Stand with Ukraine and Donate here

Cryptocurrency transaction fees


For the normal operation of the blockchain, some efforts are needed from a certain group of users. And they must somehow be compensated, otherwise, people will not be motivated to act in the interests of the network. And one of the easiest ways to ensure this is material compensation in the form of transaction fees.

On most exchanges and services, it is fixed, but in some situations, it can change - both increase and decrease. This is usually done in order to change the priority of placing a record on the blockchain. However, everything is not as simple as it seems at first glance.

Why does this phenomenon even exist?

Transaction fees appeared in the very first Bitcoin blockchain, only then they had a slightly different task - to prevent network congestion. After all, if you have to pay for each message, the attacker will have neither the motivation nor the opportunity to use a spam attack. As for the motivation of the participants, the reward for the production of a new block coped with this quite well. This mechanism was based on Adam Black's hash caching, which was then modified to become a full-fledged PoW mechanism.

The system was put into operation, started working, gaining popularity, and the price of bitcoin, accordingly, grows. And about 2 years later, one of the developers, Gavin Andersen, noticed that the Bitcoin rules stipulate a stable payment for transfers - exactly 0.01 BTC. And while the price of the world's first cryptocurrency was small, there were no problems.

But soon the situation changed - this commission began to exceed the size of transactions that had to be paid. Therefore, the protocol had to be modified. As part of the SegWit2x update, there was not only a significant increase in block size, but also a decrease in the cost of the base commission. The blockchain has become much more convenient and cheaper to use.

How does it work?

It all depends on the characteristics of a particular blockchain.

  • Bitcoin. All transactions go to mempool or "memory pool", from where they are taken when forming blocks. Moreover, priority is given to those of them that are accompanied by higher commissions. So the user has a choice - either pay the standard price and wait in line, or manually raise it - and complete the transaction faster.
  • Ethereum. Here the role of a means of payment for transfers is played by the so-called “gas”, measured in small shares of ETH. And since the functions of this blockchain are more complex and are regulated not only by basic protocols, but also by a bunch of smart contracts, then prioritization by increasing or decreasing fees becomes an extremely important element of the work.
  • Ripple. Since there are no miners or stakers, there is no need to further encourage anyone, so the fees on this blockchain are practically zero.
  • Various stablecoins. Everything is individual here. For example, in Tether, there is no commission when transferring USDT from one wallet to another. But when converting a token into a classic currency, there is.

What factors affect its value?

The point is that each block of the blockchain contains as many transactions as its size allows. And if many users start simultaneously transferring their currencies to other accounts, there may simply not be enough space, so they will have to wait for a new block to form.

This, by the way, is one of the sides of the scalability problem - if there are a lot of users, then they will either have to wait a long time for their turn, or provide their transactions with a higher priority due to the commission. But it soon turns out that you are not the only one willing to pay more - and the places in the block are almost distributed according to the principle of an auction.

The size of the transaction also matters, but it is usually standard and limited by the underlying protocols. But if it is reduced at this level, as it was, at one time, in the Bitcoin blockchain, then the network bandwidth will increase.

How do you compare different networks in terms of their transaction fees?

In short, the more transactions the network can process at once, the lower the base payment for each. Let's look at a couple of examples.

The already mentioned Ripple network has a standard fee of 0.00001 XRP, but in 2017, at the peak of the popularity and download of the project, it reached 0.40 XRP. But even that is not enough, since each token costs less than 25 cents.

In Ethererum, the base payment for transfers is higher, but also tends to increase during peak activity. This was the case in 2017, 2018 and 2020 (due to the rise in popularity of DeFi apps). In August 2020, the cost record was broken, and a month later - again. So that you roughly understand - there are officially registered situations in which the commission was $ 99. The only ones who like this situation are miners. On September 1, 2020, due to such an increase in prices, they were able to get a total profit of 500 thousand US dollars in just an hour, purely due to commissions. The developers, however, believe that the transition to Ethereum 2.0 will correct this state of affairs and make the situation more stable.

As for Bitcoin, there is also a steady increase in payments for transfers - already up to $ 10 at the end of October 2020. Still, blockchain does not handle the scaling problem very well.

The situation is much better in second-tier solutions and in various sidechains. In Litecoin, Bitcoin Cash, Cardano, and Ethereum Classic, transaction fees are less than a cent. And in some new projects, such as ILCoin - even less, even with a successful solution to the scaling problem.

Be that as it may, transaction fees remain one of the easiest and most convenient ways to get users interested in ensuring the operation of various blockchains, so they are unlikely to be abandoned. But to work in the direction of decreasing the size, but increasing the number - very likely.