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What Are Blockchain Network Transaction Fees?

2023.07.27 MEXC

Blockchain network transaction fees, also known as miner fees, are the fees users pay to blockchain miners/validators during the process of transferring cryptocurrencies like BTC/ETH. They are similar to transfer fees in traditional banking systems.

In most cases, blockchain networks are maintained by distributed nodes, and the node maintainers are also miners. They are responsible for verifying the accuracy of transaction information and packaging your transaction into a block on the blockchain to complete the transfer.

1.Why is It Necessary to Charge Blockchain Transaction Fees?

Charging transaction fees serves two main purposes:

Firstly, it increases the cost of performing malicious activities.

If there were no transaction fees, evildoers could repeatedly make small transfers between a few wallets, such as transferring 0.000001 BTC each time. This practice would not cause any significant loss to the evildoer but would consume a large amount of blockchain network resources, leading to network congestion and preventing legitimate users from conducting transactions. By introducing miner fees, such malicious activities are discouraged, as the cost of conducting these fraudulent transactions becomes substantial.

Secondly, it serves as a reward for miners and nodes.

When miners and nodes broadcast transaction information to the blockchain network, they expend resources and labor in the process. To incentivize miners and nodes to process these transactions into blocks, a portion of the transaction fees is allocated as a reward for their efforts.

2.How to Calculate Blockchain Transaction Fees?

The calculation of transaction fees varies slightly across different blockchain networks. Here, we will introduce the calculation methods for two popular cryptocurrencies: Bitcoin (BTC) and Ethereum (ETH).

2.1 Bitcoin Blockchain Transaction Fees

It is important to note that the Bitcoin blockchain does not enforce mandatory transaction fees, and theoretically, Bitcoin transfers can be conducted without fees. However, with the increasing popularity of Bitcoin transactions, miners have started prioritizing transactions with fees. As a result, it has become nearly impossible to complete a Bitcoin transaction without paying a fee.

The transaction fee of Bitcoin is unrelated to the amount being transacted but rather depends on the size in bytes of the transaction. The byte size is determined by the number of UTXOs used in the transaction. The more UTXOs used and consumed in the transaction, the larger the byte size of the transfer, leading to higher transaction fees. For example, if both Bob and Tom are sending 3 BTC to Alice. Bob uses 3 UTXOs each worth 1 BTC while Tom uses 1 UTXO worth 3 BTC. In this case, Bob's transaction will clearly have a much larger byte size compared to Tom's, resulting in him paying a higher transaction fee. UTXO stands for Unspent Transaction Output. For more detailed information about UTXOs, you can refer to the MEXC Beginner's Guide article "What is Unspent Transaction Output (UTXO)?"

In addition to byte size, the transaction fee of Bitcoin is also affected by the miner's fee rate, which refers to the number of satoshis (sats) required per byte of the transaction (sat is the smallest unit of Bitcoin, 1 satoshi = 0.00000001 BTC). The miner's fee rate is related to the congestion of the Bitcoin network. If there are too many people transacting Bitcoin, the network may become congested. In such cases, if you want your transaction to be confirmed quickly, you can choose to increase the miner's fee rate, and miners will prioritize your transaction in the block. Alternatively, you can wait for the Bitcoin network to return to normal, and miners will include transactions in the order they receive.

In summary, the Bitcoin blockchain transaction fee is calculated as follows: Transaction Fee = Byte Size * Miner's Fee Rate.

2.2 Ethereum Blockchain Transaction Fees

Compared to Bitcoin, it's relatively complicated to calculate transaction fees on the Ethereum blockchain. In the process of calculating transaction fees, the Ethereum blockchain network introduces the following concepts: ① Gwei, ② Base Fee, ③ Priority Fee (Tip), and ④ Gas Limit.

① Gwei:

Just as Sat is the smallest unit of Bitcoin, Gwei is the smallest unit of Ethereum, where 1 Gwei = 0.000000001 ETH. The transaction fees on the Ethereum blockchain are denominated in Gwei.

② Base Fee:

Each block has a base fee as the minimum price. If you want to add a transaction to an Ethereum block, the transaction fee (gas fee) must be at least equal to the base fee. The base fee is calculated using a formula that compares the size of the previous block (the total amount of gas used in all transactions) with the target size. If the target block size is exceeded, the base fee for each block can increase by up to 12.5%.

③ Priority Fee (Tip):

After the London upgrade, Ethereum introduced the concept of a priority fee (tip) to incentivize miners to include a transaction in the block. The tip is optional and can also be set to zero. If you want your transaction to be executed with priority, you can offer a higher tip, which encourages miners to prioritize including your transaction in the blocks.

④ Gas Limit:

The gas limit refers to the maximum amount of fees you are willing to spend on a transaction. Since transactions involving smart contracts require more computational resources compared to simple payments, they require a higher gas limit. In general, standard Ethereum transfers have a gas lower limit of 21,000 Gwei, and the upper limit can be set by the user.

Considering the above four factors, the transaction fee on the Ethereum blockchain is calculated as follows: Transaction Fee = Gas Limit * (Base Fee + Tip Fee).

Different blockchain networks or tokens have different fee standards and calculation methods. For example, the transaction fee rates on the following blockchains are PIT 4%, CULT 0.4%, FEG-ETH 2%, GM 1%. These fees are collected by nodes or miners and are independent of the platform. However, transaction fees are subject to factors such as the state of the blockchain network, so please refer to the actual transaction fees on that specific blockchain for precise information.

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