What are transaction fees?

You’ll pay transaction fees, also known as network transaction fees, or gas, for nearly all transactions on a blockchain network. What are these fees? What makes them go up and down? And who gets to keep the money?

What are network transaction fees?

Network transaction fees, also known as gas, are fees you pay to blockchain networks to process and confirm your transactions.

You pay these fees to miners or validators, depending on the consensus mechanism of the blockchain. They validate and write your transaction to the blockchain.

Fees are paid in the primary cryptocurrency of the network. For example, if you send a BTC transaction, you will pay the fee in BTC.

However, if you send a token that runs on another network, say USDC as a ERC20 token on Ethereum, you’ll pay for gas in ETH.

How do transaction fees work?

Transaction fees are determined by a variety of factors such as network congestion, transaction size, and desired transaction speed.

You pay fees in the crypto you’re sending, unless it’s a token that runs on another network.

If you’re sending a token that runs on another network, such as ERC-20 tokens on Ethereum, or BEP-20 tokens on Binance Smart Chain, you’ll pay fees for sending tokens in the primary cryptocurrency of the network.

For example, if you are sending USDT on Ethereum, you’ll pay for gas in ETH, and if you’re sending BUSD on the Binance Smart Chain network, you’ll pay for gas in BSC BNB.

Miners or validators receive these fees, then process and confirm the transactions.

Why do we pay transaction fees? Fees incentivize miners and validators to process transactions and maintain the security of the blockchain network.

Higher fees generally result in faster processing times, while lower fees may result in slower processing times. If the fee is too low, the transaction may not get processed at all.

What affects how much a transaction fee costs?

Transaction fees can fluctuate depending on a few factors. These include:

  1. Network congestion: If a network is congested and lots of transactions are waiting to process, then fees will increase. You can think of it like paying a higher toll to bypass a lineup of cars. This is the law of supply and demand. The more demand, the higher the fee.
  2. Transaction size: If a transaction is larger (i.e. has a greater number of bytes) it will require more processing power, so it will cost more.
  3. Type of transaction: Different types of transactions will have different fee structures. For example, a simple send transaction will cost less than launching a smart contract on Ethereum.
  4. Time of day: Some networks may experience peak hours where there is more activity and congestion, resulting in higher fees.
  5. Wallet settings: Some wallets allow you to set custom fees, so you can pay a lower fee for your transaction to confirm slower, or a higher fee for your transaction to confirm faster.

Fees on different networks will vary. For example, gas on Polygon is much lower than on Ethereum.

Fees can also fluctuate on the same network based on the conditions above.

What are different types of transactions and their fees?

Here are some examples of different types of transactions and their fees on various networks:

  1. Sending transaction: This is the most basic type of transaction, where you send crypto from one address to another. Fees for this type of transaction are generally lower. For example, on the Ethereum network, the gas cost for a simple send transaction can range from $1 to $5 or more, while on the Bitcoin network, the transaction fee can range from a few cents to a few dollars, depending on network congestion.
  2. Sending tokens: Sending tokens on a network requires more gas than sending a primary asset. For example, on the Ethereum network, transferring an ERC-20 token can cost between $0.50 to $5 or more, depending on network conditions.
  3. Staking transactions: Staking crypto can require paying fees for creating a staking contract, delegating your stake (i.e. sending your crypto to the staking contract), and withdrawing your stake.
  4. Smart contract deployment: Deploying a smart contract on a network requires more computational power so it incurs higher fees. For example, on the Ethereum network, deploying a smart contract can cost between $5 to $50 or more, depending on network conditions.
  5. NFT minting: Minting an NFT on a network usually costs quite a bit of gas. For example, minting an NFT on Ethereum can cost anywhere between $10 to $50 or more, depending on network conditions.

So fees vary based on what you’re doing on a blockchain network, as well as fluctuate with market conditions.

How do I see the cost before I send?

Most wallets will show you the amount you’ll pay before you send the transaction. You can look in the fee field before you confirm that you want to send the transaction.

You can also use a tool like YChart’s Bitcoin Average Transaction Fee chart to figure out how much a BTC transaction will likely cost.

You can also find current gas prices for Ethereum at Etherscan’s Ethereum Gas Tracker.

How can I minimize transaction fees?

There are a few ways to minimize transaction fees:

  1. Wait for lower network congestion: If you can afford to wait, you can send your transaction during off-peak hours when there are fewer transactions waiting to be processed.
  2. Use a wallet that lets you set custom fees: Some wallets allow you to set your own transaction fees, so you can choose a lower fee if you’re willing to wait longer for your transaction to confirm.
  3. Choose a network with lower fees: Some blockchain networks have lower fees than others. For example, Polygon generally has lower fees than Ethereum.
  4. Use a batching service: If you need to make multiple transactions, you can use a batching service to combine them into a single transaction. This can help reduce your overall transaction fees.
  5. Use a gas price tracker: Gas prices can fluctuate, so using a gas price tracker can help you determine the best time to send your transaction with a lower fee.

TL;DR

You pay transaction fees to miners or validators to process transactions on blockchain networks.

There are a few tools to assess current transaction fees, but the easiest way to see how much a transaction will cost is to look in the fee field in your wallet.

Fees fluctuate based on market conditions, transaction size, transaction type, and sometimes the time of day. Some wallets let you choose a custom fee when you send a transaction.

Who gets to keep the money? Miners and validators profit from transaction fees. This is how you can earn passive income when you stake crypto.