fees “would have been pretty negligible.”
In the stock market, high-frequency traders participated in front-running stock trades by competing on speed, the subject of Michael Lewis’s 2014 book Flash Boys: A Wall Street Revolt. The book details how high-frequency trading is less of an investment strategy than it is a rigged game, one in which high-frequency traders act on large orders just moments before they occur.
In the crypto space, trades are front-run not by internet speed, but by outbidding on gas fees. Lewis’s book inspired a 2019 paper by a group of Cornell affiliated researchers: “Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in Decentralized Exchanges.” The paper details how miners in decentralized exchanges can profit by pursuing what’s known as a “Miner Extractable Value” (MEV) strategy, in which profit is maximized by reordering, withholding, or adding transactions to the blockchain.
Sometimes, these maneuvers are also known as sandwich trading. Someone can look at large pending transactions in the mempool, front-run a targeted transaction by bidding higher gas, wait for the target transaction to occur, and then make another transaction moments after, in order to “sandwich” the trade with two quick moves that benefit the front-runner, who has now capitalized on the brief shift in price in the meat of the sandwich.
While the concept of MEV leaves many outsiders scratching their heads, it’ss a hot-button issue in the Ethereum community. Even the authors of the “Flash Boys 2.0” paper are not all in agreement. One of the paper’s authors, Philip Daian, helped co-create a free tool called Flashbots, which sets out to create “frontrunning protection.” Bloomberg described the tool as basically democratizing front-running for all. Another coauthor, Ari Juels, recently co-wrote an op-ed for CoinDesk in which he called front-running-as-a-service “theft.”
The Flashbots project welcomes scrutiny in the form of “MEV roasts,” monthly discussions where a roastmaster (an invited guest-slash-troll) poses difficult and existential questions to the team. On November 25, Dan Robinson, the roastmaster and a research partner at Paradigm, an investment firm that invested in Flashbots, asked on a presentation slide, “Isn’t working on open-source MEV tooling to prevent the MEV crisis sort of like working on open-source nuclear bombs to prevent nuclear war?”
In a separate blog post from 2020 titled “Ethereum is a Dark Forest,” Robinson described an environment in which front-running predators on Ethereum prey on users, sniffing out attempted transactions and sticking users with the worst possible price. (The post’s headline is a reference to Liu Cixin’s sci-fi book, The Dark Forest.)
Robert Miller, a steward of the Flashbots, told Morning Brew that front-running can occur on the Ethereum network because transactions are broadcast across the network before they are included in a block.
Because of this broadcasting, “Arbitrageurs can also see your strategy, copy it, and try to beat you to it by paying a higher gas price,” Miller explained. “But only one party can actually capture the arbitrage opportunity and this arms race where bots escalate their gas fees continuously leads to many failed transactions. These failed transactions add no value but clog up Ethereum blocks, crowding out blockspace from real users and raising costs for them.”
Routing through Flashbots, alternatively, “offers a safe way out of the Dark Forest with first-price sealed bid auctions where the users’ intent is not public before the transaction is mined,” Miller said.
Miller sees gas fees as a necessary mechanism to “mediate access” to the finite space on the Ethereum network at any given time. Unfortunately, he said, this does mean smaller users can be priced out when demand is high, he said.
“Of course we don’t want that, but it’s the economic reality of any blockchain and any scarce good in general. Fortunately, a lot of really smart people are working on cool technologies to scale Ethereum and other blockchains and hopefully make gas fees lower in the future.”
Until then, users interacting with Ethereum should plan on high gas fees as part of their reality. Crowdfunding DAOs have already decided to try something for their next round: A new DAO said it plans to use Solana, another blockchain technology, which has lower fees compared to Ethereum. The project, called BlimpDAO, wants to buy a blimp. And it’s probably best to carefully consider which gas to use when airships are concerned, historically speaking.