https://ethereum.org/en/developers/docs/gas/
Gas is essential to the Ethereum network. It is the fuel that allows it to operate, in the same way that a car needs gasoline to run.
To better understand this page, we recommend you first read up on transactions and the EVM.
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.
Diagram adapted from Ethereum EVM illustrated
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.
The way transaction fees on the Ethereum network were calculated changed with the London Upgrade of August 2021. Here is a recap of how things used to work:
Let's say Alice had to pay Bob 1 ETH. In the transaction, the gas limit is 21,000 units, and the gas price is 200 gwei.
Total fee would have been: Gas units (limit) * Gas price per unit i.e 21,000 * 200 = 4,200,000 gwei or 0.0042 ETH
When Alice sent the money, 1.0042 ETH would be deducted from Alice's account. Bob would be credited 1.0000 ETH. Miner would receive 0.0042 ETH.
This video offers a concise overview of gas and why it exists:
The London Upgrade was implemented on August 5th, 2021, to make transacting on Ethereum more predictable for users by overhauling Ethereum's transaction-fee-mechanism. The high-level benefits introduced by this change include better transaction fee estimation, generally quicker transaction inclusion, and offsetting the ETH issuance by burning a percentage of transaction fees.
Starting with the London network upgrade, every block has a base fee, the minimum price per unit of gas for inclusion in this block, calculated by the network based on demand for block space. As the base fee of the transaction fee is burnt, users are also expected to set a tip (priority fee) in their transactions. The tip compensates miners for executing and propagating user transactions in blocks and is expected to be set automatically by most wallets.
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.