Key Insights:
- Network congestion forces users to pay more for gas to ensure faster transactional processing.
- Various blockchain systems have different fee schemes, including gas-based, resource-based, and fixed low-cost models.
- Users can reduce their costs of using cryptocurrencies during peak market times with the help of timing their transactions as well as using Layer 2 chains.
Transaction fees, commonly referred to as crypto fees or gas prices, form an integral part of a blockchain transaction. Transaction fees are also foundational to a blockchain’s security. A transaction fee may vary based on the amount of demand a transaction has, how the network is designed, and how complex a transaction is. Understanding how congestion and gas interact will empower users to make better purchasing decisions while minimizing excessive expenses on a blockchain network.
What Are Crypto Fees and Why Do They Exist?
Payments for validators and miners to process transactions are known as crypto fees, which are basic fees for the operation and security of blockchain networks. All transactions require a certain amount of processing power and storage capacity.
Bitcoin has a fee system based on transaction size and demand for blocks, while smart contract platforms charge fees depending on their computational workload.
Crypto fees can be incurred in two ways: You send crypto tokens to someone else, swap one digital asset for another, or interact with a DAPP.
One of the quirky things about crypto fees is their volatility, caused by the amount of activity that is happening on a blockchain at a given time.
Fees fluctuate based on everything from market changes, protocol improvements, and the amount of activity in DeFi across multiple different networks.
How Do Gas Fees Work on Smart Contract Networks?
Gas is an indicator of how much computational power is used to process a transaction on a digital currency-based blockchain.
Gas is used by Ethereum and other similar networks to keep track of different transaction costs associated with different types of transactions. For example, simple transfers will use much less gas than executing a smart contract.
Every transaction has a limit and a price. A transaction’s limit indicates the maximum computation allowed to execute the transaction.
While the gas price indicates the cost per unit of gas. Therefore, you can determine how much you will pay in total crypto transaction fees by multiplying both of these values.
Some wallets allow users to manually adjust gas settings by selecting their preferred amount for either limit or price.
Therefore, higher-priced gas typically leads to faster confirmations for your transactions, whereas lower-priced gas often leads you to wait longer for your transaction to be confirmed during times of high demand on the network.
Why Does Network Congestion Increase Crypto Fees?
Transaction congestion on networks occurs when numerous users send their transactions all at once.
All blockchains have a limit to the number of transactions they can process each second; when the demand exceeds the supply, it forces users to compete against each other for gas costs.
As long as the demand is high and there are not enough transactions being processed, gas costs will continue to increase, resulting in high crypto fees, and will slow/stop the processing of low-fee transactions.
Additionally, as you may have seen recently, there are times when your pending transaction remains unconfirmed for extended time periods.
Typically, congestion will take place during market rallies, popular NFT launches, or when major protocol upgrades are released. One primary function of scaling solutions is to eliminate congestion by increasing transaction throughput.
How Do Different Blockchains Structure Crypto Fees?
There are many ways that different cryptocurrencies have created a crypto fee model within their blockchains. Bitcoin lets users bid for space on the blockchain based on the amount of space a transaction takes up, and then it charges them accordingly.
Ethereum charges a gas price to cover the cost of computation and storage. In contrast, both BandChain and Tron use resource systems where users stake their tokens to receive reduced fees.
Solana has a low-cost model that is designed to generate speed and a high number of transactions per second.
Layer 2 (like Arbitrum, Optimism, Polygon) is able to batch transactions off-chain, thereby avoiding the high costs of on-chain transactions while still benefiting from on-chain security.
What Are Practical Ways to Reduce Crypto Fees?
To decrease your crypto transaction costs, it can be helpful to process your crypto transactions during off-peak times. Common examples would be weekend evenings and off-peak hours, which have relatively low network activity levels. Gas tracking tools assist consumers in determining the optimal time to make their transactions.
Another way to decrease transaction costs is by utilising layer 2 networks, where the costs of frequent transactions are lower than traditional networks, and setting a wallet for non-urgent transfers allows for savings to the consumer.
Batching transactions allows the user to make several transactions into one, resulting in lower costs per transaction.
Certain networks will allow users to stake their tokens in exchange for bandwidth or energy. Lastly, using low-fee networks for basic transfers will generate lower costs.
What Hidden Costs Exist Beyond Crypto Fees?
In addition to the regular crypto transaction cost, there are also costs associated with performing a token swap and/or using a bridge to transfer an asset.
When the price of a token changes from the time that you initiate a transaction to the time that the transaction is processed and confirmed, this is referred to as “slippage.”
There are also fees associated with using a bridge when you move an asset from one blockchain to another.
Each protocol also imposes fees for the different types of DeFi activities it provides. There are also additional withdrawal and transfer-out fees that centralized exchanges charge when you’re withdrawing funds or moving your funds outside their platform to fund another platform.
These costs all contribute to the total amount of fees a user will incur during a single transaction.
Blockchain explorers and crypto wallets that support actual fiat currency are able to provide estimated transaction costs in terms of a fiat amount. This allows the user to more accurately budget for how much they’re going to spend.
Final Thoughts
The cost of using a cryptocurrency network can vary based on a variety of factors, such as gas pricing, the level of network congestion, and how the network has been designed.
When users use a blockchain system to conduct transactions, they have some ways to control these transaction fees by using networks that are more efficient, adjusting their gas settings, and timing their transactions carefully.
Understanding how transaction fees may be affected by hidden fees will give users more control over their on-chain activity and spending.
