Understanding The Role Of Transaction Fees In Cryptocurrencies

Understanding The Role Of Transaction Fees In Cryptocurrencies

Blockchain Knowledge

Crypto APIs Team

Sep 8, 2023 • 6 min

In the blockchain and cryptocurrency world, transaction fees are the charges that users have to pay to the blockchain network of a particular cryptocurrency. Transaction fees cover processing and verification of a transaction which happen on decentralized networks of nodes (computers) to validate and record transactions. 

In terms of transaction validation and processing, we need to cover the role that crypto miners play. Crypto mining is the process of generating new coins such as Bitcoin, Litecoin, Dash and others, as well as verifying new transactions. This can be done through utilization of computing power, which is executed by crypto miners. In simple words, crypto miners` resources are used to complete the generation of new coins or for verifying pending transactions. The role of crypto miners is crucial to maintain integrity and security of the network.  

It is worth mentioning that with each different blockchain the mechanics of how transaction fees are processed and the role of crypto mining and crypto miners vary. 

How are fees calculated?

It is very easy to answer this question, but difficult to predict and make an accurate calculation due to a wide range of factors affecting the decentralized nature of blockchains. These factors affect the price that users have to pay on each transaction. For example, each blockchain has different fees and the way of how transactions are being processed also varies from one network to another.

Тhe answer to this question is very complex as a wide range of factors define the price that users have to pay for each transaction. For example, each blockchain has different fees and the way of how transactions are being processed also varies from one network to another.  

Size of transactions is one of the factors that affect how fees are calculated. The larger the space a transaction takes into a block, the higher the fees that a customer will have to pay. Transaction size is measured in bytes. 

Deploying smart contracts on Ethereum or making token transactions on the same network is associated with higher transaction size, and thus - higher fees. The main reason for that is the increase in size due to the deployment of smart contacts, which in turn results in increases. 

Another factor affecting fees is network congestion. In times when the number of broadcasted transactions is higher than what the capacity of the network can allow for processing, the fees go up, user experience falls down and transaction time becomes longer.  

Each blockchain has a base fee, which is updated over short periods of time. In times when network congestion takes place, or if an urgent transaction needs to be placed, users can set priority on their transaction, which increases the network fees. For instance, on blockchains such as Bitcoin, Ethereum, and Tron, users pay on top of the base fee another fee to get a higher priority status, which allows quicker transaction verification by miners.  

Through Crypto APIs solutions users do not have to go through the complexity of calculating the fees on their own. Through our endpoints gas and fees estimations can be pulled, with more information on endpoints provided below. 

UTXO, Account-based & Tron fees explained

Тhere are three different approaches of managing transactions fees in blockchain systems that we will discuss. All three are used in different blockchain networks and have distinct characteristics. 

UTXO stands for unspent transaction output and is commonly used in networks such as Bitcoin. In this approach different inputs (UTXOs) are consumed on each transaction, and new UTXOs outputs are created. These UTXOs represent unspent amounts of cryptocurrency. To cover transaction fees users must provide enough UTXOs. 

To illustrate how the UTXO works, imagine that you own 10 Bitcoin addresses with 0.11 BTC balance each. You need to make a transaction of value 1 BTC. To complete this transaction, you can use all available balance across all addresses that you own in your wallet. Once you make the 1 BTC transaction and pay all outstanding fees which are UTXO inputs (let's imagine the fee costs you 0.05 BTC), you will receive change back to a new generated or already owned change address specifically for receiving your change, which is part of your wallet. In this scenario, the change is equal to the fee that you pay - 0.05 BTC. 

In account-based blockchains such as Ethereum, Tron and Binance Smart Chain, a balance management system works, similar to the way traditional bank accounts work. This means that users can spend a certain amount of their address balance. If you own 50 ETH you can make a transaction of 12 ETH, assuming that this is the amount that you would like to transact. This means that upon completion of the transaction, you will own 38 ETH (minus transaction fees), and the other party will own 12 ETH, instead of having to transact the whole 50 ETH and wait for your change to be returned, as is the case with UTXO.     

Tron fees are calculated in specific to the Tron blockchain metrics, known as energy and bandwidth. Bandwidth represents points which are paid and are equal to the size of the transaction in bytes (i.e. 300 bytes transaction means 300 points required to complete the payment). Each Tron address receives 1,500 free points daily, but this is valid for addresses which are validated by blockchain miners and have a minimum balance of at least 0.01 TRX. Energy, on the other hand, is not given for free each day. In order to obtain energy points, users need to stake TRX. 

If any of the energy or bandwidth points are insufficient, a certain amount of the transacted TRX must be burned to cover the fees. As with all other type of fees models, the larger the transaction size is, the more resources will be needed for mining.   

Solving high fees with Crypto APIs

Crypto APIs has created a set of unified endpoints in order to simplify the work with all UTXO, account-based and Tron chains. This is inclusive of support for all types of digital wallets, plus HD wallets. 

For instance, with our get fee recommendations endpoint, users receive fee recommendations in real time, allowing them to generate savings on Bitcoin, Ethereum and other networks. Whenever possible, the estimate transaction smart fee endpoint can calculate an estimated fee per kilobyte needed for each transaction to begin confirmation. Our clients can also estimate the gas limit when sending Ethereum to contracts or when performing transactions with additional data.

In terms of token transfers, as fees are normally higher than transferring coins, we can help you estimate the token gas limits needed for a transaction, showing gas expenses for specific contracts. Specific recommendations for the EIP-1559 standard are also available to our clients. 

Moving on to HD wallets, with our List HD Wallet (xPub, yPub, zPub) UTXOs endpoint you can list all unspent UTXOs outputs from a synced HD wallet. List HD wallet (xPub, yPub, zPub) Transactions is another endpoint which significantly simplifies pulling complex data on the multiple addresses and transactions which HD wallets allow to be stored and performed from a single wallet. Through non-custodial wallets users can prepare their transactions from one address to another in exchange for a particular fee. After preparation of the transaction it is being broadcast and sent to a node. 

We have other endpoints which are readily available. You can obtain more information from our technical documentation section, or you can contact our dedicated team if you have any questions or you would like to receive guidance on the best way of using our solutions for your project. 

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