5 minutes Read

What are Crypto Network Fees? All You Need to Know

When you withdraw or transfer money with your conventional bank account, the bank deducts a certain amount as its “transaction charge.” In a similar way, transactions in cryptocurrency have certain “charges” attached to them. These charges are known as Crypto network fees or transaction fees. 

It is important for crypto enthusiasts and traders to know about transaction fees, as they can greatly contribute to seamless transactions on crypto networks. However, they are generally cheaper than traditional bank transfers, particularly for international transfers. Fees such as mining and gas fees can be a tad difficult to understand, so this article explains all you need to know about network fees as a cryptocurrency user. 

What are Crypto Network Fees? 

They are the small fees you pay for each transaction or change you want to make to the public ledger (the blockchain network). These fees are paid to the miners who make the changes by solving problems to add a new block to that particular cryptocurrency network.

While most decentralised wallets suggest a minimum network fee amount, you can also choose to set the amount manually. However, keep in mind that the higher the amount you set, the more incentivised the miners will be to validate your transaction leading to faster transactions.

Basically, every time you send any cryptocurrency from your address to another, you have to pay a sort of transaction fee, which is also referred to as the network fee. 

Network fees also vary depending on the blockchain network. The fees on the Bitcoin network would differ from those on the Ethereum or Tron network.

Importance of Crypto Network Fees

The importance of network fees are:

1. Deterring Spam:

Network fees serve as a layer of protection against spam transactions. Spam transactions can cause network congestion and, eventually, higher network fees. These high network fees help to deter spam transactions.

2. Incentivize Miners:

Network fees are important because they incentivise network validators. Miners receive network fees as a reward for verifying transactions and adding them to the blockchain.

3. Maintain Efficiency and Security:

The complete absence of network fees will eventually lead to security risks, as there would be nothing to deter hackers from repeatedly sending malicious attack vectors to check for a possible vulnerability.

Factors That Influence Network Fees

The network fee for different types of blockchain interactions (send, deploy, stake, mint, etc.) on different networks is different.

The following factors can influence the network fee on a transaction:

1. Network congestion:

The high number of transactions per unit of time on a Blockchain network will lead to competition among users for transaction processing, hence, increased fees. This is because the mempool is jammed with many pending orders. Processing time will then become slow, and the processing fees will be high.

2. Wallet settings: 

Many cryptocurrency wallets let users manually set their own minimum network fee. If the fee is higher than usual, the transaction will be faster, but if it’s lower than the minimum required, the transaction will not go through.

3. Volatility in the price of cryptocurrencies:

Network fees are usually in the native cryptocurrency of the sending blockchain, and crypto is known to be volatile. So, changes in the price of the native cryptocurrency will also change the cost of the network fee.

4. Blockchain type, block size, and speed: 

Block sizes differ on many different Blockchain networks. The size of the block tells how many transactions can fit into that particular block before it is added to the Blockchain. To add your transaction to a block with a limited size that is about to be entered into the chain, you’ll need to pay higher network fees.

5. Priority of transaction:

The network fee goes directly to the validator of the transaction. So, to make a transaction of higher priority to the validators, you need to set a higher-than-normal transaction fee.

How Do Crypto Network Fees Work – How to Calculate Network Fees?

How to calculate crypto network fees 

The network fee is paid to the miner who validates the block. So, it makes sense to say that the higher the payment (network fee), the faster the transaction will be validated. 

Network fees on the Bitcoin network can be roughly calculated by multiplying a Satoshi (the lowest unit of Bitcoin) by the transaction size. 

On the Ethereum Network, you can get the network costs for major ETH transactions like send or swap by going to the gas checker on Etherscan. 

Strategies to Avoid High Gas Fees.

Gas fees are similar to network fees, the difference being that gas fees are specific to blockchain platforms that utilise smart contracts, such as Ethereum. 

Gas is the unit used to measure the computational effort required to execute a transaction or a smart contract. Users pay gas fees to compensate the network for the computational resources utilised during the transaction. In order to avoid high gas fees:

1. Choose the right wallet:

Choosing the right wallet is one of the most important steps in minimising transaction fees. Some wallets charge higher fees than others, so it is important to do your research and find a wallet that offers low fees. Some wallets allow you to set your own fees, which can be a great way to save money in the long run.

2. Avoid busy periods:

Another great way to reduce gas fees is by making transactions during off-peak hours. During busy periods, such as when the network is congested, fees tend to be much higher than usual. You can often save money on fees by waiting for a quieter time to perform your transactions.

3. Batch your transactions:

Instead of constantly making small transactions, batching them together into one larger transaction will not only save you money on fees but it can also help reduce blockchain bloat and make the network more efficient.

4. Use SegWit addresses:

SegWit, short for segregated witnesses, is a protocol upgrade that makes transactions smaller and faster. Using SegWit addresses can help reduce transaction fees by up to 50%, making it a great option for those looking to save money.

Frequently Asked Questions About Crypto Network Fees

Why are some crypto transactions more expensive than others? 

Transactions that require more data to execute and/or are computationally complex will have a higher base fee. In networks like Ethereum, where smart contracts are executed, more complex operations consume more computational resources and thus require higher fees.

Why is Ethereum’s network fee so high?

 Ethereum fees are high because the network has become congested, and ETH’s price has increased. Also, they recently updated the cost of calculations. 

Which crypto network has the lowest network fee?

 Generally, blockchains using Proof-of-Stake (PoS) consensus mechanisms offer lower transaction fees than Proof-of-Work (PoW) blockchains. Examples of blockchains renowned for their low fees include Binance Smart Chain (BSC), Solana, and Polygon (formerly known as Matic Network).

What happens if I set a low transaction fee?

 A low transaction fee means a low-priority transaction and, ultimately, a slow transaction. The higher the transaction fee, the faster your transaction is executed, so if one sets a low transaction fee, the transaction will be executed later when there are no higher-priority transactions.

 Can I negotiate crypto network fees? 

No. The crypto network fees are determined by your platform and cannot be negotiated. 

However, you can choose to increase the amount to make the transaction faster. 

Conclusion

Transaction fees have always been an important part of the financial and investment services sector, traditionally and cryptocurrency.

This is because the funds collected from these fees are used by exchanges to run their business, so they can, in turn, provide a channel for investors to invest in crypto. 

Understanding how transaction fees work is crucial for anyone who uses cryptocurrency, as it can help you save money and get your transactions processed faster and more efficiently.

Copy Link

From the blog

The latest industry news, interviews, technologies, and resources.

May 6, 2024
Cryptography 101: How to Safeguard Your Cryptocurrencies

Imagine checking your crypto wallet, ready to celebrate that Bitcoin surge, and you find it empty! I’m sure you only...

Read More
April 17, 2024
7 Common USDT Trading Mistakes And How to Avoid Them

Waiting for USDT value to accrue overtime might be a very long wait. Hence, USDT trading is increasing in popularity....

Read More
April 17, 2024
OneCoin Scam: A Comprehensive Dive Into One Of The Biggest Crypto Scams

OneCoin is a cryptocurrency scheme founded by Ruja Ignatova and Sebastian Greenwood. It was launched in late 2014. Years later,...

Read More
March 20, 2024
How to Invest in Avalanche: A Step-by-Step Guide 

In recent years, cryptocurrency has literally taken over the digital assets space because of its versatility and high profit, but...

Read More