How network fees are calculated

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30.10.2021 08:58
How network fees are calculated

    Almost every cryptocurrency network has an internal fee. It is not a constant value as the fee may fluctuate over time or depend on external and internal factors.

    The features of the service fee depend on the specifics of the particular network.

     

    Bitcoin fees

     

    Bitcoin works on the Proof of Work algorithm. To mine it, you need miners, as it were, to confirm transactions. In the process, they have to spend a lot of computing power, so the system offers a reward. That is what the network charges a fee for.

     

    Ethereum fees

     

    Ethereum and all tokens based on the ERC20 protocol have a similar, but more complicated principle of calculating fee in the corresponding network. Here it is called a gas fee.

    Gas is the amount of processing power spent by the miner in the process of confirming transactions or the unit of payment for each operation on that network.

    Gas has a price and a limit (a limit to the value of the transaction), and the user needs different amounts of fuel for different operations. Your fee and the speed at which a transaction is completed depends on these variables.

    Each transaction has a minimum amount of gas needed to complete it: usually about 21 thousand units. When this amount is manually increased, the chance of a successful transfer increases, and a certain limit is set to avoid getting too much.

     

    Why blockchain needs fees

     

    Fees on ERC20 networks and the like do not exist for profit. They perform important functions:

    • They incentivize users to maintain the viability of the network in both PoW and PoS algorithms;
    • They are a kind of protection tool, making hacking attacks on the network economically unprofitable.

     

    With some wallets, transaction fees can be set manually, but it is quite complicated and there is a risk of miscalculating the amount. For a novice user, and in general for an investor striving for simplicity and comfort, it is much more convenient to use automated services that select the optimal fee size based on the current network parameters, without overpaying, but at the same time providing a good confirmation speed.

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