What are network fees?

Every time you move cryptocurrency from one wallet address to another or swap it for something else, you must pay a network fee, which is sometimes referred to as a network transaction fee, a mining fee, or a gas fee. How much you have to pay depends on the network you use and when you use it, and sometimes by how much you are willing to spend.

For instance, moving cryptocurrency when a network is particularly busy will cost you more, but carrying out the same transaction when the network is quiet will cost you less. It’s important to bear network fees in mind so that you can time your transfers accordingly if necessary. In this AAG Academy guide, we’ll teach you how fees work, why they exist, and how to calculate them.

Why is there a need for network fees?

Much of the cryptocurrency industry, because it is decentralized, relies on a network of miners to process and validate transactions using the proof-of-work (PoW) consensus mechanism, which uses powerful computers to solve complex cryptographic puzzles. Another large portion of the industry relies on proof-of-stake (PoS), which uses cryptocurrency staking instead.

In both cases, we depend on a large community of people to ensure that our cryptocurrency transactions are not only verified and carried out but also secured and recorded on the blockchain. Of course, it wouldn’t be fair to ask those people to contribute their computing power or their cryptocurrencies for free, so they must be compensated for their efforts.

Charging network fees for every transaction is the fairest and most efficient way to collect that compensation. Without it, we would have to ask people to volunteer their resources, and it’s unlikely many would do that. But by providing a reward, we can help ensure that there are always enough people willing to contribute to a network and that it is always active.

Fees also help reduce the number of potential bad actors spamming a network with bogus transactions. If it was free to carry out cryptocurrency transfers, spammers could attempt as many valueless transactions as they wish without losing anything.

How do network fees work?

Network fees are charged on every cryptocurrency transaction. That includes simple things like sending tokens from one wallet to another, more complex things like swapping one cryptocurrency for a different one, and lots more. Fees are automatically deducted from your wallet when the transaction takes place, so you may not even notice you’re being charged at all.

However, it is important to bear fees in mind before performing a transaction. You’ll not only need to ensure that you have enough cryptocurrency to cover both the transaction itself and the network fee, but also that you’re performing the transaction at the best time for you. As we mentioned above, the current load on a network can play a part in how much you have to pay.

When a network is busy — usually between U.S. trading hours — network fees rise because some are willing to pay more to have their transactions processed quickly. Others follow suit, and this pushes up the overall price. When the network is quiet, there is no need for a small few to pay more to jump the queue, so fees tend to stay low.

No matter when you perform a transaction, however, network fees are usually pretty nominal. And even when they’re high, you can choose to pay less in most cases; it just means that your transaction will be set aside for a little while until others (carried out by those willing to pay more) are processed and the network load has been reduced.

If you do not have enough cryptocurrency to cover both the transfer itself and the network fee, then the transaction will fail. That’s why it is important to ensure you have the funds beforehand. You should also note that the person carrying out the transaction, i.e. the sender, pays the fee.

How do Bitcoin network fees work?

Bitcoin network fees are similar to any other in that they fluctuate depending on how busy the network is. In Bitcoin’s case, however, the amount of coins being transferred — and how much data they require — can also play a part in determining how much you have to pay.

Every block in the Bitcoin blockchain holds around 4MB of data. When particularly large transactions are processed, they may not fit into a single block, and therefore multiple blocks need to be processed, resulting in a larger fee. However, this can be alleviated by using a wallet that supports Bitcoin’s upgraded SegWit protocol, which reduces transaction sizes.

How do Ethereum network fees work?

Ethereum network fees, which are commonly referred to as gas fees, are determined by measuring the amount of computational effort required to carry out each operation. Ethereum is different from Bitcoin in that it uses variable block sizes, so blocks can be expanded when necessary — though they still have to be validated and secured.

Ethereum gas fees are paid in Ether, the network’s native cryptocurrency and senders can choose to set a maximum fee and offer a tip or “priority fee” for the validator. This can be used at any time but is most useful when the network is busy, and it helps ensure that a transaction is processed quickly since validators will prioritize these transactions over others.

How to calculate network fees

The simplest way to calculate network fees is to avoid trying to do it yourself. Since so many things must be taken into account, this is usually an incredibly complicated process. It’s also unnecessary with so many free network fee calculators available online.

This Bitcoin calculator will help you find out what your current Bitcoin fee will be, and this Ethereum calculator will do the same for Ethereum. You can find calculators for other networks by simply searching for them using your search engine of choice.

References

• What are network fees
• What are network fees
• What are miner fees and does coinbase pay them
• How do bitcoin transaction fees work