Using digital assets to pay for goods and services on the Internet is a current trend that is actively gaining momentum. And one of the main reasons for the popularity of bitcoins and other cryptocurrencies as a means of payment is the low transfer fee. The commission isn’t fixed, it doesn’t depend on the amount of payment and can be calculated individually.
What is the blockchain network commission? Who gets it? How much will you have to pay for the transaction? In this article, we consider all financial issues.
What is the blockchain commission?
The blockchain network is a chain of blocks consisting of confirmed transactions. And the blockchain network commission is a fee the sender pays for making a payment in cryptocurrency. The commission is mandatory and performs two important functions:
1. It goes to support miners /validators who help fix the payment process and confirm transactions in the blockchain. Miners, when processing a payment, first choose transactions with the best ratio of size of commission — this way they increase their own profit.
2. An important factor is ensuring the security of the network, protecting it from spam attacks. It works as a tool against hackers trying to attack the network by initiating a numerous number of simultaneous operations. And since it’s too expensive to launch several hundred thousand transfers with a commission, it deters intruders.
Initially, payments could be sent not only with a commission, but also for free. The waiting time for confirmation of free transactions didn’t exceed 25 minutes, so there were most of them. But with the growing popularity of cryptocurrencies, the number of payments has increased, and the commission has become mandatory.
Cryptocurrency transaction fees depend on the used network. For example, Bitcoin, Ethereum, Litecoin and Tether (USDT) have different transaction fees.
How does the cryptocurrency transfer algorithm work?
The transfer of digital assets is performed online, and when it is sent, it’s checked whether the transaction is correct and whether the user has a sufficient amount of cryptocurrency to perform the operation. If everything is in order, then the transfer is:
• sent to a kind of “waiting room” (mempool);
• included by the miner in the preliminary block — it can contain about 2,500 transactions, since the block size is limited to 1 MB, so with high traffic and high activity of the blockchain network participants, an impressive queue is formed, which automatically increases the payment processing time;
• evaluated in terms of priority — payments with a high commission are processed first (usually it indicates the importance and urgency of the transfer);
• it is confirmed and goes to the mined block.
The speed of the transaction depends solely on the miner, whose algorithm is based on the fact that the priority parameter for confirming transactions is the amount of payment offered by the sender for making the payment.
You can read more about the bitcoin transaction mechanism in our article “How is the Bitcoin cryptocurrency transaction going”.
What is the role of miners?
Sending and receiving payments in cryptocurrency is implemented with the help of miners. These are special programs that register and confirm transactions in the blockchain. Using mathematical calculations, they “sort” the transfers that are in the queue and assign them a certain priority depending on the amount of the commission fee. After that, the transaction is confirmed or remains in the queue — the transfers with the highest commission are among the first to receive confirmation.
All transactions in the blockchain are anonymous, so it is impossible to track users, but the process of queuing, sorting and confirming transactions is not closed. With the help of specialized services (for example, Blockchain), you can monitor the workload of the blockchain network in real time (here and now), namely:
• view transactions available in a certain block;
• determine their number;
• find out the average commission amount;
• calculate what commission to specify for the transfer so that the miner includes it in the nearest block.
How is the Bitcoin network commission charged?
When paying with bitcoins the commission is indicated by the user at the stage of setting the parameters of a financial transaction. And when the payment is confirmed, the fee is debited from the sender’s account along with the transfer amount. For example: the sender plans to transfer 0.2 BTC and charges a commission of 0.0006 BTC, therefore, the total amount of the payment will be 0.2006 BTC.
The amount of the fee can be calculated independently or specify the so — called recommended commission — the system gives recommendations on the amount of the commission fee at a specific moment, calculating it so that the transfer is included in the nearest block. The recommended commission is usually used by senders experiencing difficulties with self-calculation of the fee. And you can get recommendations on specialized resources or directly in wallets or on stock markets in the process of sending a transfer.
The transfer amount doesn’t affect the commission fee, but don’t forget that the fee for the services of miners directly depends on the “weight” of the transaction — the program code, which is measured in bytes. For example, your transaction size is 200 bytes, and the average transaction fee is now 70 satoshi per byte. In this case, you will have to pay about 14,000 satoshi (or 0.00014 BTC).
Due to the constantly increasing number of daily transactions, large queues are formed in the network, which slows down the transfer confirmation procedure. This is due to the fact that there are often simply not enough blocks capable of accepting the operation. But knowing that miners prefer more expensive transactions, senders of transfers try to draw the attention of programs by increasing the commission. This approach allows you to get confirmation of the transfer faster, but if there are a lot of people who want to speed up the process, and they are willing to pay well for it, the commission amount may become unreasonably large. Such “auctions” allow miners to earn great money, but they are dangerous for transfers with a small commission, which can go unnoticed and hang for an indefinite time.
The Ethereum network commission difference
The commission for transactions on the Ethereum network is charged differently from Bitcoin. This network evaluates its commission in Gas, a special pricing unit that measures the amount of computing resources spent on an operation. The Gas is also valuated at ethers. The total commission for the operation determines the ratio between the amount of work (required computing power) and the price of Gas.
The amount of Gas required for a transaction usually doesn’t change, whereas the price is confirmed by fluctuations depending on the traffic. Tasks that require more resources to complete are more expensive. Miners give preference to more expensive operations, so conducting small transactions may not be as profitable for users. Transactions with a small commission will also be processed, it’s just possible you will have to wait a bit.
What else affects the size of the commission?
The size of the commission is impacted by the workload of the blockchain network, as well as the urgency / importance of the transaction. But there are other factors, including:
- The complexity of the script. The transaction processing functionality is quite wide and allows the use of various options, for example, multiple signatures. They increase security, but significantly increase the size (not the sum!) of transfer. So, the “weight” of a complex transaction can exceed 1000 bytes (a simple one “weighs” about 400), which, of course, will increase the commission amount.
- The number of inputs. Any bitcoin is actually a link (it is also called an “input”) to transactions that were carried out earlier in order to increase capital. And this link is transmitted during transfer. And if the crypt unit was obtained from different sources, then it contains several links that affect the size of the commission.
- The number of outputs. The outputs are the addresses where payments are sent. Most operations involve one or two outputs, but there may be more. And the more of them, the more expensive the transaction will cost.
High commissions make it unprofitable and impractical to pay with cryptocurrency on the seller’s website for minor purchases, such as a cup of coffee in a coffee shop or an order in a fast food restaurant. In this case, the commission may be more than the purchase amount.
Is it possible to reduce commission costs?
The desire of users to reduce the size of the blockchain network commission for the transfer of funds is quite understandable, but trying to do this, don’t blindly trust the advice of various monitoring resources. It’s better to delve into the topic yourself and learn how to calculate the commission correctly so that transactions take place without freezes.
Commissions are not displayed directly in the blockchain, so the sender has no way to find out the true cost of the operation. But you can solve the problem if:
- you use the recommendations of a crypto wallet that calculates the average cost of 1 byte in real time. This option is suitable for beginners who don’t have much experience with cryptocurrency;
- you calculate it yourself — you need to calculate the difference between the number of sent bitcoins and the “change”.
You can check the queue of pending transactions and the minimum fee amount for already confirmed transfers on the Memory Pool. And if you specify a commission for your transfer slightly higher than the minimum one, the chances of a quick transaction will increase.
There are no universal ways to reduce the size of the blockchain network commission, while avoiding the transfer freezes. It is worth studying the issue better in order to learn how to determine the optimal fee amount and not overpay, paying attention to the following factors:
Fluctuation of the commission amount
Since the transfer fee depends on the situation in the blockchain at a particular moment, the commission may vary at different times of the day. If you track such changes, you can determine the optimal time to implement a transaction with a reasonable commission.
The recommendations of monitoring resources are not always correct
Internet resources that monitor the situation in the blockchain do not always transmit correct information to users. This is due to the fact that changes often occur so quickly that sites don’t have time to respond to them. As a result, the information is delayed, and when it reaches potential respondents, it ceases to be relevant.
Limits on mining pools
Miners interested in increasing their income are trying in various ways to support the growth of commissions and prevent a reduction. And the main tool for this is setting limits. As a result, transactions with commission below the limit are simply not included in the blocks.
Artificial overstatement of the commission fee
It’s implemented by attributing to the commission some additional amount that goes to the owner of the wallet.
A properly selected wallet will help you save on the blockchain network commission: there are wallets with the possibility of adjusting the size of the recommended fee and without it. Choose the first one, and you will have space for maneuver.
Transactions with a minimum commission are real!
The ability to determine the amount of commission when paying in such a way that the transaction doesn’t “freeze” waiting for confirmation comes with experience. And for companies and online stores wishing to work with crypto, it is better to use cryptoprocessing services to optimize their activities.
We offer you to connect Cryptomus cryptoprocessing, which allows you to organize convenient acceptance of payments with conversion to cryptocurrency on the website of the online store and prompt withdrawal of funds with a lowest fees. Cryptomus offers:
- quick registration via email or phone number;
- simple moderation without passing KYC;
- integration using API and ready-made modules;
- support for various cryptocurrencies (Bitcoin, Litecoin, Ethereum, Tether, etc.).
The connection will take no more than an hour, and you can start using the service immediately after registration.
