Understanding Gas Fees and Transaction Costs

What Are Gas Fees?

Every time you send cryptocurrency, swap tokens, or interact with a smart contract, you pay a gas fee. Gas fees are the transaction costs that compensate the network validators (or miners) who process and confirm your transaction on the blockchain.

Think of gas fees like postage for a letter. The letter itself is your transaction — the instructions telling the network what you want to do. The postage (gas fee) is what you pay to have that letter delivered and recorded permanently.

On Ethereum and most EVM-compatible chains, gas fees are denominated in the network's native token (ETH for Ethereum, for example). The fee you pay depends on two factors:

1. Gas units consumed — How computationally complex your transaction is. A simple ETH transfer uses around 21,000 gas units. A complex DeFi transaction like depositing collateral and borrowing might use 200,000 or more.
2. Gas price — How much you are willing to pay per gas unit, measured in gwei (one billionth of an ETH). This fluctuates based on network demand.

The formula is straightforward: Total fee = Gas units x Gas price.

Why Do Gas Fees Fluctuate?

Gas fees are driven by supply and demand. Blockchains have limited capacity — they can only process a certain number of transactions per block. When more people want to transact than the network can handle, users bid up the gas price to get their transactions included faster.

Common Causes of High Gas Fees

• Market volatility — When crypto prices swing dramatically, traders rush to buy, sell, or adjust positions, flooding the network with transactions.
• NFT mints and token launches — Popular drops can spike gas fees to extreme levels as thousands of users compete for limited slots.
• DeFi activity surges — Liquidation cascades, yield farming events, and protocol launches all increase demand.
• Network congestion — Even routine usage can cause spikes during peak hours.

On Ethereum mainnet, gas fees during quiet periods might cost a few dollars, but during peak congestion they have historically spiked to $50, $100, or even higher for complex DeFi transactions.

EIP-1559 and the Base Fee Model

Since the London upgrade in August 2021, Ethereum uses a two-part fee structure:

• Base fee — Set algorithmically by the protocol based on how full the previous block was. This portion is burned (destroyed), reducing ETH supply over time.
• Priority fee (tip) — An optional amount you add to incentivize validators to include your transaction sooner.

This model makes fees more predictable, but does not eliminate spikes during high-demand periods.

Gas Fees Across Different Blockchains

Not all blockchains charge the same fees. The cost varies dramatically depending on the network's architecture, consensus mechanism, and throughput.

Ethereum Mainnet (Layer 1)

Ethereum remains the most established smart contract platform, but its fees are also among the highest. A simple token transfer might cost $1-5 during calm periods, while complex DeFi interactions can easily exceed $20-50.

Layer 2 Networks

Layer 2 solutions like Arbitrum, Optimism, and Base process transactions off the main Ethereum chain, then post compressed proofs back to Layer 1. This architecture dramatically reduces costs:

• Arbitrum — Typically 5-20x cheaper than Ethereum mainnet.
• Optimism — Similar savings, with fees often under $0.50 for standard transactions.
• Base — Built by Coinbase on the OP Stack, often the cheapest among major L2s.

For a deeper understanding of how these networks work, see our guide on understanding Layer 2 networks.

Other Layer 1 Chains

• Solana — Fees are fractions of a cent, thanks to its high-throughput architecture.
• BNB Chain — Typically a few cents per transaction.
• Avalanche — Low fees with fast finality.
• Bitcoin — Fees vary based on transaction size (in bytes) and network demand. During quiet periods, a Bitcoin transfer might cost under $1; during congestion, it can reach $10-30 or more.

Fee Comparison Table

Note: These are approximate ranges and can vary significantly during periods of high demand.

How Gas Fees Affect Crypto Borrowing

When you borrow against your Bitcoin, gas fees are a real cost that eats into the value of your loan. Consider the transactions involved in a typical DeFi borrowing workflow:

1. Deposit collateral — Sending your wrapped Bitcoin to the lending protocol's smart contract.
2. Approve token spending — Granting the protocol permission to interact with your tokens.
3. Execute the borrow — Initiating the loan and receiving stablecoins.
4. Repay the loan — Returning the borrowed stablecoins plus interest.
5. Withdraw collateral — Reclaiming your Bitcoin after repayment.

Each of these steps is a separate transaction that incurs a gas fee. On Ethereum mainnet during a busy period, the total cost across all these transactions could easily reach $100-200. On a Layer 2 network, the same set of transactions might cost $2-5 total.

This is one reason why many DeFi borrowing protocols have deployed on Layer 2 networks — the economics simply do not work for smaller loans on Ethereum mainnet.

How Borrow by Sats Terminal Handles Gas Fees

Borrow by Sats Terminal is designed to help users navigate the complexity of gas fees across multiple protocols and chains:

Aggregation and Comparison

Borrow aggregates lending offers from protocols like Aave v3 and Morpho Blue, which operate across multiple networks. When you compare offers on Borrow, you are implicitly comparing the gas costs of different chains, because a lower interest rate on Ethereum mainnet might not actually save you money once you factor in higher transaction fees.

Protocol-Level Optimizations

The protocols that Borrow aggregates often batch operations or optimize gas usage at the smart contract level. For example, some protocols combine the approval and deposit steps into a single transaction, reducing the number of on-chain interactions you need.

Self-Custodial Efficiency

Because Borrow uses embedded Privy wallets, the transaction signing process is streamlined. You do not need to switch between apps, copy addresses, or manually set gas parameters. The platform handles gas estimation and presents the expected cost before you confirm.

For more details on how gas fees work in practice, check our FAQ on gas fees.

How to Reduce Your Gas Fees

While you cannot eliminate gas fees entirely, there are practical strategies to minimize what you pay:

1. Time Your Transactions

Gas fees on Ethereum tend to be lowest during weekends and early morning hours (UTC). Tools like Etherscan's Gas Tracker show real-time and historical fee data so you can pick the cheapest window.

2. Use Layer 2 Networks

If the protocol you want to use is available on a Layer 2 network, consider using it there instead of on Ethereum mainnet. The savings can be 10-50x for the same operation.

3. Set Appropriate Gas Limits

Most wallets let you adjust the gas price you are willing to pay. If your transaction is not time-sensitive, setting a lower gas price means you pay less — though the transaction may take longer to confirm.

4. Batch Transactions When Possible

Some protocols and tools allow you to combine multiple operations into a single transaction. One transaction at a higher gas cost is usually cheaper than three separate transactions at a lower gas cost each.

5. Monitor for Protocol Incentives

Some protocols periodically subsidize gas fees or offer gas rebates during promotional periods. Following protocol announcements can help you take advantage of these opportunities.

Understanding Gas Estimation

When you initiate a transaction, your wallet estimates the gas required. This estimate includes a buffer to ensure the transaction succeeds — if it runs out of gas mid-execution, it fails, and you still pay the fee for the work already done.

What Happens When a Transaction Fails?

A failed transaction still costs gas. The network already consumed computational resources to attempt execution, so those validators still need to be compensated. Common reasons for transaction failure include:

• Insufficient gas limit — The transaction needed more gas units than you authorized.
• Slippage exceeded — For swaps, the price moved beyond your tolerance between submission and execution.
• Smart contract reverts — The contract's logic rejected the transaction (e.g., trying to borrow more than your collateral allows).

This is another reason why using a platform like Borrow is advantageous — it simulates transactions before submission, reducing the likelihood of costly failures.

Gas Fees and the Future of DeFi

The long-term trajectory of gas fees points toward dramatic reductions. Several trends are converging:

• Layer 2 maturation — As L2 networks gain adoption and implement improvements like EIP-4844 (proto-danksharding), their fees continue to drop.
• Chain abstraction — Emerging protocols aim to let users interact across chains without thinking about which network they are on, automatically routing to the cheapest option.
• Account abstraction — Smart contract wallets can sponsor gas fees, batch transactions, and pay fees in any token instead of the native gas token.

These developments will make DeFi — including crypto borrowing — accessible to a much broader audience by lowering the cost barrier that currently prices out smaller users.

Key Takeaways

• Gas fees are the transaction costs paid to blockchain validators for processing your transactions.
• Fees fluctuate based on network demand — they spike during congestion and drop during quiet periods.
• Layer 2 networks offer 10-50x cheaper transactions compared to Ethereum mainnet.
• When borrowing against Bitcoin, gas fees across multiple transactions can add up — choosing the right network matters.
• Borrow by Sats Terminal aggregates offers across chains and protocols, helping you factor in total costs including gas.
• Timing your transactions, using Layer 2s, and avoiding peak congestion are practical ways to reduce fees.

Understanding gas fees is essential for anyone participating in DeFi. The more you know about how they work, the better you can optimize your borrowing strategy and keep more value in your pocket.