What are transaction fees? | How Do Bitcoin and Crypto Work? | Get Started with Bitcoin.com

Why do we need transaction fees?

Transaction fees prevent blockchain networks from being flooded with transactions which prevent legitimate usage of networks. Transaction fees are also paid out to people who help run and maintain the security of the network. Finally, transaction fees serve as a mechanism to distribute a potentially scarce resource — blockspace.

The amount of transactions that can be processed in a given time is called blockspace. Every blockchain has an upper limit of transactions per second (TPS) that can be added. Bitcoin’s TPS is approximately 5, Ethereum’s is 10, and Avalanche’s is 1000+.

Blockspace creates a supply and demand dynamic. If the demand for blockspace is lower than the total achievable blockspace (e.g., for Bitcoin, there is less than 5 TPS), the transaction fee will be low. Conversely, if the demand exceeds the transactions per second, then the transaction fee will rise commensurate with the demand. Popular blockchains with low blockspace will almost always have high transaction fees.

During events that create high demand for blockspace, such as NFT mints or even market meltdowns, transaction fees can be as high as the equivalent of 300 US dollars as people compete to get their transactions added to the blockchain before others.

How do transaction fees work?

As stated above, transaction fees are paid for actions that take place on a blockchain. Those actions can be broken into two categories:

1. Adding data to the blockchain.
2. Computational effort performed by the blockchain.

Blockchains lacking general purpose smart contract functionality derive almost all of their transaction fee from the first category. These are cryptocurrency-like blockchains such as Bitcoin. For a more in-depth look at how Bitcoin transactions work read the article below.

Read more: How bitcoin transactions work.

Blockchains with general purpose smart contract functionality calculate transaction fees using both categories. Ethereum is the most popular general smart contract blockchain. Transactions on the Ethereum network are measured by computational effort, called ‘gas.’ For example, sending ETH from one address to another (one of the simplest transactions you can make on the Ethereum network), may consume 20,000 units of gas. More complicated transactions require more computational effort and, therefore, consume more gas. If your transaction involves interacting with several smart contracts, for instance, you may consume 100,000 gas units or more. You can read more about Ethereum gas and how transactions are calculated in the article below.

Read more: What is ETH gas and how do fees work in Ethereum?

Customizing transaction fees

The best digital wallets allow you to customize your transaction fees. For example, here’s how Ethereum transaction fees work in the Bitcoin.com Wallet:

1. On the “Enter send amount” screen, tap on the “Network fee” icon at the top-left
2. Choose from one of the three following options:

‘Eco’ means you’ll pay a lower fee, but your transaction will take longer

‘Fast’ strikes the optimal balance between cost and speed

‘Fastest’ optimizes for speed over cost

The Bitcoin.com Wallet constantly monitors the market rate for gas to arrive at the optimal gas price for each preset mode, but you also have the option to manually customize your ‘gas price’ for each transaction. Note that gas prices fluctuate based on Ethereum network congestion, so whether your transaction is picked up by validators sooner rather than later depends on the current market rate for gas. You can check gas rates using a tool like Eth Gas Station and set customized fees based on the market rate for gas. Here’s how to set customized fees in the wallet:

1. On the “Enter send amount” screen, tap on the “Network fee” icon at the bottom-left
2. Select “Advanced fee options.” You’ll then be prompted to enter your precise desired gas price for your transaction.

The Bitcoin.com Wallet allows you to control the transaction fees for other popular blockchain networks, including Bitcoin. This support article explains how you can control your transaction fees on Bitcoin, Ethereum, and other popular blockchains.