How Cryptocurrency Transaction Fees Work

A beginners guide for understanding what cryptocurrency transaction fees are and how they work

Photo by Bitcoin BCH on Unsplash

Dealing with cryptocurrencies can be confusing. There are now over 1500 different coins and tokens, each of which have their own unique quirks. One of the things that many cryptocurrencies have in common is a transaction fee. How this fee is calculated depends on the coin, with most calculating it based on the amount of data transmitted. Why do coins charge a fee for their transactions? The most common answer is to compensate miners for using their computer power to run the blockchain. Let’s explore some of these ideas at a deeper level.

In order to attract miners to run a blockchain, there has to be some sort of reward. On top of a block reward, miners can also earn the network fees of transactions that they participated in mining. If a transaction fee is too low, then miners are less likely to pick up that transaction for mining. The reason for this is that miners won’t spend more computing power than it is worth to mine that transaction. Most personal wallet software calculates the fee automatically depending on the blockchain network activity. Most of these wallets made for Bitcoin, the most popular cryptocurrency, only allow you to calculate it this way. However, many of these wallets also allow users to choose what they want to include for the transaction fee. An example of this would be Ethereum, which gives you the option to change your gas cost. Certain online providers, like Coinbase, may even have their own wallet fees. Though there are other reasons for transaction fees besides to benefit miners, we won’t explore them here.

The average transaction fee for a coin is dependent on a few factors. One of these factors is network activity. The busier a network, the harder it is to get your transaction entered on a block. The more people competing for this space, the more these fees tend to rise. Another factor that affects this fee is the amount of included data. A plain transaction won’t cost an arm and a leg, and the fee will be fairly standard. In contrast, if a transaction is being used to execute a smart contract, the fee tends to rise. The more data included in a transaction, the higher the cost will be. The third thing that may affect a transaction fee is the provider being used. While a majority of wallets don’t have additional fees, many cryptocurrency exchanges and online wallets include them. Often these providers charge a percentage fee to keep their platforms running.

The world of blockchain can be hard to navigate. Concepts such as cryptocurrency transaction fees can at times be mind boggling. Understanding these concepts can take time and research. The crypto space is very new, only existing in the mainstream for less than a decade. If you are a beginner, you are certainly not alone. For more resources, check out the articles on our CoinLion blog as well as the resources page on our research portal.