For blockchain networks, transaction fees serve two primary purposes. They reward miners or validators who help confirm transactions and protect the network from spam attacks. Transaction fees can be either small or large, depending on network activity. Market forces can also affect the fees you pay. While high fees can hinder wider blockchain adoption, very low fees can potentially raise security concerns.
Why transaction fees?
Transaction fees are and have been an essential part of most blockchain systems since their inception. You have most likely encountered them when sending, depositing or withdrawing crypto. Most cryptocurrencies benefit from transaction fees for two important reasons. First of all, the fees reduce the amount of spam on the network. It also makes large-scale spam attacks costly and expensive to implement. Second, transaction fees provide an incentive for users to help verify and approve transactions. Think of it as a reward for helping the network. For most blockchains, transaction fees are relatively inexpensive, but can be quite high depending on network traffic. As a user, the amount you choose to pay in fees determines the priority of transactions in being added to the next blockchain. The higher the fee paid, the faster the confirmation process.
Bitcoin transaction fees
As the world’s first blockchain network, Bitcoin set the standard for transaction fees now used by many cryptocurrencies. Satoshi Nakamoto realized that transaction fees could protect the network from large-scale spam attacks and encourage good behavior.
Bitcoin miners receive transaction fees as part of the process of confirming transactions to a new block. The pool of unconfirmed transactions is called a memory pool (or mempool). Naturally, miners will prioritize transactions with higher fees, which users have agreed to pay by sending their BTC to another bitcoin wallet.
Malicious actors who want to slow down the network must therefore pay the fee associated with each transaction. If they set the fee too low, miners are likely to ignore their transactions. If they set it at the right level, they will incur high economic costs. Thus, transaction fees also act as a simple but effective spam filter.
How are BTC transaction fees calculated?
On the Bitcoin network, some crypto wallets allow users to manually set transaction fees. It is also possible to send BTC with zero fees, but miners are likely to ignore such transactions, meaning they will not be verified.
Contrary to some opinions, Bitcoin transfer fees do not depend on the amount sent, but on the size of the transaction (in bytes). For example, imagine that the transaction size is 400 bytes, and the average transaction fee is now 80 satoshi per byte. In that case, you would have to pay about 32,000 satoshi (or 0.0032 BTC) to have a good chance of adding the transaction to the next block.
When network traffic is heavy and there is a high demand for sending BTC, the transaction fee needed for quick confirmation increases as other bitcoin users try to do the same. This can happen during periods of high market volatility. As a result, high fees can make it difficult to use BTC in everyday situations. Buying a cup of coffee for $3 may not be practical if the fees are much higher. Only a certain number of transactions can be included in a block, which has a limit of 1 MB (i.e. block size). Miners add these blocks to the blockchain as quickly as possible, but there is still a limit to their speed.
Scalability of the cryptocurrency network is a key issue when deciding on network fees. Blockchain developers are constantly making efforts to address this issue. Previous network updates have helped improve scalability, such as the implementation of SegWit and Lightning Network.
Ethereum transaction fees
Ethereum’s transaction fees work differently than Bitcoin’s. The fee takes into account the amount of computing power needed to process a transaction, known as gas. Gas also has a variable price measured in ether (ETH), the network’s native token. While the gas needed to process a particular transaction may remain the same, gas prices can rise or fall. The price of gas is directly related to network traffic. If you pay a higher gas price, miners are likely to prioritize your transaction.
How are Ethereum transaction fees calculated?
The total gas fee is simply the price that covers the cost, plus the incentive to process the transaction. However, take into account the gas limit, which determines what the maximum price paid for that transaction or share can be.
In other words, the cost of gas is the amount of work required, and the price of gas is the price paid for “each hour” of work. The relationship between the two and the gas limit determines the total fee for an Ethereum transaction or smart contract operation.
For example, if a given transaction costs 21,000 gas and the gas price is 71 Gwei, the transaction fee will be 1,491,000 Gwei or 0.001491 ETH.
As Ethereum moves toward the Proof of Stake model (see Casper), gas fees are expected to drop. The amount of gas needed to validate transactions will be less, as the network will only need a fraction of the computing power to validate transactions. However, network traffic may still affect transaction fees as validators prioritize higher-value transactions.
Binance Chain transaction fees
Binance Chain is a blockchain network that allows users to transact with BNB and other BEP-2 tokens. They can also create and distribute their own tokens. Binance Chain uses a consensus mechanism called Delegated Proof of Stake. So instead of miners, we have validators.
Binance Chain also supports Binance DEX (a decentralized exchange), where users can trade cryptocurrencies directly from their wallets. Binance Chain and DEX transaction fees are regulated at BNB.
Note that Binance Chain and Binance Smart Chain are two different blockchains. For more information, see Introduction to Binance Smart Chain (BSC).
How are transaction fees calculated in Binance Chain?
Depending on the action you want to take, there is a fee structure settled in BNB. There is a distinction between transaction fees, such as sending BNB, and transaction fees on Binance DEX. In addition, the total transaction price may increase or decrease depending on the market price of BNB.
If you make a non-trade-related transaction, such as withdrawing or depositing BNB into your portfolio, fees are only charged at BNB. Fees for trade-related activities on Binance DEX are paid with the traded token, but there is a discount for payment at BNB. This program helps incentivize increased BNB adoption and build the user base.
Binance Smart Chain transaction fees
Binance Smart Chain (BSC) is another blockchain built by Binance that runs in parallel to Binance Chain (i.e., two separate networks). While the BNB running on Binance Chain is a BEP-2 token, the BNB on BSC is a BEP-20 token.
Binance Smart Chain allows the creation of smart contracts, making it more customizable. The fee structure on BSC is not the same as for Binance Chain. In this case, a gas system (similar to Ethereum) is used, reflecting the computing power needed to perform transactions and operations of smart contracts.
The BSC network uses the Proof of Staked Authority consensus mechanism. Users of the network must staked BNB to become a validator, and upon successful validation of the block, they receive the included transaction fees.
How are Binance Smart Chain transaction fees calculated?
As mentioned, BSC’s fee structure is very similar to that seen on the Ethereum network. Transaction fees are expressed in Gwei, which is a small BNB denomination equal to 0.000000001. Users can set gas prices to prioritize their transactions added to the block. To find out the current and historical average gas price, BscScan provides the daily average value along with the lowest and highest price paid. As of March 2021, the average fee on BSC is about Gwei 13. In the example below, the gas price was 10 Gwei. Note that the gas limit was set at 622,732 Gwei, but in this transaction only 352,755 (52.31%) Gwei was used, resulting in a transaction fee of 0.00325755 BNB.
Fees on BSC are usually very low, but if you try to send tokens without BNB in your account, the network will tell you that you don’t have enough funds. Make sure you have extra BNB in your wallet to settle the transaction fees.
Final thoughts
Transaction fees are an integral part of the cryptoeconomics of the blockchain network. They are part of the incentives for users that keep the network running. Fees also provide a layer of protection against malicious behavior and spam. However, the amount of traffic that takes place on some networks has led to much higher fees. The decentralized nature of most blockchains makes them difficult to scale. It is true that some networks have high scalability and transaction throughput, but this often involves sacrificing security or decentralization. Still, many researchers and developers are working on improvements that will hopefully bring more integration when it comes to cryptocurrencies in developing countries.
