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In blockchain networks, transaction fees serve two important functions. They reward miners or validators who help confirm transactions and protect the network from spam attacks.
Depending on the activity on the network, the transaction fee can be either small or high. Its size is also affected by market conditions. High fees can discourage blockchain use, while fees that are too low can potentially cause security issues.
Why are transaction fees needed?
Transaction fees have remained an integral part of most blockchain systems since their inception. You've probably already encountered various fees when sending, depositing or withdrawing cryptocurrencies.
Most cryptocurrencies use transaction fees for two reasons. First, they reduce the amount of spam on the network, making large-scale spam attacks costly to implement. Second, transaction fees provide an incentive for users to help verify and confirm transactions. This is a kind of reward for helping the network work.
Most blockchains have fairly low transaction fees, but they can increase significantly depending on the traffic on the network. What this means for you as a user is that the amount you choose to pay determines the priority of your transaction when added to the next block. The higher the commission, the faster the confirmation process will go.
Bitcoin transaction fees
As the world's first blockchain network, Bitcoin set the standard for transaction fees that many cryptocurrencies use today. Satoshi Nakamoto realized that transaction fees could protect the network from large-scale spam attacks and encourage correct behavior.
Bitcoin miners receive a fee when they confirm a transaction for a new block. The pool of unconfirmed transactions is called the "memory pool" (or "meme pool"). Of course, miners will prioritize transactions with higher fees that users have agreed to pay when sending their BTC to another Bitcoin wallet.
Consequently, attackers who want to slow down the network must pay a fee associated with each transaction. If they set the fee too low, miners will likely ignore their transactions. If they set them at the appropriate level, they will incur high costs. In this way, transaction fees also work 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 also allows you to send BTC with zero commission, but miners will most likely ignore such transactions, which means they will not pass validation.
Despite some theories, Bitcoin transaction fees do not depend on the amount sent, but on the size of the transaction (in bytes). For example, your transaction size is 400 bytes and the average transaction fee is currently 80 satoshi per byte. In this case, you will have to pay around 32,000 satoshi (or 0.00032 BTC) to increase the likelihood of your transaction being added to the next block.
When network traffic is high and there is a lot of demand to send BTC, the transaction fee required for quick confirmation increases as other Bitcoin holders try to do the same. This may occur during periods of high market volatility.
Thus, high fees may make it difficult to use BTC in everyday life, since buying a cup of coffee for $3 may not be sustainable if the fees are much higher.
A block has a limit of 1 MB (block size) and can only contain a certain number of transactions. Miners try to add these blocks to the blockchain as quickly as possible, but there is still a limit to their speed.
The scalability of cryptocurrency networks plays a decisive role in determining the size of the commission. Blockchain developers are constantly working to solve this problem. Previous network updates, such as the implementation of SegWit and the Lightning Network, have helped improve scalability.
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Ethereum transaction fees
The way Ethereum transaction fees work is different from Bitcoin. The fee takes into account the amount of computing power required to process the transaction, known as gas. Gas also has a variable price, measured in Ether (ETH), the network's native token.
The amount of gas needed for a particular transaction may remain the same, but gas prices may rise or fall depending on network traffic. If you pay a higher gas price, miners will likely process your transaction first.
How are Ethereum transaction fees calculated?
The final gas price includes the cost of gas as well as the incentive to process your transaction. However, you should also consider the gas limit, which determines the maximum price for a certain transaction or task.
In other words, the cost of gas is the amount of work required, and the price of gas is the price for “every hour” of work. The relationship between these and the gas limit determines the total fee for an Ethereum transaction or smart contract operation.
For example, if a 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.
Source: Etherscan.io
As Ethereum transitions to the Proof of Stake model (see Casper), gas fees are expected to decrease. The amount of gas required to confirm a transaction will also be lower, since the network will only need a fraction of the computing power for validation. However, network traffic will still be able to affect transaction fees as validators prioritize higher paying transactions.
Binance Chain Transaction Fees
Binance Chain is a blockchain network that allows users to transact and trade BNB and other BEP-2 tokens, as well as create and distribute their own tokens. Binance Chain uses a consensus mechanism called Delegated Proof of Stake. That's why we have validators instead of miners.
Binance Chain also powers the Binance DEX (decentralized exchange), where users can trade crypto assets directly from their wallets. Transaction fees on Binance Chain and DEX are paid in BNB.
Please note: 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 on Binance Chain?
BNB has different fee structures for different actions. There is a difference between transaction fees such as sending BNB and trading fees on Binance DEX. Additionally, the total transaction price may rise or fall depending on the market price of BNB.
When making non-trading transactions such as withdrawing or depositing BNB, fees are charged in BNB only. Trading fees on Binance DEX are paid in the token being traded, but there is a discount applied when paying in BNB. This scheme helps stimulate the adoption of BNB and grow its user base.
Binance Smart Chain Transaction Fees
Binance Smart Chain (BSC) is another Binance blockchain that runs parallel to Binance Chain (that is, two separate networks). BNB on Binance Chain is a BEP-2 token, and BNB on BSC is a BEP-20 token.
Binance Smart Chain allows you to create smart contracts, making it more customizable. Unlike Binance Chain, BSC's fee structure is not fixed. Instead, it uses a gas system (similar to Ethereum) that takes into account the computing power required to execute transactions and smart contract operations.
The BSC network uses the Proof of Staked Authority consensus mechanism. To become validators, network users must stake BNB. Upon successful block validation, they receive the included transaction fee.
How are transaction fees calculated on Binance Smart Chain?
As mentioned, BSC's fee structure is very similar to Ethereum's. The transaction fee is calculated in Gwei, which is a small denomination of BNB equal to 0.000000001. Users can set their gas prices so that their transactions have priority when added to the block.
To find out the current and historical average gas price, visit BscScan. It shows the average daily price, as well as the lowest and highest price paid. As of March 2021, the average commission at BSC is around 13 Gwei.
In the example below, the gas price was 10 Gwei. Please note: the gas limit was set to 622,732 Gwei, but only 352,755 (52.31%) Gwei were used in the transaction. As a result, the transaction fee was 0.00325755 BNB.
Source: Bscscan.com
Typically, BSC fees are very low, but if you try to send tokens without having BNB in your account, the network will tell you that you do not have enough funds. Make sure you have extra BNB in your wallet to pay transaction fees.
Binance Withdrawal Fees
When withdrawing funds from Binance, you must pay the applicable transaction fee, which may vary depending on the cryptocurrency and network used. Binance applies its own fee structure for transactions within the trading platform. However, withdrawal fees are affected by external factors that are beyond Binance's control.
Cryptocurrency withdrawals depend on the work of miners or validators who are not part of the Binance ecosystem. As such, Binance has to periodically adjust withdrawal fees based on network conditions, including traffic and demand.
Binance also sets a minimum limit for cryptocurrency withdrawals. You can view current limits on the Fee Structure page.
Trading fees are calculated based on your account VIP level and are independent of withdrawal fees. Your account's VIP level is determined by your cumulative monthly trading volume. Currently, the maximum commission is 0.1% of the cryptocurrency traded, both as a maker and as a taker. Please note: paying in BNB reduces trading fees.
Summary
Transaction fees are an integral part of the cryptoeconomics of blockchain networks. They serve the function of rewarding users who support the network, and are also used as protection against intruders and spam.
However, the increase in traffic volume on some networks has led to significant increases in fees. The decentralized nature of most blockchains makes them difficult to scale. At the same time, some networks with high scalability and bandwidth often have to sacrifice either security or decentralization.
However, various researchers and developers are actively pursuing improvements that will hopefully lead to the adoption of cryptocurrencies in the developing world.
