What does it mean when you are asked to pay transaction fees before your trade orders can be confirmed on the blockchain? How do you calculate these fees? Are these fees really important for a transaction to be successfully executed?
In this article, you will learn about the meaning of blockchain fees, how these fees are utilized and what you need to do to avoid spending much on these fees.
What do Blockchain Fees Mean?
Blockchain fees (also called Transaction or Network Fees) are the fees you are required to pay anytime you use blockchain technology to process any transaction. You pay these fees mostly when you trade on a cryptocurrency exchange.
Blockchain fees are similar to the fees charged by payment processors, such as PayPal. The only differences are that blockchain fees are remitted to the blockchain and the fees are usually lower than what you get from traditional payment processors.
Types of Blockchain Fees
There are different types of fees charged by a blockchain-based platform. Asides from being used to facilitate order confirmation, the fees are also used to reward the miners or those who validate those transactions. Transaction/blockchain fees are also used to secure the blockchain network because the fees are used to confirm the authenticity of the transactions.
The different types of blockchain fees are:
· Cryptocurrency Exchange Fees: These fees are charged when you transact on a cryptocurrency exchange.
· Wallet Fees: You will pay these fees when you transfer crypto assets from a cryptocurrency wallet to exchange or another crypto wallet.
· Network Fees: These are the main fees payable to the blockchain network. Network fees are used to reward the miners for the different services they render.
How do Blockchain Fees Work?
Specific blockchain networks have dedicated processes or models for the fees charged for transactions executed there.
Bitcoin and Ethereum are the two most popular blockchain networks. Bitcoin was the first blockchain network and has continued to dominate the crypto market. Ethereum comes behind and has been the reason for some of the recent developments in the crypto ecosystem.
So, how do these blockchain fees work across different blockchain networks?
How do Transaction Fees work on the Bitcoin Network?
In the case of the Bitcoin blockchain network, the fees are charged when the miners (or those who validate transactions) pick any of the orders and confirm the same.
Every order or transaction processed via the Bitcoin blockchain network is added to a pool called Memory Pool (Mempool). This is the pool that houses most of the pending or unconfirmed transactions on the blockchain network.
The miners will then pick any of these pending transactions and add the same to the next block for confirmation. The faster the miners do this, the faster it will take for Bitcoin-based transactions to be confirmed.
In return, these miners are rewarded with what is called “block rewards.” These are incentives payable in Bitcoin (BTC). The miners take a certain percentage of the fees paid by the transacting parties as their rewards for helping in the transaction/order confirmation.
How to Calculate Blockchain Fees on the Ethereum Blockchain
The Ethereum blockchain offers another opportunity for miners to earn some rewards for confirming transactions.
The difference between the Ethereum blockchain and that of Bitcoin is that the fees paid here are called “gas fees.”
In recent months, the gas fees used in confirming transactions on the Ethereum blockchain were on the increase. This led to the move to launch Ethereum 2.0, as a mechanism for cutting down on some of the factors triggering a spike in Ethereum gas fees.
Blockchain Fees for Stablecoins
Stablecoins are crypto assets that do not fluctuate. These assets are always pegged to the United States Dollar (USD). A good example of a stablecoin is Tether USD (USDT).
Transaction fees apply for transactions made via the blockchain networks powering these stablecoins.
Many cryptocurrency investors claim that stablecoin transaction fees are one of the lowest. You can pay as low as $1 USDT for a transaction.
Ripple (XRP)’s Blockchain Fees
Ripple (XRP0 is one of the most resilient crypto assets. Despite negativities surrounding the coin, including the claims of non-regulation by the U.S. SEC, it has continued to soar.
The XRP blockchain fee is one of the most competitive. This is because no XRP coins are generated or mined when the transactions are validated by the miners.
Why is Blockchain Fees High?
Have you always wondered why you have to pay so much when you want to use specific blockchain networks to trade crypto coins? The Ethereum blockchain network readily comes to mind because it is one of the costliest networks to use.
These are some of the reasons why some blockchain/transaction fees are on the high side:
· Network congestion (when there are many transactions to confirm) can trigger an increase in blockchain fees.
· Larger transactions require more fees for validation/confirmation.
· Some miners might prefer to confirm transactions that pay higher fees, thereby delaying the others in the process.
How to cut down on Blockchain Fees
Read more on CoinText for tips on how to reduce the amount you spend on blockchain fees:
· Consider processing larger amounts of crypto assets so you can spend less.
· Check major cryptocurrency exchanges to be sure of the current blockchain fees.
· It would be a brilliant idea to wait until the average fee amount drops before you process your transaction. This helps you to pay less.
Final Words: Blockchain Transactions Require Fees
You need to pay fees for every transaction you make via a blockchain network, cryptocurrency exchange, or crypto wallet.
Implement the tips we just shared so you can cut down on how much you spend on blockchain transaction fees.