What is a network fee?
A user receives a network fee, sometimes called a transactional fee(tx), when they send cryptocurrency. Network fees are also charged when trading on crypto exchanges. Any transaction from one address to another will incur a network fee.
The price of a network fee depends on the technical makeup of a crypto platform, the platform’s conditions, and the transaction’s data size. The cash value of the transaction does not determine a network fee’s price.
You might wonder why a network fee is needed when submitting a transaction. This fee is used to pay crypto miners for helping to maintain a blockchain platform. Without a network fee, miners would have no incentive to mine blocks.
You’ll encounter network fees regardless of the type of cryptocurrency you are sending. Bitcoin, Ethereum, Litecoin, and most other cryptocurrencies have network fees. Since most crypto coins live on a blockchain, miners are needed to maintain it.
The need for network fees is understandable, but knowing how to calculate them isn’t as straightforward. A network’s capacity to process data plays a major role in the cost of a network fee. You can save some extra money by knowing how to calculate the size and processing speed of your transaction.
Why do network fees exist?
Network fees are a reward for the work crypto miners do to maintain the integrity of a blockchain network. Mining is the process through which cryptocurrency transactions are gathered, verified, and recorded.
Each new transaction is recorded into a “block,” which is then added to the existing blockchain. Every blockchain block contains a cryptographic hash from the previous block, a timestamp, and transactional data. Miners receive cryptocurrency, known as “block rewards,” each time they successfully validate a new block.
Mining maintains a blockchain network through the processing power of several computers. According to The Balance, regardless of the number of computers, it takes roughly 10 minutes and 72 terawatts to mine one Bitcoin. It has become difficult to mine Bitcoin and other popular cryptocurrencies since more platforms and people are using them. More processing power from miners is required to keep up with the demand for popular cryptos.
A blockchain network cannot exist without the work done by miners. The amount of processing power needed by miners is quite costly. Charging network fees is important because they pay miners for the hard work they’ve done.
How do network fees work?
Network fees depend on the type of transaction being processed. The transaction’s data size and processing speed are two factors that come into play. Understanding how these two factors affect the price of a network fee can help you estimate its cost.
Miners will prioritize transactions with higher fees over those with lower fees. For example, if the transaction is urgent and you pay a higher network fee, the miner will process it quicker. Transactions with lower fees take less priority and will be processed at a slower pace.
The amount of crypto a user sends impacts the transaction’s data size. The more crypto a user wants to send, the larger the size. Network fees are higher for larger transactions because they take longer to process.
It’s essential to think about your transaction’s data size and processing time when calculating a network fee. Doing so will allow you to avoid any surprise charges once you send the transaction.
How are network fees calculated?
Network fees can fluctuate depending on a cryptocurrency’s market demand and a network’s processing capacity. Understanding how a network processes transactions will allow you to estimate network fees more accurately.
When referring to this chart on BitInfoCharts, you will see that average fees for Bitcoin Cash (BCH) are lower than Bitcoin (BTC). This is due to BCH having a larger block size limit. A larger block size limit prevents network congestion and allows for faster processing times. When a network becomes congested, users set higher fees to outbid each other, so their transaction goes first.
Knowing the size of your transaction is important to avoid long wait times in the mempool. The mempool is a “waiting room” for transactions waiting to be processed by miners. Since miners prioritize transactions by their size, more significant transactions will need to wait longer.
Calculating a network fee can become confusing and difficult to understand. Luckily, several online network fee calculators are available. Buy Bitcoin Worldwide and Eth Gas Station are two great sites to use for calculating network fees.
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