Cryptocurrency is largely glorified due to its innovation, as it allows users to make money transfers on a peer-to-peer and decentralized basis. But if the cryptocurrency is decentralized, then who charges a fee for each transaction? It’s all about the people who help add your transactions to the blockchain. It is they who get the funds paid as a fee. We will find out further how it all works and how you can save on fees.
What Is Transaction Fee?
The blockchain network is a chain of blocks consisting of confirmed transactions. And the blockchain network fee is a fee the sender pays for making a payment in cryptocurrency. The fee is mandatory and performs two crucial functions:
- It supports miners/validators who operate the payment process and confirm transactions in the blockchain. When processing payments, miners first choose transactions with the best ratio of volume and fee — this way, they increase their own profit.
- It is essential to ensure the network’s security and protect it from spam attacks. In addition, it works as a tool against hackers trying to attack the network by initiating many simultaneous operations. And since it is too expensive to run several hundred thousand transfers with a fee, this scares off intruders.
In addition, the fee regulates the order of operations with cryptocurrencies — the larger the fee amount, the faster the transfer will be processed and confirmed.
How Does Crypto Transaction Work?
The transfer of digital assets is carried out online, and when it is sent, the correctness of the transaction is checked. If everything is in order, the transaction is sent to a “waiting room” (mempool). The miner includes it in the preliminary block — it can contain about 2,500 transactions since the block size is limited to 1 MB. With high traffic and activity of the blockchain network participants, an impressive queue is formed, automatically increasing the payment processing time. Miners evaluate transactions in terms of priority — payments with a high fee are processed first (usually, it indicates the importance and urgency of the transfer). Then they confirm the transaction and add it to the mined block.
The speed of the transaction depends solely on the miner or validator, whose algorithm is based on the fact that the priority parameter for confirming transactions is the amount of payment (fee) offered by the sender for making the payment.
How to Save on Fees?
- Wait for the network congestion to decrease
Since the transfer fee depends on the situation in the blockchain at a particular moment, the fee may vary at different times of the day. Therefore, you can determine the optimal time to implement a transaction with a reasonable commission if you track such changes.
Verified, but not yet confirmed, and not included in the block transactions are in the so-called mempool, where they are waiting for miners. Obviously, the greater the number of such transactions, the longer you will have to wait: the usual situation with a queue.
However, unlike the standard queue, first of all, served are not those who came earlier, but those who paid more. Therefore, theoretically, a transaction can be in it indefinitely, as long as transactions have a larger fee.
Up to 2-3 thousand transactions are placed in one Bitcoin block. If the current mempool volume (which you can view in your wallet or on certain websites) does not exceed this indicator, your transaction will occur instantly. If there are many, then either wait or increase the fee. You can regulate the commission for blockchain transactions entirely independently. A crypto wallet will usually offer you the minimum and maximum fees.
- Reduce the number of inputs and outputs
Modern crypto wallets allow you to do the same thing as banks: instantly and without fees, transfer funds between your accounts. If funds have come to you from hundreds of different accounts, you can send them all to your only wallet and then send everything back in one coin. Then you will have one input instead of hundreds — which means a significantly smaller transaction volume.
In addition, during periods of a bearish trend, do not rush to withdraw your crypto assets to fiat. Transactions with fiat currency are subject to a much higher fee. Instead, you can use stablecoins since buying crypto saves significantly on transaction fees.
It is also good advice to look at cryptocurrencies with lower network fees. For example, some cryptos transactions are not subject to any fees. Striking examples of fee-less cryptocurrencies are XNO, EOS, MIOTA, and TRON.
Conclusion
As you can see, the reduction of transaction fees is a reality. Cryptocurrency can be the most cost-effective means of payment if you know how to use it properly.