When interacting with blockchain networks, transaction fees serve two essential purposes. They reward the miners or validators who help confirm transactions and contribute to network protection by preventing spam attacks.
These fees can be small or large, depending on network activity. Market trends can also influence fee levels. While high fees might inhibit blockchain adoption, fees that are too low can lead to security problems.
Transaction fees have been a fundamental part of most blockchain systems since the technology's inception. If you've ever sent, deposited, or withdrawn cryptocurrencies, you've likely encountered a transaction fee.
Most cryptocurrencies use transaction fees for two important reasons. First, fees reduce the amount of spam on the network. They also make large-scale spam attacks prohibitively expensive. Second, transaction fees act as an incentive for users who help verify and validate transactions. It's a reward for assisting with network operations.
On most blockchains, transaction fees are inexpensive. However, depending on network traffic, these costs can increase significantly. As a user, your transaction's priority level often depends on the fee amount you choose to pay. In other words, this amount determines how quickly your transaction will be added to the next block. Generally, the higher the fee paid, the faster your transaction confirmation.
How Bitcoin Transaction Fees Work
As the world's first blockchain network, Bitcoin set the standard for transaction fees used by many cryptocurrencies today. Satoshi Nakamoto recognized that transaction fees could protect the network from large-scale spam attacks while encouraging good behavior.
Bitcoin miners receive transaction fees as rewards for confirming transactions added to new blocks. The pool of unconfirmed transactions is called the "mempool." Naturally, miners prioritize transactions with higher fees that users agree to pay when sending BTC from one Bitcoin wallet to another.
Malicious users attempting to slow down the network must pay a fee associated with each transaction. If these users set very low fee values, miners will likely ignore their transactions. If fees are sufficiently high, the costs become prohibitive. Thus, transaction fees also act as a simple and effective spam filter.
On the Bitcoin network, some cryptocurrency wallets allow users to set their transaction fees manually. It's also possible to send BTC without fees, but miners will likely ignore these transactions, meaning they won't be validated.
Contrary to what some believe, Bitcoin fees don't depend on the amount sent but on the transaction size (in bytes). For example, if your transaction size is 400 bytes and the average transaction fee is currently 80 satoshis per byte, you would need to pay approximately 32,000 satoshis (or 0.0032 BTC) for your transaction to have a good chance of being added to the next block.
When network traffic is high and there's significant demand for sending BTC, the transaction fee required for fast confirmations increases as more users request new transactions. This often occurs during periods of intense market volatility.
Consequently, high fees can make using the BTC network difficult for some everyday situations. For example, buying a $3 cup of coffee might not be practical if the transaction fees exceed the purchase value.
There's a limit to how many transactions can fit into a block, which is 1MB (block size). Miners add these blocks to the blockchain as quickly as possible, but there's also a limit to how fast they can complete the process.
The scalability of cryptocurrency networks is a crucial issue that directly affects fee determination. Blockchain developers continuously work to solve this problem. Some network upgrades have helped improve scalability, such as implementing SegWit and the Lightning Network.
Ethereum Gas Fees Explained
Ethereum transaction fees work differently compared to Bitcoin. The fee considers the computational power required to process a transaction, known as Gas. Gas also has a variable price measured in Ether (ETH), the network's native token.
While the Gas required for a specific transaction might remain constant, its price can fluctuate. The Gas price is directly related to network traffic. If you pay a higher Gas price, miners will prioritize your transaction.
The total Gas fee simply covers the cost with an added incentive for processing your transaction. However, you must also consider the Gas limit, which defines the maximum price to be paid for a specific transaction or task.
In other words, the Gas cost is the amount of work required, and the Gas price is the amount paid per "unit" of work. The relationship between these two factors and the Gas limit defines the total fee for an Ethereum transaction or smart contract operation.
For example, if a certain transaction costs 21,000 Gas and the Gas price is 71 Gwei, the transaction fee would be 1,491,000 Gwei or 0.001491 ETH.
As Ethereum transitions to a Proof of Stake model (see Casper), there's an expectation that Gas fees will decrease. The amount of Gas needed to confirm a transaction will be lower since the network will require only a fraction of the computational power to validate transactions. However, network traffic will still affect fees, as validators prioritize transactions that pay more.
👉 Explore real-time gas fee trackers
Binance Chain Fee Structure
Binance Chain is a blockchain network that enables users to transact and trade BNB and other BEP-2 tokens. Users can also create and distribute their own tokens. Binance Chain adopts a consensus mechanism known as Delegated Proof of Stake. So instead of miners, we have validators.
Binance Chain also powers the Binance DEX (decentralized exchange) system, where users can trade crypto assets directly from their wallets. Binance Chain and Binance DEX transaction fees are paid in BNB.
Depending on user requests, the fee is applied according to the fee table in BNB. There's a distinction between transaction fees (such as sending BNB) and Binance DEX trading fees. Additionally, the total price of a transaction may increase or decrease depending on the market price of BNB.
When making non-trading transactions, such as withdrawing or depositing BNB, fees are paid only in BNB. Fees related to trading activities on Binance DEX can be paid using the traded token, but users receive a discount if they pay in BNB. This system encourages BNB adoption and contributes to user base growth.
Binance Smart Chain Fees
The Binance Smart Chain (BSC) is another blockchain developed by Binance that operates parallel to Binance Chain (meaning they are two distinct networks). BNB on Binance Chain are BEP-2 tokens, while BNB on BSC are BEP-20 tokens.
Binance Smart Chain is more customizable as it allows for the creation of smart contracts. BSC's fee structure isn't fixed like Binance Chain's. Instead, it uses a Gas system (similar to Ethereum's) based on the computational power needed to execute transactions and smart contract operations.
The BSC network runs on a Proof of Staked Authority consensus mechanism. Network users need to stake BNB to become validators and, after successfully validating a block, receive the value corresponding to transaction fees.
As mentioned, BSC's fee structure is similar to Ethereum's. Transaction fees are indicated in Gwei, a small amount equivalent to 0.000000001 BNB. Users can set their Gas prices to change the priority of their transactions being added to the block.
To check the current and historical average Gas price, consult BscScan, where you'll find a daily average along with maximum and minimum prices. At the time of writing in March 2021, the average fee on BSC was about 13 Gwei.
In the example below, the Gas price was 10 Gwei. Note that the Gas limit was set at 622,732 Gwei, but only 352,755 Gwei (52.31%) were used in this transaction, resulting in a transaction fee of 0.00325755 BNB.
Generally, BSC fees are very low, but if you try to send tokens without BNB balance in your account, the network will notify you that you have insufficient funds. Make sure to maintain some BNB in your wallet to pay your transaction fees.
👉 Learn about optimizing transaction costs
Exchange Withdrawal Fees
When you make withdrawals on the Binance exchange, you must pay associated transaction fees. These fees vary depending on the cryptocurrency and network used. Binance has its own fee structure for transactions that occur within its trading platform. However, withdrawal fees are affected by external factors beyond Binance's control.
The cryptocurrency withdrawal process depends on the work of miners or validators who aren't part of the Binance ecosystem. Therefore, Binance needs to adjust withdrawal fees periodically according to network conditions such as traffic and demand.
Binance also sets minimum limits for cryptocurrency withdrawals. You can check the current limits on the Fee Schedule page.
Trading fees are based on your account's VIP level and don't depend on withdrawal fees. Your cumulative monthly trading volume determines your account's VIP level. The maximum fee currently charged is 0.1% of cryptocurrencies traded as maker or taker. Remember, users who pay in BNB pay lower fees when trading.
The Role of Fees in Crypto Economics
Transaction fees are an essential part of the cryptoeconomics of blockchain networks. They incentivize users who work to maintain proper network functioning. Fees also provide an extra layer of protection against malicious users and spam.
However, the considerable increase in traffic on some networks has resulted in significantly higher fees. The decentralized nature of most blockchains can hinder scalability. While some networks demonstrate high scalability and high transfer rates, this usually comes at the cost of security or network decentralization.
Nevertheless, many researchers and developers are working on improvements with the potential to provide greater inclusion of cryptocurrencies in the developing world.
Frequently Asked Questions
Why do blockchain transactions require fees?
Blockchain transaction fees serve two primary purposes: they compensate miners or validators for confirming transactions and securing the network, while simultaneously discouraging spam attacks by making malicious activity economically impractical.
How are Bitcoin transaction fees calculated?
Bitcoin fees are calculated based on transaction size (measured in bytes) rather than the monetary value being transferred. The total fee equals transaction size multiplied by the fee rate (satoshis per byte), which varies according to network demand.
What determines Ethereum gas prices?
Ethereum gas prices are primarily determined by network congestion. When more users are transacting, gas prices increase as users compete to have their transactions processed faster. Validators prioritize transactions with higher gas prices.
Can I avoid paying transaction fees?
While technically possible to submit transactions with zero fees on some networks, these transactions will likely be ignored by miners/validators and never confirmed. Some networks offer fee-less transactions under specific conditions, but most require fees for reliable processing.
Why do transaction fees fluctuate so much?
Fees fluctuate based on supply and demand dynamics within each network. When many users want to transact simultaneously, competition for block space increases, driving up fees. During quieter periods, fees typically decrease.
How can I reduce my transaction costs?
You can reduce costs by transacting during off-peak hours, using layer-2 solutions, adjusting fee settings based on current network conditions, and choosing blockchains with lower fee structures for specific use cases.