Why Cryptocurrencies Have Transaction Fees – A Simple Explanation

NFTexplained.info is a team of long term crypto investors who are well versed in the blockchain space. In this article we will explain why cryptocurrencies have transaction fees in a manner that is comprehensive and easy to understand. 

Let’s dive in.

Cryptocurrencies have transaction fees because of the blockchain consensus algorithm they use which helps secure the network. Fees are incurred as miners must verify transactions which ensures that the additional blocks being added to the existing chain are correct; miners are rewarded for this via gas fees

Blockchains that are based on smart contracts (e.g. Ethereum – amongst many others) incur gas fees depending on two separate things. 

The first one being how challenging it is to verify the transaction. More complicated transactions – on smart contract blockchains – will incur greater gas fees. 

The second one being the amount of people looking to make a transaction. Miners choose to verify the transaction with the biggest reward – meaning the one with the highest gas fee. If someone offers to pay US $50 in gas fees and the next person looking to make a transaction offers US $55 in gas (the miner will choose to verify the $55 transaction and then the next best option which could be the $50 transaction).

Depending on the different blockchain consensus algorithms used, like proof of work or proof of stake, differing amounts of transactions fees must be paid in order for transactions to be processed.

In a proof of work blockchain consensus algorithm, miners are competing amongst one another to be the first to verify a transaction which (across the entire network) consumes far more energy than the proof of work consus algorithm. Learn more about that and the amount of energy an NFT uses, here

Bitcoin transaction fees are primarily based on rewarding miners for their work and for the amount of block space used. Ethereum transaction fees are also based on rewarding miners for their work but also for how challenging it is to execute the smart contract (rather than the amount of block space the transaction takes up). All transactions are displayed publicly for all users to see and are immutable – this makes the blockchain safe.  

In addition to keeping the blockchain secure through having miners validate transactions, you should be aware – or perhaps you’ve already noticed – crypto exchanges also take transaction fees.

Which Crypto Exchange Has The Lowest Fee?

As a general statement all crypto exchanges have fees as this is the primary way they make money. While Robinhood has no fee for crypto trading, there are fewer crypto currencies supported on their platform. Binance sees the highest trading volume and the low fees while offering the most cryptocurrencies. 

These types of fees are not gas fees but rather fees incurred by the platform. While these are often minimal, it’s ideal to minimize them. One straightforward way to do this is to deposit a large amount of funds at once rather than multiple times as many platforms charge a deposit fee. 
If you are in the U.S., you can use our team’s crypto trading discount on Binance! It should be noted that in comparison to publicly-traded giant Coinbase, Binance’s fees are less expensive.

Why Is The ETH Miner Fee So High?

As a general statement, the Ethereum miner fee is high because there are lots of people looking to complete a transaction and miners choose to verify the transaction with the biggest rewards (i.e. highest gas fee). During times of less congestion, Ethereum gas fees are much lower.

Ethereum gas fees range enormously in price. High gas prices have a direct correlation to the amount of people looking to make a transaction at that specific time. Any transaction on Ethereum will incur a gas fee as it must be verified; this allows for peer-to-peer verification and the overall safety of the network.

Miners verify a transaction by solving mathematics – specifically of cryptographic hash puzzles. Once the equation is solved, that block is added to the existing blocks and the miner is rewarded. 

Why Are Bitcoin Transaction Fees So High?

Bitcoin transaction fees are high because the supply of block space is limited to 1MB of transactions for every 10 minutes; if the number of people looking to make a transaction exceeds 1MB, then the miner chooses the most profitable one first (i.e. the one with the highest gas fee). 

Bitcoin transaction fees depend more on the size or the amount of block space that is taken up. As previously mentioned, Ethereum is different as it is based on smart contracts and gas fees are impacted more by how complicated the smart contract is. That being said, times when both Bitcoin and Ethereum networks are charging high gas fees is highly correlated to the number of people looking to complete a transaction.

How To Avoid Cryptocurrency Mining Fees

The best way to avoid fees is to transact at a time that isn’t congested; this can be determined by looking at blockchain explorers like Etherscan. When transferring money, it’s better to do one large transaction compared to multiple smaller pieces as any transaction incurs a gas fee. 

Blockchain explorers like Etherscan allow you to view many features including: transaction or pending transactions on the blockchain (the blockchain is immutable and all users can see any transaction). Blockchain explorers allow you to view deposits on specific blockchain, tokens like ERC20, and NFT projects amongst many other features. 

Possibly, the most important is the ability to track gas fees on blockchains. Our team will link the Ethereum gas tracker where low, average, and high fees are shown on platforms like OpenSea amongst many others. That Ethereum gas tracker can be found here

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