Blockchain has been making waves across industries, from finance to healthcare, with its promise of secure and decentralized transactions. Have you ever wondered why blockchain trades come with transaction fees, however?
In this blog, we’ll explore transaction fees in blockchain, including ‘how do transaction fees work?’, ‘what are the types of transaction fees?’, and how blockchain transaction fees affect the overall efficiency and security of the network. So, if you’re curious about blockchain and its inner workings, keep reading!
What are Transaction Fees?
For a blockchain transaction to be valid and successful, it must be added to the chain within a virtual block; the ‘chain’ is the official public record of all completed transactions.
When you initiate an action on a blockchain, you are required to pay a transaction fee. These actions might be as straightforward as sending a cryptocurrency or digital asset to a recipient or as complex as utilizing a decentralized application (dapp) to carry out an act like borrowing a certain amount. Nodes on the blockchain are responsible for carrying out these activities on your behalf, and the blockchain transaction fees act as their compensation.
The native crypto asset of a blockchain is used as the medium of exchange for most transaction fees. For example, the fees associated with Bitcoin transactions are paid in Bitcoin, while those associated with Ethereum transactions are paid in Ethereum.
As you may guess, the fees associated with less complicated acts are lower, while the fees associated with comparatively more complex actions are higher.
How do Blockchain Transaction Fees Work?
Users must pay blockchain transaction fees when actions are carried out on a blockchain. These activities can be divided into two different categories:
Data addition to the blockchain.
The computational work executed by the blockchain.
Blockchains that support smart contracts use both types of transaction fees in their calculations.
For example, Ethereum widely utilizes smart contracts. Gas is the Ethereum network’s measure of the computing effort required to process a transaction. Before the Ethereum Merge, Ethereum had a limit of processing only 30 transactions per second, leading to high transaction costs or gas fees that can reach up to $100. The number of transactions is inversely proportional to gas fees, with fewer transactions resulting in higher fees.
However, after the complete move to Ethereum 2.0, the network’s throughput is expected to increase significantly, reducing gas fees to as low as $0.02 after the implementation of rollups.