Blockchain Transaction Fees: Everything You Need To Know
Blockchain technology promises to revolutionize the world of online payments, in fact, many feel that it already has. Unlike traditional banking, it can deliver international payments almost instantly. Many also consider the blockchain alternative as a safer option, although it does come with its own set of risks.
One thing that even blockchain technology couldn’t escape, are transaction fees. Although blockchain fees tend to be much lower than those of traditional banks and other payment services. Fees are a part of all cryptocurrency transactions within any blockchain network. This guide will explain what they are, why they are needed, and what they are used for.
What Are Blockchain Fees, and How Do They Work?
Firstly, let's explain what blockchain fees are. Essentially, these are small fees that crypto users must pay when they perform an action on the blockchain. When we say “action,” this can include virtually anything, for example, processing payments.
In most cases, transaction fees must be paid in the blockchain’s native crypto asset. This incentivises users to hold the blockchain’s native token in their wallet. For example, if you are using the Ethereum blockchain, all gas fees are paid in ETH.
Another thing to note is that the size of your fee will depend on the action you are trying to perform on the blockchain. Smaller and less complex actions require a smaller fee. Meanwhile, more complex tasks naturally cost more.
How Do Transaction Confirmations Work?
Since digital currency doesn’t have a physical form, you cannot own it like physical money. Instead, the way ownership is assigned is via blockchain technology. Essentially, the blockchain records ownership, and it distributes information about it throughout the network.
If you decide to send money to someone or make a payment, ownership of that money is transferred. Your payment is essentially a request to transfer the ownership of that money. Processing is carried out by the algorithm, but since blockchain is decentralized, it requires users to power that algorithm. This is where crypto mining comes in.
What Does Mining Have To Do With Transactions?
Miners are users who provide their electricity and computing power to the blockchain. The algorithm uses this power to process transactions and packs them into blocks. Once the transactions are processed, a block is created and added to the rest of the blockchain. As such, blockchain represents a chronological history of all transactions made within its network.
Blockchains that can be mined reward their miners with the new cryptocurrency coins. This comes in the form of the blockchain’s native coin. Miners also receive the transaction fee that you have paid while submitting the payment. For example, Bitcoin’s blockchain awards miners withboth the transaction fee and the new coins.
As you may know, once a transaction is recorded on the blockchain, they cannot be changed. However, in order for them to become truly immutable, they must achieve finality. Different blockchains require a different amount of time to achieve it. Bitcoin for example, takes about an hour, whereas other blockchains can achieve this in a matter of seconds.
Why Are Blockchain Transaction Fees Necessary?
Cryptocurrency fees have several uses within the blockchain ecosystem. As mentioned, they are sometimes used to reward the miners in addition to mining rewards. Blockchain fees also prevent spam attacks occurring on the blockchain, as it would be too expensive to spam the blockchain and pay a fee every time. Therefore only legitimate use for the network is ensured.
On blockchains that use a Proof-of-Work mechanism, blockchain fees are paid by the users. These fees then go to the miners for transaction validation. These should not be mistaken for block rewards, which are issued by the network for “solving” blocks. Block rewards are separate from transaction fees, but both are granted to miners as rewards for their service.
Blockchains that use the Proof-of-Stake mechanism, also pay Transaction fees. Here, they are used to reward validators, who have replaced miners. On PoS blockchains, users stake their assets in order to become validators. This means they lock up their assets into smart contracts, and in return, they receive rewards.
What Is Blockspace?
Blockspace is the amount of transactions that can be processed in a certain period of time. Each blockchain has its own limit of TPS (transactions per second). Blockspace is there to create a dynamic between supply and demand. For example, if demand for blockspace is below the available blockspace, the transaction fees will remain low. However, if the demand exceeds the supply, blockchain fees tend to be higher. This is why Bitcoin, which can only achieve 5 TPS on average, tends to have high fees. Its blockspace is too low, while the demand is typically high.
What Are Transaction Fees for Bitcoin?
Bitcoin was the world’s first blockchain network, featuring the first and largest cryptocurrency, Bitcoin. As such, it has set the standard for other blockchains in using transaction fees. Its mysterious creator, Satoshi Nakamoto, used the fees to protect the network from spam. At the same time, he used them to incentivize miners.
Some crypto wallets allow users to set their transaction fees manually, as mentioned earlier. You can even make a transaction with zero fees. However, such transactions will most likely be ignored, and they will not be validated.
While some believe transaction fee size depends on the amount sent, this is not the case. They actually depend on the transaction size, which is measured in bytes. Bitcoin blocks have a limit of 1 MB, so miners have to combine transactions to fill up this space. With that said, the higher the average fee per byte is, the more you have to pay per transaction size. This makes it hard to use bitcoin in day-to-day situations, such as paying for your coffee. It could easily happen that the fee would be more expensive than the price of coffee itself.
What Are Transaction Fees for Ethereum?
Ethereum’s blockchain fees do not work in quite the same way as Bitcoin fees. Fees on Ethereum’s network depend on the amount of computing power required to process a transaction. This is called a gas fee, and it is paid in ETH, but its price tends to vary. Gas required for specific transactions may stay the same, although the gas price could go up or down.
While Ethereum used to be a PoW blockchain, it switched to PoS in late 2022. In doing so, it has become a lot more scalable. This is why gas fees have dropped significantly in the last year. The project can now scale to meet the demand, and transactions do not have to wait anymore.
Are Blockchain Transaction Fees Worth It?
Blockchain transaction fees definitely have their uses. They are not there simply to take away your money. Their use cases include incentives, securing the network, and distributing blockspace. Transaction fees are also used to reward stakers. All of this means that users have a reason to contribute to the blockchain and keep it running. Of course, the more scalable the blockchain is, the lower the fees that you need to pay. This is why scalability has always been one of the key goals of the crypto industry.
FAQs
How Much Is a Blockchain Fee?
Blockchain fees are not fixed, and the average blockchain fees differ from chain to chain. On the blockchain, everyone chooses what amount they wish to pay. However, on slower blockchains, people tend to pay more to have their transaction processed sooner.
Why Is the Blockchain Fee So High?
If a blockchain network is slow, transactions often have to wait for their turn to be processed. Users tend to make higher and higher fees so that their fees would stand out from the rest. That way, miners would process their transactions sooner, but this also increases the average fee.
Does Blockchain Have High Fees?
This depends on the blockchain in question. Fast and scalable blockchains have very low fees, often only a few cents or even a fraction of a cent. However, slow but popular blockchains like Bitcoin can have high fees to attract miners.
What Are the Cheapest Blockchain Fees?
There are plenty of blockchains that have cheap fees. One example is Stellar (XLM), where transactions cost as little as 0.00001 XLM. NANO is another good example, as its transactions charge no fee.
Is Blockchain Free To Use?
Anyone is free to join a public blockchain and become a part of the community. However, most blockchains will charge a small fee for any transactions. Some blockchains that are slow but popular can have higher fees.
How Much Is the Blockchain Withdrawal Fee?
You cannot withdraw the money from the blockchain, per se. You can only withdraw funds by taking them to an exchange or crypto ATM and converting them. As for the fee for doing so, each exchange or ATM company charges its own fee.
