High transaction fees have long been a recurring issue for users on popular blockchain networks like Ethereum and Bitcoin during periods of increased demand. However, there are protocols, platforms and methods that help users reduce costs.
What are transaction fees?
Transaction fees are fees that users pay to send a transaction or interact with a smart contract on the blockchain network. While gas fees can refer to transaction fees on any blockchain, the term is primarily used to describe transaction fees on the Ethereum network.
Transaction fees are paid in small fractions of the network’s native cryptocurrency. For example, with Bitcoin (BTC), users pay in Satoshi (very small fractions of BTC), and with Ether (ETH), they pay in gwei.
There are two main reasons why users need to pay a fee when sending a transaction. The first reason is to pay miners or validators (also known as nodes) to keep the network secure. Proof-of-work (PoW) blockchains have miners verifying transactions by using their computing power to solve complex algorithms. In contrast, proof-of-stake (PoS) blockchains have validators who issue their tokens to secure the network.
To maintain the security of the network and ensure that there are no fraudulent transactions, these nodes are paid transaction fees on the blockchain. Network authentication allows blocking to be done in a decentralized manner without relying on centralized entities to ensure that no malicious activity is performed on the network.
The second reason users pay transaction fees is to enable the operation of smart contracts. Smart contracts are programs that run automatically after certain conditions are met. For example, a smart contract can be programmed to release tokens or a nullable token (NFT) after receiving a payment or after a certain period of time has passed. Like users, smart contracts also have to pay fees for sending transactions. Therefore, if a user wants to perform a certain function on a smart contract, they will pay gas fees.
Why can transaction fees be so expensive?
Transaction fees are not fixed and vary based on many variables. One of these variables is speed, which means that transactions with higher payouts are prioritized by nodes, reducing the time it takes to arrive. On the other hand, transactions with lower fees take longer to verify because nodes do not prioritize them.
Most major platforms, such as wallets and exchanges, charge a moderate amount upfront for a transaction. However, users can change the fee, increase the amount for urgent transactions, and reduce the amount to save money by waiting longer for the transaction to complete.
Supply and demand are the biggest factors in high transaction fees. Once the blockchain network has a high demand for transactions, the supply cannot keep up, so costs will naturally increase. This leads to nodes prioritizing transactions with higher fees, causing users to increase their transaction fees, which raises the maximum. For example, imagine that the average transaction fee is $3.00, but the network is congested. Therefore, many users start setting their transaction fees at $10. Reasons can include a popular Initial Coin Offering or NFT offering that people are trying to get into.
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However, the demand increases, and even $10 transactions take a long time to complete. So consumers start paying $15 for gas, then $25, then $50, and so on. Additionally, there could be a huge ecosystem of tools and products (i.e., more NFT offerings, product farming, loans, mortgages, general decentralized finance (DeFi) etc.) so the demand for transactions has exploded in various sectors. Now, transaction fees cost more than $300, which was in May, when Yuga Labs launched another NFT portfolio, with gas fees costing more than $450 per Ethereum.
CEO of crypto wallet Ambire, Ivo Georgiev, told Cointelegraph: “All of us at Web3 like to challenge TradFi and expose its weaknesses. It must be admitted that there is no gas payment problem in TradFi. In traditional finance, the fees for operations are insignificant and people don’t care about them.” They are used.
Georgiev continued, “Imagine you log into Web3 right now and you have to pay a $30 fee to exchange $150 worth of tokens during peak hours. Given the many things that happen in crypto interactions – adding/removing liquidity, moving spaces between protocols, bridging between layers – it’s important that gas fees are kept low in order to create minimal friction for the next 1 billion users.
So, basically, when there is high demand, users are willing to pay more to ensure that their transactions are completed. As transaction fees increase, other users pay more to be rejected than previous users and to ensure that their transaction is completed first. Over time this will result in an increase in overall transaction fees on the blockchain network.
Anthony Georgiades, co-founder of Pastel Network – an NFT and Web3 infrastructure and security project – told Cointelegraph:
“Lower gas fees reflect lower congestion and lower ‘network complexity’ on the blockchain, allowing users to participate in cheaper network transactions for capital efficiency. Additionally, the cost of buying and listing crypto assets is reduced by lower gas fees.”
Georgiades continued, “High fees are a major deterrent for new and existing customers who don’t want to spend large amounts on gas — sometimes equal to or more than their purchase price. Keeping gas bills low is essential to ensure the space is accessible and welcoming to consumers.
Current solutions for high transaction fees
Various protocols have been developed in response to the high transaction costs incurred when the blockchain is congested. One of the most popular solutions are layer-2 platforms.
Layer-2 platforms operate on top of the main blockchain or Layer 1, taking a portion of the transaction and verifying it off-chain. By verifying transactions on a separate network, L2s reduce the burden on the main blockchain, prevent congestion and maintain lower fees by increasing speeds. L2 networks themselves have very low fees and fast speeds. The most popular L2 platform that helps scale the Bitcoin blockchain is the Lightning Network. Polygon is another popular L2 for the Ethereum network.
Another popular layer-2 solution is zero-knowledge rollups (zk-Rollups).
They work by extracting sets of transactions from the main chain into a single transaction. A single transaction is verified and proof of validity is sent to the main chain. Zk-Rollups allow the Ethereum blockchain to have lower transaction fees, increased transaction capacity, and faster transaction times due to the reduced load on the network.
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Protocols and wallets have taken steps to reduce transaction fees for users. For example, Ambire Wallet has a gas tank feature that allows users to reduce transaction fees by paying in advance. This works by using credits to pay current gas bills, which will be used for future transactions. So, for example, if gas bills are currently low, the user can prepay the transaction using the current rates, allowing them to send the transaction at a later date with prepaid rates. Users can also pay for gas fees using stablecoins such as USD Coin (USDC) or Tether (USDT), which are less volatile than standard cryptocurrencies.
Different ways for users to reduce transaction fees
There are various ways users can save transaction fees manually. One way to reduce fees is to schedule transactions for periods of low activity or congestion on the network. For example, the Ethereum gas tracker shows average gas charges as well as high and low prices on the Ethereum network. Users can plan to send transactions when the costs are lower to take advantage of the reduced fees.
Depending on the wallet or exchange, users can manually deduct fees for transactions. However, doing so will cause the nodes on the network to be given a lower priority and their transactions will be delayed. If users make too low payments, they may have to wait a long time before their transaction is verified. This approach is best taken during periods of high network activity and for non-urgent transactions. Time transactions are a better option.