What is the transaction fee? Why are transaction fees charged?

Transaction fees are paid when cryptocurrencies are transferred from one wallet to another.

Directing cryptocurrencies on the blockchain is labor-intensive, and thanks to these fees, miners and validators are paid for ensuring the system works properly.

Transaction fees can vary depending on the density of the blockchain network. A user who wants their payment to be urgently verified; He may choose to pay a higher fee to avoid the current transaction queue.

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These charges are fixed on most cryptocurrency exchanges, but users can have the option to set fees when using their wallet.

Why are there transaction fees in cryptocurrencies?

Transaction fees were originally developed to prevent “spamming” on the Bitcoin network. However, it later evolved into one of the blockchain’s most essential features.

Initially, the only purpose of transaction fees was to prevent malicious actors from overloading the Bitcoin network. Satoshi Nakamoto, the inventor of the cryptocurrency, was inspired by Adam Cash’s “hash cash system”, which includes the Proof of Work (PoW) algorithm.

About two years later, Bitcoin developer Gavin Andresen noticed a source code that required a minimum transaction fee of 0.01 BTC (equivalent to $ 319.4 at the time of writing).

In 2010, this fee seemed to be no problem. However, as time went on, Bitcoin’s value against the dollar increased, these fees became astronomical for those who wanted to send a symbolic amount of cryptocurrency.

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Bitcoin developers updated the network to exclude that rule, and the block size was increased with the SegWit2x update. Today transaction fees can be much less than 0.01 BTC, and it has become one of the main features that protect the health of the network.

Other blockchain networks such as Ethereum and Ripple have also recognized the importance of transaction fees and have adopted similar strategies to motivate miners.

How do transaction fees work?

Transaction fees; It encourages miners to prioritize high-fee transactions and add them to the next block.

Going from the Bitcoin example, all pending transactions are delivered to an area called the memory pool (mempool), where they are selected by the miners and waiting to be added to the next block. If the mempool is full, the miners will choose the higher fee transactions and leave the rest to the next block. That’s why most cryptocurrency users manually raise fees when their transactions are urgent.

In the Ethereum network, transaction fees are measured by Gas, which are tiny chunks of ETH. This blockchain offers more complex features than Bitcoin, such as smart contracts and decentralized applications (dApps). So wages are more important here.

In Ripple’s case, there are no miners that produce new XRP coins. Therefore, transaction fees are negligible.

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What about stablecoins? For example, those fixed to the US dollar? Tether; It does not charge transaction fees when transferred between two USDT accounts or any two blockchain-based wallets that can store digital assets. However, USDT may charge a fee when redeeming fiat currency.

What factors affect the transaction fee?

There are two main factors that affect the fees: the size of the transaction and the demand for block space.

Considering that some networks can store a limited amount of data in each block, miners or validators should be selective in the number of transactions they can add.

While many users are sending cryptocurrencies at the same time, the demand for block space increases and there are more transactions waiting for verification.

Sometimes the demand for block space gets so high that networks become congested and wages rise to unsustainable levels.

Also, larger transactions require more space on the block and take longer to be verified than smaller transactions.

Generally, blockchain networks that can process more transactions per second have lower fees. A simple rule of thumb is: the higher the efficiency of the network, the lower the transaction fee.

For example, the standard fee for Ripple transaction is around 0.00001 XRP as of today. Transaction fees are higher on Ethereum and can spike during congestions in the network. Ethereum transaction fees skyrocketed during the decentralized finance (DeFi) craze in 2017, 2018, and mid-2020.

Bitcoin, the largest cryptocurrency by market cap, saw a notable increase in transaction fees. Transaction fees, which were below $ 1 in July, rose to $ 6 in August and exceeded $ 10 at the end of October.

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