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Commission fees for cryptocurrency operations in blockchain: what it is and how it works
Blockchain Fees Explained
Cryptocurrency
15.09.2021
Updated 12.03.2022
7:37

Fees are an element of the functionality of the majority of popular blockchain networks. It aims to qualitatively execute two main tasks: 

  1. Serve as a reward for miners supporting the work of the blockchain.
  2. Be a component of the network’s protection element from spamming.

Depending on how active and loaded the network is, the volume of commission fee may be low, average, or even high. Both user’s settings and existing market conditions may affect its size. But always such points are true: 

Why are fees implemented into blockchain: why are they needed? 

A fee is an element of most blockchain networks since the moment of their emergence at the beginning of the previous decade. Anyway, everyone who invests in cryptocurrencies or used them to solve other tasks has faced them. But most frequently, they are paid specifically during digital money transfers, wallet replenishments, or a withdrawal of cryptocurrencies into fiat money.

The protection from spam attacks on the basis of a fee is a great solution. Without this tool, the actions of ill-wishers would be limited only by their number and the capacity of their hardware. However, due to these fees, powerful and concerted spam attacks are facing the main problem of their realization – the high cost of such enemy for blockchain actions. 

The encouragement of miners is one more useful mechanism. Nobody would help and provide the blockchain with the capacities just out of plain altruism. And even if such people were, their number wouldn’t allow implementing a high level of network decentralization. Eventually, everyone who verifies and approves transactions of, say, Bitcoin or Ethereum receives an interest paid by those who make the transfers. 

The majority of blockchains are adjusted in such a way that the commission fee per transaction isn’t too high for a regular user making several transfers a day. But its size is really dependent on how loaded the network is. If you want to quicken the transfer during the high traffic within a blockchain (other users actively make transactions), you will have to set a higher fee by hand. And the more you pay, the higher in priority of processing your transaction will be.

Commission fee for Bitcoin transfer

Due to the fact Satoshi Nakamoto’s coin was the first blockchain asset in the world, it managed to create a certain standard of the amount of the fee. Many projects rely on it, while others openly copy its indicators. The creator of the original cryptocurrency (other coins commonly referred to as altcoins) was the first to understand how effective the fee may be against the actions of external ill-wishers as well as for stimulating the support of the network. 

Miners engaged in Bitcoin mining receive their reward for transaction confirmations and adding data of them to new blocks. Each transfer that hasn’t been approved yet is always located in the so-called ‘memory pool’. That is where the transfers of users (starting from the highest to lowest commission fee paid) are taken from. The one who agrees to pay more can always count on fast verification and crediting of funds on transactions. 

Thanks to such a scheme, each attacker trying to slow down or freeze the work of blockchain will have to pay an enormous amount of money for fees. But it doesn’t make much sense, and it’s unlikely somebody will have enough funds to conduct a full (at least for several days) slowdown of blockchain. Such a filter from spam in the form of commission fees for blockchain operations has been successfully working for several years. 

Example of the fee calculation for Bitcoin transfer 

Many Bitcoin-specific wallets have an option to set the size of the commission fee manually. Also, there’s an option to set this parameter to zero, but such transfer is going to be ignored by miners due to its unprofitability. 

Despite popular myths, the fee for ‘digital gold’ transfer is defined not by the sum but by the size of transaction files in bytes. If your transfer is 500 bytes, while the average commission for a byte unit is 80 Satoshi, the standard speed for transaction processing will require 40,000 Satoshi – 0.00040 BTC. If you add some small amount of cryptocurrency on top, it will quicken the operation processing.

If the load on the network increases, senders worldwide will try to make their transfer more prioritized for miners: otherwise, they will have to wait too long. Based on this logic, the commission fee is increasing. And in the situation when the activity of transactions is falling, the amount of a fee is gradually reducing, too.

It’s not a good idea to make large transfers when you notice the volatility of the market (rapid changes in the cryptocurrency rate within a short time). Under these circumstances, many start worrying and selling/buying Bitcoin. It multiplies the number of transfers being processed, and the average cost of the fee grows as well.

You must understand that each miner block is an object the size of which is 1 MB. And the speed of work of the whole network of miners itself is the value having its limitations. This deficit is produced by a mechanism that triggers to add only those transfers to the blocks, which allow earning as much profit as possible. 

It’s quite often when the network scalability affects the size of a fee – that is the value of the speed of operations performed per minute. Many blockchain developers are trying to improve this indicator to make the transfers cheapest possible. In this regard, Bitcoin lags behind and has the maximum of several (up to 10) transactions per second. Meanwhile, new blockchains offer the speed of up to several hundreds of operations per second, making their transfers much cheaper.

Commission fees in the Ethereum network

Fees in the network of Ethereum cryptocurrency are something principally different from what Bitcoin offers. The size of deductions for ETH transfers depends on which amount of computing capacity (gas) was involved in the process of transaction processing. This indicator has its cost and is easily converted into Ethereum. 

It often happens that two transactions with the same difficulty have identical costs in gas. But after that, it became clear that the network traffic within a blockchain network was higher, which increased the cost of gas. As a result of this, the actual price of one of the transfers increases.

To pay for a higher amount of gas helps to ensure that miners will pay attention to your transfer specifically and will process it as prioritized. 

How to calculate the fee for Ethereum transfer

The final cost of gas in the Ethereum network consists of its actual cost as well as additional stimulating payment to contribute to the faster processing of a transaction. 

An example: if the transfer costs 24,000 gas, and the gas price is 75 Gwei, then having multiplied these values, we will receive a commission fee in the form of 1 800 000 Gwei or 0.00180000 ETH.

Currently, there are plans for a seamless transition of Ethereum to the Proof-of-Stake algorithm. Consequently, the gas costs will start reducing until they reach the lowest volumes possible, which will make this cryptocurrency more attractive for everyday use. 

General conclusions 

The fee for cryptocurrency transfers is an indispensable part of blockchain functionality and the creation of a stable digital economy. It is impossible to realize a secured network without it, which would encourage the support of its stability instead of its destruction. 

Nevertheless, the growth of the popularity of many older blockchain projects leads to a situation when the limited scalability and the increase in the number of transfers trigger significant growth of commission fees. And it’s pretty hard to get rid of this negative influence without sacrificing the decentralized essence of blockchain of many coins. 

On the other hand, there are projects offering immense bandwidth and low fees. But that negatively affects security and network decentralization. 

As a result, users are facing the choice: whether to opt for cheap and fast transfers or a slow analog with a high-security degree. But we believe that developers will effectively work on blockchain improvements, and there won’t be a need to choose what to sacrifice soon.