As we have seen previously in ‘Mining and Validating’, depending on the consensus method used by a blockchain, a fee will be required to send a transaction. Each form of consensus has its advantages and disadvantages, always responding to a balance between security, scalability, and decentralization.
These costs may seem restrictive at first but if we take a closer look, they’re essential to securing the network and avoiding ‘double-spending’.
Depending on the blockchain used, costs can serve to reward miners for their commitment to the network yet they can also become completely invisible to the end-user to facilitate the various use-cases.
To understand transaction fees on the Bitcoin blockchain, you must be aware that each transaction is processed one after the other by miners based on the ‘Proof of Work’ consensus. Depending on the length of this transaction queue, called ‘Mempool’ or memory pool, your transactions will take more or less time to be validated. This is one of the big drawbacks of the Bitcoin blockchain: if there are too many transactions, it could take several hours or even several days before your transaction is put in a block and then broadcast on the network!
The fees are expressed in satoshi/byte and are calculated based on the length of the transaction and how busy the network is. A long transaction could, for example, involve several recipients. Even if most wallets nowadays pay these fees according to the queue, it is possible to pay more for your transaction to be prioritized over others.
As explained above, miners will take care of entering transactions into blocks, but not just anyhow. Since fees are a form of payment for them, they will therefore prioritize the transactions with the highest fees. In the diagram above, the transactions will therefore be processed by the miners from top to bottom.
Bitcoin has slow transactions and cannot handle a lot of transactions at one time. To overcome these issues, a solution has been developed: a second layer on top of Bitcoin called the ‘Lightning Network’. This second layer opens a temporary ‘mini-safe’ where a very high number of transactions can occur with almost non-existent fees.
Technically, this ‘mini-safe’ is a micropayment channel because of its capacity to handle in a very efficient way a small amount of Bitcoin. Instead of having a transaction validated one after another, the Lightning network opens a payment channel reserved for two entities and must be supplied with Bitcoin by both parties wishing to use the channel.
As long as the channel is open, the number of possible transactions is almost unlimited. When the channel is closed, each participant of the transaction will get their due number of Bitcoin.
Let’s take the example of Zoup and Dan who want to play poker. Each of them puts 1 Bitcoin into a Lightning Network channel and divides the 2 Bitcoin into 1 million satoshis each. They will not be able to trade more than 2 million satoshis during the game. They will be able to carry out a very large number of transactions and in order to keep the accounts, Dan and Zoup will need to complete an engagement transaction from time to time which will mark a ‘milestone’ in the exchanges. Once they’re finished playing poker, Zoup and Dan will only have to close the channel to receive the Bitcoin owed to them.
Being able to use the Lightning Network is not free. When the channel opens, during engagement transactions and when the channel is closed, Bitcoin’s usual transaction fees apply. Each transaction carried out in the channel also costs 1 satoshi.
Having the ability to open up ‘micropayment channels’ has enabled crypto or blockchain games to instantly reward gamers in satoshis much faster and more cheaply.
Ethereum also uses the ‘Proof of Work’ consensus and the way it handles transactions is very similar to Bitcoin. Each transaction must be entered into a block by the miners to be confirmed, and the fees serve both to secure the network and to reward the miners. Transaction fees on the Ethereum Blockchain are paid in Gwei and are commonly called ‘gas’.
Two concepts hide behind this name:
To determine the final price for transaction fees, simply multiply the gas limit by the gas price.
The calculation seems simple at first, but the gas limit varies according to the type of transactions that will be carried out. For example, there’s a big difference in terms of gas limit between sending Ether to a friend and deploying a more resource-intensive smart contract!
On Ethereum, the more lines of code there are to be read and validated by miners, the higher the gas limit will be. The limit referred to in ‘gas limit’ is the minimum limit for a transaction’s entire code to be read and validated by miners. Regarding the maximum limit, it is determined by the storage capacity of a block, namely 10,000,000 of Gas. Once this maximum is reached, you have to wait for the next block to register the transaction.
The price of gas balances according to the network use. You might think that the more trades there are, the higher the price, but as the graph above shows, this is not always the case. Although between 2018 and 2019, the use of NFTs experienced a slight increase, 2020 was marked by the arrival in the ecosystem of institutional actors as well as a lot of Decentralized Finance (DeFi) projects.
This overlay has an extremely simple goal: to radically lower the costs as well as the time of Ethereum blockchain transactions. Designed to facilitate the exchanges of the ERC-20 and ERC-721 standards, it is nevertheless necessary to pass through a ‘bridge’ between the Ethereum blockchain and the Polygon overlay so that the assets can be transferred.
Unlike the Lightning Network where it is necessary to close the channel or send an engagement transaction for the exchanges to be registered on the main blockchain, on Polygon it is possible to see the transactions taking place publicly.
For transactions to be validated, this secondary blockchain operates as a ‘Proof of Stake’ system, which requires a minimum number of tokens to be able to participate in securing the network. As a result, the costs inherent in the transactions are a reward for the various users who have staked their tokens.
The fees on WAX and EOS blockchains have nothing to do with the previous examples. Both are based on the EOSIO protocol (which has lower and faster transaction fees) and use the same system of management for the transaction fees. This protocol works in ‘Delegated Proof of Stake’ and in order to work, it requires having frozen resources in the wallet.
Depending on the Dapp you want to interact with, these cryptos use three types of resources to complete a transaction: RAM, NET, and CPU.
RAM means Random Access Memory. It is the amount of space (in bytes) the Dapp will need to work properly. It will read users’ data such as keys, balances, and other account data during a transaction.
NET can be understood as the blockchain bandwidth. It is the amount of space (in bytes) dedicated to storing your transactions.
CPU stands for Central Processing Unity. It is the amount of time (in microseconds) a blockchain will dedicate to processing your transactions.
Where Ether is needed to pay gas to send your Ethereum transaction, EOS will need the CPU, RAM, or NET account resources to complete the transaction. On EOS, the CPU and NET regenerate over time while RAM will have to be bought on a secondary market. The transaction-intensive Dapps quickly raise these different counters and if too many transactions take place on the network, risk of congestion of another type will appear which will require stacking a gigantic number of EOS or WAX to be able to interact with the blockchain.