Cryptocurrency has now become the center of attention for many people. Not only accomplished traders, but many beginners have also started trying their luck in this world. But like any other investment, cryptocurrency has its risks, which is why many things must be taken into account so you get the maximum profit. One factor to watch out for is blockchain transaction fees. You need to minimize spending on transaction costs so that the profit you get can be maximized. Are you wondering what are blockchain transaction fees and why are they important to consider? Let’s discuss more in this article.
What Are Blockchain Transaction Fees and Why Are There?
If you want to do some form of transaction on the blockchain, then you have to pay a transaction fee. The fees incurred depend on the dynamics of the market and the activities of the blockchain network. These fees are important in the blockchain ecosystem. This is because all existing transaction activities do not occur automatically. Transactions that occur need to be checked, validated, and added data to the blockchain. All of these activities require high computing power and the help of miners who need sophisticated software to solve complex mathematical problems. From there, transaction fees are needed as an incentive for those who participate in carrying out all the activities necessary for a transaction to be carried out successfully on the blockchain.
Transaction fees are also presented as a form of protection for the blockchain network. The fact that carrying out any type of transaction on the blockchain requires a fee makes people think twice about spamming and can also give miners an incentive to secure the Blockchain network.
The fees incurred depend on the dynamics of the market and the activities of the blockchain network. In addition, transaction fees can fluctuate depending on the density of the blockchain network. The quicker you want the transaction to happen, the higher the fees you will have to pay. This is necessary because miners need a higher fee to prioritize those transactions to be completed.
You need to understand that blockchain transaction fees are not the same as fees charged by cryptocurrency exchanges. Those additional fees go directly to the exchange, while blockchain transaction fees go to the block miner.
How Do Transaction Fees Work?
In general, the costs incurred in blockchain transactions depend on the complexity and amount of data in the transaction. The more complex and large the data in the transaction, the more expensive the costs incurred. For example, executing smart contract transactions on the Ethereum blockchain requires more computational power than ordinary transactions. With this, the costs incurred are also more expensive.
If the blockchain network is congested, then the user has to manually increase transaction fees if he wants his transactions to be prioritized. Blocks on the network have limited space for a few transactions, so miners focus more on validating transactions with higher fees. This led to a bidding war that pushed transaction costs even higher.
But if we want to know how transaction fees work, we have to look at it from a blockchain type. Each blockchain network has its mechanism. Let’s discuss the two largest blockchain networks that exist in the cryptocurrency world: Bitcoin and Ethereum.
Bitcoin Transaction Fees
The Bitcoin blockchain network requires miners to validate transactions. Without miners, there would be no blockchain network and transactions could be validated. In determining the number of transaction fees, the biggest factor is the transaction size in bytes. The more complex a transaction that requires more inputs and outputs of large data, the more expensive the costs incurred.
Ethereum Transaction Fees
While Bitcoin sets its fees based on bytes, Ethereum transaction fees depend on the amount of computing power used to validate a transaction. This computing power is referred to as ‘gas’. Just as a car needs gas to run, you need gas to do anything on Ethereum. Starting from doing smart contracts, exchanging coins, and so on.
This gas fee consists of two things: the gas limit which is the maximum amount of gas that you are willing to pay and there is also the gas price which is the total transaction fee that you will pay per unit. The basic transaction fee is set based on the existing block, but the price charged can be increased or decreased depending on the activity of the network. To mitigate the risk where validators determine their base fees for their benefit, the base fees are forfeited and only tips from users are rewarded to validators.
Why Understanding Transaction Fees is Important
With the increasing popularity of cryptocurrencies today, many businesses are integrating their services into the blockchain. Understanding how transaction costs work is critical to predicting expenses. There is always the possibility that the user will pay more than the amount of cryptocurrency they are trading. For this reason, it is wise to study the transaction fee mechanism to avoid the risk of loss.
Tips for Saving Transaction Fees
After understanding how the transaction fee mechanism works, the next thing you need to understand is how to save on your expenses. Here are some tips that you can do to reduce the transaction fees you need to incur in the blockchain:
Waiting for the network not to be busy
As explained above, network congestion greatly affects the transaction costs that you incur. If you wait for network congestion to decrease when making transactions, the costs incurred can be smaller. If the network is busy, you can still pay a small fee by waiting a long time, which can be very long, for the transaction to complete. These two things can be your main way of saving on cryptocurrency transaction fees.
Using the Lightning Network
The Lightning network is a network built on top of the Bitcoin blockchain to reduce transaction congestion and increase the number of transactions that can be made at one time. With the lightning network, transaction costs incurred can be reduced.
Gas Cost Optimization
In carrying out transactions on the Ethereum blockchain network, the determining factor for transaction fees is network density. If you want to make transactions faster, you can increase 25% of the gas costs incurred. To lower transaction fees, you can lower gas fees by 25% but with longer waiting times.
Smart Contract Efficiency
Optimizing smart contracts is another tip for saving on transaction fees on Ethereum. The more complex the smart contract used, the higher the fee. This implies that you must make your smart contract as simple and small as possible to reduce transaction costs. By simplifying it, you can remove unnecessary smart contract functionality and simplify the code.