What Are Blockchain Fees? | Notum
Nov 11, 20214 min read
Once you’ve already tried to send, deposit, or withdraw crypto, you surely faced that there was a fee charged for a transaction. But do you know exactly why it is so? Where does it go? Who will receive your money? Here’s some helpful information on the topic.
Two types of transaction fees exist:
Cryptocurrency exchanges (DEXs) charge money for making transactions on their platforms. But you should also take into account that the majority of them don’t do that for the sake of attracting people to use their platforms.
Network fees (also called Gas)
These fees are set by and paid to a miner or a validator of the network. A low blockchain fee means that your transaction's priority in the blockchain network is low, as well. But there is another layer to reveal here, as network fees in their turn could be: Proof-of-Work or Proof-of-Stake.
- Proof-of-Work system (PoW) — is an algorithm that is used to confirm transactions and produce new blocks to the chain. Miners compete against each other to complete transactions on the network and get rewarded.
- Proof-of-Stake (PoS) — is an algorithm that was made as an alternative to PoW, and miners aren’t involved in the process. Instead, participants in the network provide the validity of network transactions and create blocks in a PoS network. They “place a stake” or “stake.” Staking is when you allow your coins to be used for verifying transactions. Your coins are locked up while you stake them, and the more coins you stake, the more likely you’ll be chosen as the one who adds a new block. Among the pros of PoS is safety, lower risk of centralization, and energy efficiency.
Who Gets Blockchain Fees?
To begin with, let’s have a closer look at who gets a transaction fee at the end. The fees you pay go straight to miners who “catch” a transaction held in memory pools on the network, and they decide which transactions to confirm first. That is essential to understand that validating new blocks takes a lot of computing power and energy, so no wonder rising transaction fees motivates miners to continue validating new blocks. As providing your transaction is not the easiest thing to do, a miner’s work should be somehow compensated, that’s why you have to pay. It is also considered that the higher fee you pay, the faster your transaction will be, and that’s because of fees associated with transactions in the block. Each block contains a limited amount of space, so a miner will obviously try to add transactions with higher fees to the blockchain first.
Paying fees is a way to reward a miner and counter spam attacks, and thanks to the fee, the network could remain decentralized, and the whole system can work.
What Kinds of Rewards Do Miners Receive?
To put it in a nutshell, there are two types of mining rewards: a block reward which is the number of altcoins you get if you mine a block of the currency effectively, and a transaction fee that you give to the network. The main point here is that a block reward takes too long to get, as it is halved every four years, that is why the sufficient income for a miner is a fee you pay.
How Is Transaction Fee Calculated?
Different blockchains calculate their fees differently. Some fees are static, whereas the others are dynamic. Some factors influence transaction fees:
- The transaction size
- The block space demand
That’s essential to understand that some blockchains have limited block sizes, so miners can include a definite amount of transactions. Imagine the situation when many users want to send funds with the blockchain so that the block space increases hugely, and more transactions are waiting for confirmation. When it happens, the transaction fee might grow, too. It is worth mentioning that the bigger transaction takes longer to be processed.
Why Is Blockchain Fee Could Be High?
Here are listed some possible reasons for a high transaction fee:
- the blockchain network is extremely busy or loaded at the moment;
- sudden blockchain rate fluctuations and essential world events;
- your account has a big amount of small deposits, so the size of your transaction will be bigger because it will consist of many inputs;
- the larger transaction you're willing to make, the higher fee you have to pay;
- if you move your crypto from an exchange and not a wallet, you won't be able to set a fee, and please, mind that exchanges usually have high transaction fees.
How to Save On High Transaction Fees?
Nevertheless, there are some tips which could help you to save on your transactions. Here they are:
- Try not to exchange small amounts often, it might help to use larger amounts instead
- Have a look at decentralized exchanges, as they don’t have a “middle man,” which allows peer-to-peer crypto swaps.
- If you are up to centralized exchanges, you can always compare and find the lowest prices among them, as well.
- Monitoring a blockchain fee in the network could be quite useful. If you are not in a hurry, and you have time to wait, it is much better to wait for the best fee price. In this case, main cryptocurrency exchanges, block explorers, and such websites as BitcoinFees would be really helpful.
- There are some advantageous days for making transactions. The best option is weekends as the majority of businesses are closed, and the blockchain isn’t that crowded.
- You can hold those coins that offer a discount. As an example, in 2021 Binance extended the option for their users to receive a 25% discount on trading fees when paying by BNB.
Now you have a clear idea why transaction fees matter — it’s pretty evident that making transactions on the blockchain still demands effort — and they are used to compensate the miners and validators who help keep things going. Don’t forget that fees are quite flexible, and there are always different ways to reduce the pricing once you don’t want to pay too much.