Blockchain technology promises to change the world’s economy from centralized to completely decentralized by no one being able to manage or change them, but obstacles for most current users come. Those Blockchains have very expensive transaction fees. So what are transaction fees? Why do Blockchains need transaction fees? Let’s find out from Weakhand in this article.
Some other basic terminology articles from Weakhand that people can also refer to:
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- What is Bridge Layer? Top 3 Projects Living Between Web2 and Web3
- What is Social E-Commerce? Its Future in Web3
What Are Transaction Fees?
Before learning about what transaction fees are, we will go back to a little basic knowledge about the main components involved in operating a Blockchain: Nodes or Validators. They operate a network of different computers from around the world with the purpose of organizing, validating and storing data for transactions on the Blockchain.
Operating this network will take a lot of resources and costs for PoW Blockchains or a large amount of money to Stake for PoS Blockchains. And of course, they will have to earn profits from participating in network operations with the 3 main and most popular sources:
- Block Rewards: Inflation rewards are generated after each block.
- Transaction fees: It is the fee that users pay for transactions on the Blockchain.
- MEV: Profit earned from arranging intentional transactions.
Therefore, the transaction fee is a payment in the native token of the Blockchain itself that is paid to the parties involved in operating the network to perform a transaction. If the transaction is more complex, the transaction fee the user needs to pay will be larger.
Factors Affecting Transaction Fees
Number of transactions
As the number of transactions at a given time on a Blockchain increases, validators will have to process a larger amount of information. The processing mechanism of validators is to prioritize transactions with higher fees, so users are required to pay a larger fee to be processed first.
Abnormal increases in the number of transactions often occur during periods when the market fluctuates continuously up or down. Users will now tend to continuously trade to buy or sell, causing the number of transactions to increase sharply.
Transaction complexity
Each different Blockchain will have a different way of calculating transaction fees based on complexity. For Bitcoin, the fee will be calculated based on size (in bytes). For example, the size of any transaction on Bitcoin is 1000 bytes and the average transaction fee will be 50 satoshis per byte, so for that transaction to be confirmed, it will require 50,000 satoshis or 0.0005 BTC. .
As for the Blockchain with the largest DeFi economy currently, Ethereum, the transaction fee will be calculated on the Gas of the network. A transaction of great complexity, such as interacting with smart contracts, will have to consume more Gas, resulting in higher transaction fees. For example, a simple money transfer transaction will only cost one Gas fee, but a swap transaction from token A to C that must go through B will cost 2 more Gas fees.
Blockchain consensus mechanism and algorithm
Blockchains that were created a long time ago using old consensus mechanisms such as PoW will not optimize the costs for a transaction, so the fees users have to pay will be very high. As for new generation Blockchains that use more modern consensus mechanisms such as PoS or PoH, the transaction fees that people have to pay will be much more optimal.
Why Does Blockchain Need Transaction Fees?
Retain transaction validators
Becoming a transaction authenticator will require a lot of expenses, including:
- Hardware costs.
- Electricity costs.
- Security costs.
- Research and security costs.
Therefore, transaction fees from Blockchain users will be a very important source of revenue to help transaction authentication cover other costs. Blockchains with too few users usually also do not attract transaction validators with too little transaction fees.
Resists spam attacks
Paying a small fee won’t be too much for a normal user, but it makes a huge difference when it comes to fighting spam bots. People with bad intentions can use bots to attack a protocol or even Blokchain by creating many transactions continuously, having to pay for each transaction will make these attacks very expensive. least.
In fact, transaction fees are too cheap and will also be a problem for some Blockchains when bad actors can rely on them to attack for profit. The most typical example is Solana when this Blockchain continuously crashes due to too many NFT mint bots on the network.
Summary
Above is the necessary information to understand what transaction fees are? As well as why transaction fees are so important to Blockchain. Hopefully, through this article, Weakhand has brought everyone useful content for the investment process.
