When you make a transaction on a blockchain, you have to pay associated transaction fees. These fees vary depending on the type of cryptocurrency and the network you use. In this article, we will explore what blockchain transaction fees are and how they are calculated on popular blockchains in the market.
What are Blockchain Transaction Fees?
Blockchain transaction fees are fees that users must pay to complete an action, such as sending, buying, selling, or lending cryptocurrency. These fees are denominated in the native token of that blockchain. For example, on Ethereum the fee is paid in ETH, and on Solana it’s paid in SOL.
The purpose of blockchain fees is to reduce spam transactions on the network, ensuring platform stability and preventing risks of attacks from hackers. Additionally, blockchain fees are used to reward and incentivize miners, nodes, and validators who participate in validating and recording transactions on the platform.
Blockchain transaction fees can be high or low, depending on the network’s fee calculation method and other influencing factors. High fees can hinder blockchain adoption, while low fees can pose security and safety risks.
Comparing Blockchain Transaction Fees and Gas Fees
Since the launch of the Ethereum network, blockchain transaction fees have also been referred to as gas fees, which are fees users pay to complete transactions, specifically on networks with smart contract capabilities.
Most blockchains today charge gas fees to users, including Ethereum, Solana, and Polkadot.
There are two main components of gas fees that users need to be aware of:
- Gas price: The amount of money a user is willing to pay for one unit of gas. Gas price directly affects the speed at which a transaction is confirmed.
- Gas limit: The maximum amount of gas a user is willing to pay for a transaction to be executed.
Read more: What are Gas Price and Gas Limit? Tips for Optimizing Gas Fees.
Users can gain a better understanding of transaction fees and gas fees through the following table:
Why Do Blockchains Have Transaction Fees?
Mitigating Spam Attacks
A spam attack describes when a hacker intentionally performs a large number of transactions with malicious intent, causing network congestion, slowing down transaction confirmation times, and creating vulnerabilities to extract value from the blockchain.
These attacks can occur on any network in the DeFi market. However, hackers often target blockchains with low fees to reduce the cost of the attack and achieve their goals. For blockchains with high fees, such as Ethereum, large-scale attacks become very expensive to execute and have a low success rate.
Real-world example: Previously, the Polygon network was known for its low transaction fees, around 0.02 MATIC (Polygon’s native token), equivalent to $0.001 USD.
According to data from Flipside Crypto, in May 2021, an attacker used bots to execute 8 million transactions per day on the Polygon network. Over 120 days, the hacker earned 218.5 ETH from arbitrage with an initial capital of 14 ETH (after deducting network spam costs), resulting in an average profit of about $6,800 per day.
The chart shows that the number of spam transactions on the Polygon network (8 million transactions/day) at the time of the incident was much larger than on the Ethereum network (1.2 million transactions/day).
After this event, Polygon increased the average fee per transaction to about $0.5 to limit similar attacks.
Increasing Security
A portion of the transaction fees is paid to miners and validators as an incentive to maintain and help ensure network stability. The more people involved in the validation process, the more secure the network becomes
Factors Affecting Blockchain Transaction Fees
Blockchain transaction fees are not fixed but depend on two main components: the blockchain network and other factors.
Blockchain Network
Each blockchain has a different way of calculating transaction fees and a different purpose for using them.
For example, on the Bitcoin blockchain, transaction fees are partially used to pay miners for the validation process of creating new blocks. The set of unconfirmed transactions is called the mempool (short for memory pool). Miners will prioritize transactions with higher fees attached.
Some wallets allow users to manually set transaction fees. This means users can also send BTC with a zero fee, but miners are likely to ignore this transaction. Bitcoin transaction fees do not depend on the amount being sent but on the size of the transaction (calculated in bytes).
Example: Trang makes a transaction with a size of 400 bytes, where 1 byte = 80 satoshis (the smallest unit of Bitcoin). In this case, Trang needs to pay about 32,000 satoshis, or approximately 0.0032 BTC, to complete the transaction.
In cases of high network traffic and large BTC transaction demand, the minimum fee per byte may increase.
Therefore, high fees are one of the reasons why BTC is difficult to use for payments in everyday activities. For example, you cannot buy a $3 cup of coffee because the transaction fee is too high compared to the coffee itself.
Note that some blockchains have unreasonable transaction fees that are quite high compared to the average. Therefore, before confirming a transaction, users should carefully check and pay attention to avoid potential risks.
Other Factors
Besides the calculation method based on the blockchain network, transaction fees are also affected by external factors such as:
- Network congestion: Occurs when too many transactions are sent to the blockchain network within the same timeframe. This leads to network congestion and slows down the transaction validation process for users. As a result, users often have to pay a higher fee to be prioritized over other transactions.
- Market supply and demand: Supply and demand factors affect fees when demand (user transaction needs) exceeds supply (network processing capacity), causing transaction fees to tend to increase.
How Transaction Fees are Calculated on Some Popular Blockchains
Ethereum Transaction Fees
Ethereum transaction fees are measured by the computational power required to process a transaction and are referred to as “gas.” Gas fees fluctuate according to the market as they are denominated in ETH, the network’s native token.
While the amount of gas required for a transaction rarely changes, the gas price can increase or decrease. This gas price is directly related to network traffic. If you pay a higher gas price, miners may prioritize your transaction.
The total gas fee can be understood as payment in exchange for the required computational energy, plus a fee to process transactions faster. However, users should also consider the gas limit to determine the maximum price they are willing to pay for a transaction on Ethereum.
Example: If a transaction requires 107,218 gas and the gas price is 70.639167932 Gwei, the transaction fee will be 7,573,790 Gwei or 0.007573790 ETH ($25.56).
Users can monitor gas fees on Etherscan to determine an appropriate fee level.
Solana Transaction Fees
Solana is an open-source blockchain developed by Solana Labs. Solana can process many transactions per second with low fees, thus attracting a large number of users.
Transaction fees on Solana are measured by the computational power required to process a transaction and are used to pay validators who participate in the validation process. The formula for calculating Solana transaction fees is as follows:
Transaction Fee = Computation Fee + Signature Fee
Where:
- Solana fee unit: Lamport
- Computation fee: Fixed for each transaction, currently at 5,000 lamports (0.000005 SOL)
- Signature fee: Calculated by multiplying the number of signatures required in each transaction by the network fee. The network fee is determined by the network congestion status.
Example: If a transaction has two signatures and the network fee per signature is 1,000 lamports (0.00001 SOL), the total transaction fee will be: 5,000 + 1,000 + 1,000 = 7,000 lamports (0.00007 SOL).
Solana allows users to directly track transaction fees on Solscan.
Binance Smart Chain Transaction Fees
BNB Chain uses a Proof of Authority consensus mechanism. Network validators need to stake BNB to become validators, and after successfully validating a block, they will also receive transaction fees as an incentive reward.
In fact, BNB Chain’s transaction fee system is similar to Ethereum’s. Transaction fees are calculated based on the computational power required to execute transactions or smart contracts.
Transaction fees are expressed in gwei, which is a small denomination of BNB – equivalent to 0.000000001 BNB. Users can set a high gas price to prioritize their transactions for inclusion in a block.
In the example below, the gas price is 10 Gwei. Note that the gas limit is set to 622,732 Gwei, but the actual gas used is only 352,755 (52.31%). With the amount of Gwei used in this transaction, the actual transaction fee is 0.00325755 BNB (around $1 USD).
Learn more: Blockchain Consensus Algorithms
How to Reduce Transaction Fees on the Blockchain
Minimizing transaction fees is always a concern for users participating in the crypto market, especially on networks with high fees like Ethereum.
Typically, a transaction on Ethereum will cost around $5-$10. However, when the network is congested, an Ethereum transaction can incur gas fees of up to $50 or even higher.
Therefore, to avoid paying excessively high fees, users should avoid transacting during peak hours.
Simply put, when a blockchain network receives too many transactions simultaneously, fees will increase significantly. Therefore, users can use blockchain explorers provided by browsers like Etherscan or Solscan to understand the current fee levels, thereby determining an appropriate transaction time and size to save on costs.
Last time Ethereum median gas was this high was in May 2022 ⛽️
source: https://t.co/bjIOV2m4Cd pic.twitter.com/H2sqHAtvaZ— hildobby (@hildobby_) May 4, 2023
[Ethereum Gas Fees Soar Due to Meme Coin Craze
However, it’s important to note that minimizing fees can affect the transaction validation and completion process. Users need to determine which factor is a priority: transaction time or transaction fees, to align with their own strategy.
Some Questions About Blockchain Transaction Fees
Are Gas Fees the Same as Blockchain Transaction Fees?
Technically, gas fees are blockchain transaction fees. However, in practice, the term “gas fee” was not used in the cryptocurrency market before the advent of Ethereum. Therefore, gas fees are specific to networks with smart contract capabilities.
Example: Litecoin is a fork of the Bitcoin blockchain. Litecoin does not support smart contract execution; therefore, the platform does not apply gas fees to users.
Why are Blockchain Transaction Fees High?
When a blockchain network has to process too many transactions simultaneously, some transactions will need to wait to be processed. As a result, users tend to adjust their fees higher to have their transactions completed sooner. This also leads to an increase in the average fee level because miners will prioritize processing transactions with higher fees.
Are There Any Blockchains with Free Transactions?
No. Almost all blockchains charge fees for every user transaction. Fees can vary depending on the technology and characteristics of the blockchain.
If I Don’t Pay a Fee, Will My Transaction Still Be Validated?
If users do not pay a fee, their transaction can still be sent to the blockchain network. However, whether the transaction is validated depends on the miners or validators
