Transaction Fees, Explained
Blockchain networks can verify transactions without a single authority's interference. This is because of miners who take their time and computing power to execute a process called mining, which in return provides them with rewards—blockchain transaction fees.
More so, transaction fees are closely linked to the process of mining. To define, transaction fees are paid (by traders) whenever cryptocurrencies are transferred to another wallet.
Processing transactions on a blockchain requires effort. These fees compensate the miners and validators of a blockchain network for keeping the blockchain network running smoothly.
Transaction fees’ value can fluctuate depending on how busy a network is; meaning to say, transaction fees are somewhat flexible. But in some cases, a transaction fee is fixed on some crypto exchanges. Furthermore, trading crypto will always come with transaction fees.
Why do transaction fees exist?
Initially, a transaction fee’s purpose was to deter malicious actors from overloading the Bitcoin network. As blockchain technology progressed, transaction fees have now become an integral part of a network’s condition.
Apart from Bitcoin, other blockchain networks have realized the importance of transaction fees and adopted the same strategy. For example, Ethereum has the same mechanism, the gas fee, that traders pay when executing transactions on the network.
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How does it work?
Transaction fees incentivize miners to prioritize transactions with higher fees and then add them to the next block in the blockchain.
Most of the time, transaction fees work differently on each blockchain network.
In Bitcoin, all pending transactions reach the mempool (memory pool), wherein miners have the option to choose which transaction has higher fees, when it’s full. As explained previously, the higher the transaction fee, the better chance it has to be prioritized and executed.
For this reason, crypto users tend to manually increase their transaction fees to ensure priority in the queue.
On Ethereum, however, transaction fees are measured in gas (gas fees; small fractions of ETH). It offers more sophisticated features than Bitcoin such as smart contracts and decentralized applications (dApps).
Usually, blockchains that handle a greater number of transactions per second offer lower transaction fees. Like the law of supply and demand, the size of the transaction and the demand for blockchain space also contribute to the transaction fees.
The demand for a block space often affects the network’s congestion; thus, leading to fees surging to unexpected levels. Henceforth, this answers the question, “Why are transaction fees so high?”
Conclusion
Transaction fees have grown to be an essential part of a blockchain network. Crypto users pay them for better service and execution; hence, enabling them to experience seamless transactions.
