Transactions on a blockchain are verified by a network of nodes. This is the central premise of a blockchain-based structure. However, sometimes due to high volumes of transactions taking place simultaneously, the validators have to prioritise transactions. A gas war is basically an auction system designed to prioritise transactions that are going to be validated in an upcoming block.
The Ethereum network is known for its extremely high transaction fees. These exuberant charges are often the result of gas wars. While the term might sound like some sort of chemical warfare, it is merely a bidding battle to get your transaction processed ahead of others.
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Transactions on a blockchain are verified by a network of nodes. This is the central premise of a blockchain-based structure. However, sometimes due to high volumes of transactions taking place simultaneously, the validators have to prioritise transactions.
A gas war is basically an auction system designed to prioritise transactions that are going to be validated in an upcoming block. Users can attach additional priority fees to the base gas fee (transaction fee) to prioritize their transactions. The higher the priority fee, the higher the chance of your transaction getting processed ahead of others.
What are gas fees and priority fees?
In the proof-of-work consensus model, validators dedicate vast amounts of computational power to verify transactions, bundle them into a block and add them to the network. Validators are rewarded with tokens as fees from users for processing their transactions. This is the base fee and is often referred to as gas fees.
Sometimes there are several transactions waiting to be processed. However, as there are only a limited number of validators in the network, and not all transactions can be processed at the same time. This puts validators in a dilemma -- which transactions should they process first? All transactions cannot be validated simultaneously, as the energy cost for miners would be exceedingly high.
This is why blockchain has developed a system where users looking to complete their transactions faster can offer a ‘priority tip’ on top of a base fee. The priority fee gives an incentive to a validator to add a particular transaction in the blockchain first. The user has free reign as to how much s/he wants to tip to get the validators to process their transaction faster.
This is especially important in blockchain networks like Ethereum, which has more than three thousand decentralised applications (also known as dApps) currently running on it. And the users of all these apps could all be transacting at the same time.
During such high-congestion periods in the network, multiple transactions are waiting for validation. Users who don’t want to miss the opportunity to seal their transaction in an upcoming block are known to pay significantly more than the base amount.
While the priority fee is utilized in day-to-day transactions on the Ethereum network, they hold the most prevalence in the sales of non-fungible tokens or NFTs. If there are a limited number of NFTs from an artist, buyers need to prioritise their transactions if they do not want to lose the opportunity to buy the NFT. This basically creates a bidding war among prospective buyers.
In rare cases, these gas wars or bidding wars have managed to pull more money from the buyer than the actual price of the asset being sold. For example, when Time magazine sold a limited number of NFTs for 0.1 ETH each in September 2021, some buyers allegedly spent four times as much on gas as they did on the tokens themselves.
Ethereum 2.0 may be a solution to gas wars
Ethereum has been in the process of transitioning to the proof-of-stake (PoS) mechanism. The transition is expected to complete by the end of 2022. This shift will end the PoW mining process that is energy extensive and will allow validators to validate transactions more quickly.