Gas Fees and the Market for Block Space

A block on Ethereum can only hold so many transactions. When demand for space exceeds that limit — a popular NFT mint, a market crash triggering liquidations everywhere at once — not every pending transaction fits into the next block, and something has to ration the space. That something is gas fees: block space is auctioned, and the fee you attach is your bid.

How the auction works

Every operation a transaction performs (a transfer, a swap, a contract call) consumes a measured amount of gas, a unit of computational effort. The total fee is gas used times the price per unit of gas you're willing to pay. Since EIP-1559 (2021), that price splits into two parts:

$$\text{Fee} = \text{Gas Used} \times (\text{Base Fee} + \text{Priority Fee})$$

In words: the base fee is set algorithmically by the protocol itself, rising when the previous block was more than half full and falling when it was less than half full — it isn't paid to miners/validators at all, it's burned, destroyed permanently. The priority fee (tip) is what you add on top to bid your transaction ahead of others when space is tight, and that part does go to the block producer.

Worked example

A transaction uses 21,000 gas (a simple ETH transfer). The current base fee is 30 gwei and you add a 2 gwei priority tip.

1. Price per gas. $30 + 2 = 32$ gwei.
2. Total fee. $21{,}000 \times 32 = 672{,}000$ gwei $= 0.000672$ ETH.
3. In dollars, at an ETH price of $3,000, that's $0.000672 \times 3{,}000 \approx 2.02$, i.e. about $2.02 — but during a congestion spike where base fee jumps to 300 gwei, the identical transfer would cost roughly $20, ten times more, for the exact same operation.

What this means in practice

Traders running time-sensitive strategies (liquidations, arbitrage, NFT mints) routinely overpay on the priority fee deliberately, because losing the race to be included in the next block can be worth far more than the extra gas cost. Gas price is also a live signal of network demand: a sudden gas spike often means something significant is happening on-chain — a major liquidation cascade, a hot new mint — well before it's obvious from any other data source.