Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network.
Since each Ethereum transaction requires computational resources to execute, each transaction requires a fee. Gas refers to the fee required to conduct a transaction on Ethereum successfully.
Gas fees are paid in Ethereum's native currency, ether (ETH). Gas prices are denoted in gwei, which itself is a denomination of ETH - each gwei is equal to 0.000000001 ETH (10-9 ETH). For example, instead of saying that your gas costs 0.000000001 ether, you can say your gas costs 1 gwei. The word 'gwei' itself means 'giga-wei', and it is equal to 1,000,000,000 wei. Wei itself (named after Wei Dai, creator of b-money) is the smallest unit of ETH.
Calculating the total transaction fee works as follows: Gas units (limit) * (Base fee + Tip)
Let's say Jordan has to pay Taylor 1 ETH. In the transaction, the gas limit is 21,000 units and the base fee is 100 gwei. Jordan includes a tip of 10 gwei.
Using the formula above we can calculate this as 21,000 * (100 + 10) = 2,310,000 gwei or 0.00231 ETH.
When Jordan sends the money, 1.00231 ETH will be deducted from Jordan's account. Taylor will be credited 1.0000 ETH. Miner receives the tip of 0.00021 ETH. Base fee of 0.0021 ETH is burned.
Additionally, Jordan can also set a max fee (maxFeePerGas) for the transaction. The difference between the max fee and the actual fee is refunded to Jordan, i.e. refund = max fee - (base fee + priority fee). Jordan can set a maximum amount to pay for the transaction to execute and not worry about overpaying "beyond" the base fee when the transaction is executed.
Calculating fees
Wallet will automatically set a recommended transaction fee (base fee + recommended priority fee) to reduce the amount of complexity burdened onto their users.
Why do gas fee exist?
In short, gas fees help keep the Ethereum network secure. By requiring a fee for every computation executed on the network, we prevent bad actors from spamming the network. In order to avoid accidental or hostile infinite loops or other computational wastage in code, each transaction is required to set a limit to how many computational steps of code execution it can use. The fundamental unit of computation is "gas".
What is the gas limit?
Gas limit refers to the maximum amount of gas you are willing to consume on a transaction. More complicated transactions involving smart contracts require more computational work, so they require a higher gas limit than a simple payment. A standard ETH transfer requires a gas limit of 21,000 units of gas.
For example, if you put a gas limit of 50,000 for a simple ETH transfer, the EVM would consume 21,000, and you would get back the remaining 29,000. However, if you specify too little gas, for example, a gas limit of 20,000 for a simple ETH transfer, the EVM will consume your 20,000 gas units attempting to fulfill the transaction, but it will not complete. The EVM then reverts any changes, but since the miner has already done 20k gas units worth of work, that gas is consumed.
Why can gas fee get so high?
High gas fees are due to the popularity of Ethereum. Performing any operation on Ethereum requires consuming gas, and gas space is limited per block. Fees include calculations, storing or manipulating data, or transferring tokens, consuming different amounts of "gas" units. As dapp functionality grows more complex, the number of operations a smart contract performs also grows, meaning each transaction takes up more space of a limited size block. If there's too much demand, users must offer a higher tip amount to try and outbid other users' transactions. A higher tip can make it more likely that your transaction will get into the next block.
Gas price alone does not actually determine how much we have to pay for a particular transaction. To calculate the transaction fee, we have to multiply the gas used by the transaction fee, which is measured in gwei.
Initiative to reduce gas cost?
The Ethereum scalability upgrades should ultimately address some of the gas fee issues, which will, in turn, enable the platform to process thousands of transactions per second and scale globally.
Layer 2 scaling is a primary initiative to greatly improve gas costs, user experience and scalability. More on layer 2 scaling.
The new proof-of-stake model, introduced on the Beacon Chain, should reduce high power consumption and reliance on specialized hardware. This chain will allow the decentralized Ethereum network to agree and keep the network secure, while limiting energy consumption by instead requiring a financial commitment.
Anyone with at least 32 ETH can stake them and become a validator responsible for processing transactions, validating blocks, and proposing new blocks to add to the chain. Users who have less than 32 ETH can join staking pools.
Strategies to reduce gas cost
If you are looking to reduce gas costs for your ETH, you can set a tip to indicate the priority level of your transaction. Miners will 'work on' and execute transactions that offer a higher tip per gas, as they get to keep the tips that you pay and will be less inclined to execute transactions with lower tips set.
If you want to monitor gas prices, so you can send your ETH for less, you can use many different tools such as:
Etherscan Transaction gas price estimator
ETH Gas Station Consumer oriented metrics for the Ethereum gas market