Blockchain enthusiasts claim that it offers fast cross-border transactions and lower fees.
There are relatively few fees when compared to traditional international transfers.
Transactions and transfers would have been entirely free of charge. Still, they were set up to protect the network from attacks and provide incentives for operators to operate the network.
These transaction fees can be small or large, depending on network activity.
Market forces can also affect the fees users pay.
While high fees can hinder broader blockchain adoption, meager fees may raise security concerns.
Blockchain transaction fees
Blockchain transaction fees have been and remain an essential part of most blockchain systems since their inception.
You most likely have come across it when sending, depositing, or withdrawing cryptocurrencies.
The majority of cryptocurrencies use transaction fees for two essential reasons:
First of all, fees reduce the number of attacks and random transactions on the network, making it costly to be vulnerable.
Second, transaction fees act as an incentive for users who help verify transactions.
Think of it as a reward for helping the network do its job.
For most blockchain networks, transaction fees are pretty cheap, but they can be expensive depending on the transaction traffic within the network.
As a user, the amount you choose to pay the fee determines the priority of your transaction is being added to the next block in the blockchain.
Meaning the higher the fee paid, the faster the confirmation process.
Bitcoin transaction fees
As the world’s first blockchain network, Bitcoin has set the transaction fee standard used by many cryptocurrencies today.
Satoshi Nakamoto realized that transaction fee could protect the network from attacks and incentivize good behavior.
Bitcoin miners receive transaction fees as part of the process of confirming transactions in the new block.
The pool of unconfirmed transactions is called a memory pool or “mempool.”
Of course, miners will prioritize transactions with higher fees, which users have agreed to pay when sending their bitcoins to another bitcoin wallet.
So malicious actors wanting to slow down the network face the obstacle of paying fees associated with each transaction.
If they set the fees too low, miners will likely discard their transactions.
If they put it at an appropriate level, they bear a high economic cost.
Therefore, transaction fees also act as a simple but effective filter for attacks of this type.
How are bitcoin transaction fees calculated?
On the Bitcoin network, some cryptocurrency wallets allow users to set their transaction fees manually.
It is also possible to send bitcoins without a fee, but such transactions are more likely to be ignored by miners, which means that the transaction will not be validated.
Contrary to what some believe, Bitcoin fees do not depend on the amount sent but on the size of the transaction (in bytes).
For example, imagine your transaction size is 400 bytes, and the average transaction fee is now 80 satoshis per byte.
In this case, you would have to pay around 32,000 satoshis (or 0.0032 Bitcoin) to have a good chance of adding your transaction to the next block.
When network traffic is high and there is a high demand for bitcoins to be sent, the transaction fees required for express confirmation go up as other bitcoin users try to do the same.
This may happen during periods of extreme market volatility.
As such, high fees can make it difficult to use Bitcoin in everyday life.
Buying a $3 cup of coffee may not be practical if the fees are much higher.
Only a certain number of transactions can be included within the block, which has a limit of 1MB (i.e. block size).
Miners are adding these blocks to the blockchain as quickly as possible, but there is still a limit to how fast these transactions can go.
The scalability of cryptocurrency networks is a critical issue here in determining network fees.
Bitcoin blockchain developers are making continuous efforts to address the problem.
Previous Bitcoin updates have helped improve scalabilities, such as implementing the ‘SegWit’ mechanism and the ‘Lightning Network’.
Ethereum transaction fees
Ethereum transaction fees work differently compared to Bitcoin.
The fee considers the amount of computing power needed to process a transaction, known as gas.
The gas also has a variable price measured in Ethereum (ETH), the original digital currency of the Ethereum network.
While the gas needed for a particular transaction can remain the same, gas prices can go up or down.
This gas price is directly related to network traffic.
If you pay a higher price for gas, miners are more likely to prioritize your transaction.
How are Ethereum transaction fees calculated?
The total gas fee is simply a price that covers the cost, plus an incentive for miners to process your transaction.
Consider the gas limit, which sets the maximum price paid for that transaction or assignment.
In other words, the cost of gas is the amount of work required, and the price of gas is the price paid for “hourly” work.
The relationship between these two determines the total gas to be pushed.
Binance transaction fees
Binance has a blockchain network that allows users to transact and trade BNB and other BEP-2 currencies.
The Binance Blockchain adopts a consensus mechanism called Delegated Proof of Stakes.
So instead of miners, auditors are hired.
The Binance Blockchain powers the decentralized trading platform Binance, where users can trade cryptocurrencies directly from their wallets.
Transaction fees on the Binance blockchain and DEX are paid with the digital currency BNB.
As a reminder, Binance owns two of the old or average blockchains and the new or innovative blockchain, the latter of which was presented to be a competitor to Ethereum, as it supports the work of smart contracts and decentralized applications.
How are Binance Blockchain transaction fees calculated?
Depending on the transaction you wish to take, the BNB fee structure applies.
There is a difference between transaction fees, such as sending BNB, and trading fees on the Binance decentralized trading platform.
The total price of the transaction can also go up or down depending on the cost of BNB in the market.
When making non-trade-related transactions, such as withdrawing or depositing BNB to a digital wallet, the fees are paid in BNB only.
The activity fee related to trading on Binance DEX is paid in the cryptocurrency traded, but there is a discount on the fee when paying with the cryptocurrency BNB.
Blockchain transaction fees are an integral part of the crypto economy.
The fees are part of the incentives given to users who indirectly maintain the network’s operation and security.
However, the volume of traffic that some networks receive leads to fees that may seem excessive and become an obstacle for users.
There is still a lot of research and development aimed at making improvements that we hope will bring more inclusion to cryptocurrencies in the developing world.