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Understanding Cryptocurrency Transaction Costs

As cryptocurrencies continue to garner an increasing amount of traction within the global finance ecosystem, more and more people are beginning to come across terms such as ‘gas fees’, ‘crypto transaction costs’, etc. These terms are fairly interchangeable in nature and can be thought of as the fee that is levied on an individual whenever … Continued

As cryptocurrencies continue to garner an increasing amount of traction within the global finance ecosystem, more and more people are beginning to come across terms such as ‘gas fees’, ‘crypto transaction costs’, etc. These terms are fairly interchangeable in nature and can be thought of as the fee that is levied on an individual whenever he/she makes a cryptocurrency transfer from one wallet to another.

This is because validating transactions on a blockchain requires miners and validators to work continuously so as to help keep the network running smoothly. For their efforts, they are compensated using the network fee that is levied per transaction (txn). Furthermore, it bears mentioning that txn fee rates are subject to change, depending primarily on how congested the network is at any given time. 

Since prices are flexible, users can choose to pay more fees so as to get their transactions confirmed quickly. On the other hand, non-urgent payments can be processed at significantly lower rates. The logic behind this setup is that by choosing to pay a higher fee, miners are incentivized to put an individual’s transaction at the top of their processing queue.

Transaction fees — A deep dive

Though the initial idea behind txn fees was meant to serve as an anti-spam tool to protect the Bitcoin ecosystem, the feature has since become one of the most vital attributes of blockchain tech as a whole. To elaborate on this point, transaction fees were initially meant to simply deter bad actors from clogging the Bitcoin network.

However, around a decade back, Gavin Andresen, a member of Bitcoin’s core development team, discovered that there existed a “source code rule” that entailed users paying a minimum fee of 0.01 BTC per transaction. This rule was swiftly amended even though a decade back Bitcoin’s value was nowhere near the levels the flagship crypto has scaled up to in recent years.

With the historical side backdrop out of the way, it bears mentioning that tx fee basically serves as the core incentive for miners to prioritize transactions with higher fees and add them into the next block. However, that may be simplifying matters a bit too much actually, since while that may be the case with Bitcoin and Ethereum (to a certain extent), the cannot be said for Ripple since the platform does not have any miners generating new XRP. This is also the reason why txn costs are virtually negligible on the network.

So what are the main aspects that influence fee sizes?

Simply put, the two core aspects that affect the size of a transaction are “demand” and “block space”. To expand on this, we can see that certain networks are able to contain a highly fixed amount of data in each of their blocks as a result of which miners are severely limited as to the total number of transactions they can add to that particular block.

For example, there are certain time periods when there are a number of crypto users facilitating voluminous transactions all at the same time, as a result of which block space demand shoots up considerably — which in turn leads to prolonged confirmation times. 

In fact, sometimes things can become so bad that fee rates can go up to insanely high levels, as was seen earlier in 2021 when the cost of facilitating a single transaction on the Ethereum network scaled beyond the $200 threshold, albeit briefly. 

Lastly, the fact that larger transactions need more block space makes it quite obvious why they take longer to validate in comparison to their smaller counterparts

Key takeaways

Transaction fees are a vital component of the crypto world, especially in regard to how the tokenomics of most blockchain networks are governed. As mentioned earlier, these fees are part of the rewards that are issued to node operators/validators for their governance-related efforts. Not only that, the presence of fees also helps keep malicious actors at bay as well as minimize spammy network behavior.

That said, it is important to acknowledge that as more and more blockchain platforms continue to attract an increasing amount of traffic, transaction fees too have started to skyrocket. This is because the decentralized nature of most blockchains makes it extremely difficult for platforms to scale efficiently. And while there are projects like Ripple, Polkadot, Cardano, etc that offer high transaction throughput rates, more often than not these advantages come at the cost of either security or decentralization of the network.

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