Blockchain transaction fees
Fees apply to all cryptocurrency transactions and on all networks. In this article we will tell you what commissions are in the blockchain and what they are for.
Introduction
The field of online payments has changed significantly with the advent of blockchain.
International transactions using cryptocurrencies are completed almost instantly, which makes them very different from bank transfers. There is also an opinion that cryptocurrencies are a more reliable method of transferring funds, although it is not without certain risks.
However, even with the development of blockchain technology, one constant remains - the charging of transaction fees. In blockchain they are often noticeably lower than in banks and payment systems.
International transactions using cryptocurrencies are completed almost instantly, which makes them very different from bank transfers. There is also an opinion that cryptocurrencies are a more reliable method of transferring funds, although it is not without certain risks.
However, even with the development of blockchain technology, one constant remains - the charging of transaction fees. In blockchain they are often noticeably lower than in banks and payment systems.
What are commissions and how they work
Blockchain fees are small payments that are charged for various transactions. A striking example of such an operation is payment processing.
Most often, the transaction fee is charged in the native token of the blockchain network, which makes it beneficial for users to store this cryptocurrency in their wallet. For example, using ETH, all fees for using gas in the Ethereum blockchain are paid.
The amount of the fee also depends on the type of transaction you are trying to complete. Simple and small transactions usually require a small commission, while complex transactions can cost significantly more.
The amount of the fee also depends on the type of transaction you are trying to complete. Simple and small transactions usually require a small commission, while complex transactions can cost significantly more.
Transaction confirmation
Cryptocurrency has no material form, which eliminates the possibility of storing it in a physical wallet, as is common with traditional money. Ownership of tokens is verified and recorded using blockchain technology, which stores and distributes this information to all network participants.
If you decide to send money or make a payment, then ownership is transferred to someone else. Thus, payment constitutes an act of transfer of possession. This process is handled using an algorithm, however, the blockchain is decentralized, so it is the responsibility of the users to ensure the algorithm works. This process is called mining when it comes to the PoW algorithm.
If you decide to send money or make a payment, then ownership is transferred to someone else. Thus, payment constitutes an act of transfer of possession. This process is handled using an algorithm, however, the blockchain is decentralized, so it is the responsibility of the users to ensure the algorithm works. This process is called mining when it comes to the PoW algorithm.
The connection between mining and transactions or why commissions are needed
Users who participate in the mining process are active participants in the network, providing the blockchain with their energy resources and computing power. These resources are used by the PoW algorithm to process transactions and then write them into blocks.
Once transactions are successfully processed, a new block is created, which is then attached to the overall blockchain. As a result, the blockchain represents a chronologically ordered history of all events and transactions occurring on a given network.
Blockchain networks that use a mining mechanism reward miners with cryptocurrency, which is most often native to the given blockchain. In addition, miners are rewarded in the form of transaction processing fees, which users pay when making payments. For example, in Bitcoin, when mining, you can receive both types of rewards at once.
In systems based on the Proof-of-Stake algorithm, there is no concept of mining. But here users also pay transaction fees. In this case, the funds are used to reward validators, not miners. Users stake their assets (like a bank deposit) and become validators, receiving rewards in exchange for locking their assets into smart contracts.
Once transactions are successfully processed, a new block is created, which is then attached to the overall blockchain. As a result, the blockchain represents a chronologically ordered history of all events and transactions occurring on a given network.
Blockchain networks that use a mining mechanism reward miners with cryptocurrency, which is most often native to the given blockchain. In addition, miners are rewarded in the form of transaction processing fees, which users pay when making payments. For example, in Bitcoin, when mining, you can receive both types of rewards at once.
In systems based on the Proof-of-Stake algorithm, there is no concept of mining. But here users also pay transaction fees. In this case, the funds are used to reward validators, not miners. Users stake their assets (like a bank deposit) and become validators, receiving rewards in exchange for locking their assets into smart contracts.
Block volume and TPS
TPS, or transactions per second, determines how many operations can be completed in a given period of time on a blockchain.
Each blockchain network has its own TPS limit, which determines the maximum number of transactions that can be processed per second.
Block size plays an important role in maintaining the balance between supply and demand. For example, if demand for a blockchain is below its maximum volume, transaction fees typically remain low. However, when demand exceeds the capacity available to it, fees typically begin to increase. This explains why in Bitcoin, where the average TPS is only 5 transactions, fees are often high.
Block size plays an important role in maintaining the balance between supply and demand. For example, if demand for a blockchain is below its maximum volume, transaction fees typically remain low. However, when demand exceeds the capacity available to it, fees typically begin to increase. This explains why in Bitcoin, where the average TPS is only 5 transactions, fees are often high.
Bitcoin fees
Bitcoin, the first and largest cryptocurrency and network in the world. The mysterious creator of Bitcoin, Satoshi Nakamoto, introduced commissions to protect the network from spam and to encourage miners. Thus, he set standards for other blockchain projects.
Bitcoin fees value (blue value) over the last year. Source: blockchain.com
Some DeFi tools allow you to set transaction fees manually, including zero fees. However, such transactions will most likely not be processed.
Some people mistakenly believe that the fee depends on the amount of the transfer, but in fact it depends on the size of the transaction, measured in bytes. Since Bitcoin blocks are limited to 1 MB, miners are forced to combine transactions to fill this space. The higher the average fee per byte, the more you will need to pay for the transaction size. This makes it difficult to use Bitcoin in everyday situations, for example, if the commission is larger than a glass of coffee, then you are unlikely to increase the cash register of the coffee shop.
Some people mistakenly believe that the fee depends on the amount of the transfer, but in fact it depends on the size of the transaction, measured in bytes. Since Bitcoin blocks are limited to 1 MB, miners are forced to combine transactions to fill this space. The higher the average fee per byte, the more you will need to pay for the transaction size. This makes it difficult to use Bitcoin in everyday situations, for example, if the commission is larger than a glass of coffee, then you are unlikely to increase the cash register of the coffee shop.
Ethereum fees
Ethereum has a different fee system than Bitcoin. Here, the fees depend on the amount of computing resources required to process the transaction and are called “gas fees”, which are paid in ETH. However, the price of gas is usually volatile: although the volume of gas required may remain constant, its price may fluctuate.
Previously, Ethereum operated on the basis of the Proof-of-Work algorithm, but at the end of 2022 it switched to the Proof-of-Stake mechanism, which significantly increased its scalability. Thanks to this, the cost of gas has dropped significantly over the past year. The project is now able to scale to meet growing demand, which has reduced the waiting time for transactions to be confirmed.
Previously, Ethereum operated on the basis of the Proof-of-Work algorithm, but at the end of 2022 it switched to the Proof-of-Stake mechanism, which significantly increased its scalability. Thanks to this, the cost of gas has dropped significantly over the past year. The project is now able to scale to meet growing demand, which has reduced the waiting time for transactions to be confirmed.
Ethereum fees value (blue value) over the last year. Source: blockchain.com
Are the fees reasonable?
Transaction fees play an important role in blockchain and are not just an extra expense. These payments serve as an incentive for miners and validators to ensure the security and health of the network. Additionally, transaction fees are used to reward staking participants, which motivates users to contribute to the blockchain and keep it running. Obviously, the more scalable the blockchain, the lower the fees. This is why scalability has always been one of the key aspects in the crypto world.
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