The Economics of Gas Fees: How NEAR Protocol Optimizes Transactions

Anton Ioffe - March 23rd 2024 - 7 minutes read

In the rapidly evolving realm of blockchain technology, the economic model underpinning transaction fees continually shapes the usability and developer engagement of each platform. Amidst this dynamic landscape, the NEAR Protocol emerges with a groundbreaking approach to gas fees, aiming to redefine transaction optimization. This article delves into the intricacies of NEAR's innovative gas fee mechanism, its unique distribution model, and the broader implications these have within the competitive sphere of blockchain networks. Through a comparative analysis, we unpack the potential of NEAR Protocol to not only improve transaction efficiency and equity but also to fuel a paradigm shift in how blockchain platforms conceptualize and implement gas fee structures. Join us as we explore the economic intricacies of gas fees and the visionary solutions offered by the NEAR Protocol, a discussion that promises both enlightenment and intrigue for the future of blockchain economics.

Understanding Gas Fees in the Blockchain Ecosystem

In the intricate ecosystem of blockchain technology, gas fees emerge as a fundamental transactional mechanism, playing a pivotal role in ensuring the smooth functioning of network operations. These fees are essentially payments made by users to validators or miners, serving as compensation for the computational power expended in processing transactions and including them in a block. Conceptually, gas fees are integral to the economic model of blockchain, acting as a bridge between the resource-intensive nature of transaction validation and the need to maintain a decentralized and secure network. By requiring users to pay for the computational efforts their transactions necessitate, blockchain networks can sustainably allocate resources and prioritize transactions based on the willingness of users to pay these fees.

At its core, the concept of gas fees is tied to the network's capacity to handle transactions, often referred to as transactional throughput. Each operation on the blockchain, be it a simple token transfer or a complex interaction with a smart contract, demands a certain amount of computational resource. This demand translates into varying gas fees, with more complex operations incurring higher costs. The dynamic nature of these fees reflects supply and demand dynamics within the network; during times of high demand and network congestion, gas fees tend to increase, acting as a natural regulator that prioritizes transactions based on the paid fee. This mechanism not only ensures that validators are fairly compensated for their contributions to network security and functionality but also encourages efficient use of network resources.

Understanding gas fees is essential for both developers and end-users within the blockchain space as it directly impacts the feasibility and cost-effectiveness of deploying and interacting with blockchain applications. Developers, in particular, must navigate these costs to budget for and optimize their applications' operations, seeking a balance between user experience and economic viability. As such, the gas fee mechanism encapsulates the complex interplay between network health, economic incentives, and user experience, making it a critical component of the blockchain's foundational infrastructure. By delving into how different blockchain protocols manage gas fees, one can gain insights into their respective approaches to scalability, efficiency, and user accessibility.

NEAR Protocol's Innovative Gas Fee Mechanism

NEAR Protocol has creatively restructured the concept of gas fees by adopting and then adapting Ethereum's EIP-1559 model with some critical changes that make its economic mechanism unique and potentially more user and developer-friendly. Unlike Ethereum, where the entire base fee is burnt, creating a deflationary pressure that benefits token holders, NEAR only burns 70% of this fee. The remaining 30% is allocated to the smart contracts involved in the transactions, which effectively provides a direct funding mechanism for developers. This approach not only aims at creating a more stable and predictable fee market but also addresses one of the open-source software development world's perennial challenges: monetization. By directly rewarding smart contract creators, NEAR fosters a more sustainable and incentivized development ecosystem.

In the NEAR protocol, the absence of tips for block producers stands as a notable departure from the traditional incentivization models. This design choice prevents users from paying extra to expedite their transactions, a common practice in Ethereum that often leads to unpredictable and sometimes exorbitant transaction fees during peak traffic times. NEAR's model aims to democratize the process, focusing on an equitable and predictable transaction mediation mechanism. The maximum fee change per block is kept at a minimal 1%, with block times designed around a rapid 1-second interval. This significantly contrasts with Ethereum's model pre-EIP-1559 and aims to practically eliminate overbidding for block space, thus reducing fee market volatility and improving the overall user experience.

These adaptations prioritize predictability and fairness in transaction processing, attempting to reduce the barriers to entry for both users and developers within the blockchain space. By streamlining the fee structure and explicitly supporting smart contract development through the fees collected, NEAR opens up new avenues for funding innovations while also seeking to manage network congestion more effectively through its novel base fee and block producer incentivization strategies. Through this, NEAR Protocol aspires to cultivate a more accessible, developer-friendly environment that could accelerate adoption and utility across its network.

The Implications of NEAR's Gas Fee Distribution Model

NEAR Protocol's decision to burn 70% of the base fee while allocating the remaining 30% to smart contracts introduces a novel approach to transaction fee distribution that could potentially foster a more developer-friendly ecosystem. By rewarding smart contracts directly, developers are incentivized to create and maintain high-quality, efficient code as their work could now have a direct revenue stream beyond initial deployment. This model acknowledges the challenges in open-source software funding, providing a sustainable method for developers to benefit financially from their contributions to the network. Bolded Text This innovative mechanism appears to solve the age-old problem of monetizing open-source endeavors, encouraging ongoing innovation and development within the NEAR ecosystem.

However, this model is not without its potential downsides. Allocating a portion of transaction fees to smart contracts might encourage developers to write deliberately expensive code to maximize their returns, leading to increased transaction costs for users. This could inadvertently create a misalignment of incentives, where developers prioritize revenue over efficiency and user experience. Additionally, this model might foster the formation of interest groups with a vested interest in maintaining high gas prices, potentially opposing scalability improvements that would reduce transaction costs. Bolded Text These unintended consequences could undermine the network's long-term viability, harming the user experience and impeding widespread adoption.

Furthermore, by altering the traditional gas fee model, NEAR risks breaking the delicate balance of incentives that maintain network security and efficiency. If smart contracts return a portion of their earnings to users to remain competitive, the ecosystem could enter a feedback loop that ultimately lowers the effective cost of transactions but at the expense of network congestion and increased gas usage. Bolded Text This deviation from the intended economic mechanism, designed to regulate network load and transaction prioritization, may lead to unforeseen issues in maintaining an optimal level of network utilization, calling into question the sustainability of this approach in the face of burgeoning demand and complex on-chain activity.

Evaluating NEAR Protocol's Approach in the Broader Blockchain Landscape

NEAR Protocol's transaction optimization strategies introduce a compelling yet contrasting approach to transaction fees when viewed against the broader blockchain landscape. By electing to burn a portion of the base fee while simultaneously rewarding smart contract developers, NEAR ventures into territory that other leading protocols, like Ethereum, have yet to fully explore. This strategy not only addresses the need for a sustainable and developer-friendly economic model but also raises questions about its long-term efficacy in balancing efficiency, fairness, and developer incentives. As blockchain technology continues to evolve, the effectiveness of such mechanisms in fostering an environment conducive to both user engagement and developer contribution remains under scrutiny.

Comparatively, the absence of tips for block producers in the NEAR ecosystem delineates a pivotal difference from other protocols where tipping is employed as a method to prioritize transaction processing. This fundamental variance suggests a unique attempt by NEAR to streamline transaction processing without succumbing to the potential volatility and unpredictability associated with bidding wars for transaction space. However, it's essential to ponder whether this method sufficiently incentivizes block producers for the critical role they play or if it inadvertently leads to a bottleneck that could affect network throughput and scalability.

As the blockchain domain witnesses the emergent diversity in transaction fee models, it beckons a future where adaptability and innovation could pave the way for more equitable and efficient networks. NEAR Protocol, with its nuanced take on gas fees, might set a precedent for others, but it also opens a dialogue on whether its model will drive the anticipated equilibrium between user experience, developer incentive, and network performance. Only time will reveal if NEAR's approach can catalyze a shift towards more dynamic and user-centric fee models across the blockchain ecosystems or if adjustments are needed to meet the complex demands of an ever-growing digital economy.


The article explores the innovative gas fee mechanism introduced by the NEAR Protocol in the realm of blockchain technology. By adopting and adapting Ethereum's EIP-1559 model, NEAR aims to redefine transaction optimization and economic incentives within the network. Through its unique approach of burning a portion of the base fee while allocating the rest to smart contracts, NEAR incentivizes developers and seeks to create a more sustainable and developer-friendly ecosystem. However, potential downsides and the need to maintain a delicate balance of incentives are also highlighted. Overall, NEAR Protocol's gas fee distribution model presents an intriguing approach that could shape the future of transaction fees and developer engagement in the blockchain landscape.