What Is a Blockchain Fee? Where Do Blockchain Fees Go?

What is blockchain fee?

If you mint NFT artworks, send cryptocurrencies, and manage supply and logistics on a blockchain you should know what is a blockchain fee.

According to a report of Financial News Media, the global revenue for bitcoin mining was $15.3 billion in 2021. In the same year, the all-time high mean transaction fee on the Bitcoin blockchain touched the $28 mark as per an interactive graph available on Statista.

Like bitcoin transactions, all other blockchain projects also incur a certain amount of transaction fees when you buy NFTs or trade them. Now, you must be wondering, since blockchain is a decentralized system, where does the network fee come from, and where do the fees go? 

Before diving deep into blockchain network fees, you may want to know the best NFT artists to follow and stay updated on NFTs that can perform well in the market. If you are new in the NFT space, here are the best NFT tools for you to try out.  

What Is a Blockchain Fee?

In any blockchain project, there is a distributed ledger. The blockchain ledger stays distributed and shared among its users or peers. A strong cryptographic layer protects this ledger so that the blocks remain immutable and unaltered. 

When any transaction takes place, the users who mine or validate the blocks need to solve a cryptographic puzzle to add multiple transaction information in one block. This new block is linked with its parent block, and eventually, the blockchain arranges the blocks in temporal order on its chain. 

Resolving the cryptographic puzzle requires human effort, computing power, and enormous electricity. Though the blockchain is an open-source network, its users or miners still need to pay for hardware, internet, and electricity. 

So, whenever you need to transfer a bitcoin or a fraction of it to your friend or another trader, you need to pay a little bit more than the exact bitcoin amount that you want to transfer. Most of the Bitcoin wallets will show this fee in USD amount.  

What Are the Types of Blockchain Fees?

Blockchain fees/network fees/gas fees are simply the transaction charges you need to pay to the miners or minters transferring bitcoin or minting an NFT

However, the term blockchain fees have become an umbrella term in the crypto space, referring to charges associated with crypto buying, staking, or trading. Here are the most common fees that you pay when transacting in crypto coins:

  • You pay exchange withdrawal charges when you withdraw your crypto asset from an exchange and transfer it to a third-party wallet.
  • You are liable to pay either a royalty fee or NFT marketplace commission when you trade NFTs.
  • When you buy a BTC or ETH you pay a bitcoin fee or gas fee to add a new block to the existing blockchain to get immutable ownership.
  • Crypto and NFT exchanges also charge you for the services they render. For example, Coinbase charges up to 0.5% of the total USD amount you want to invest in any cryptocurrency. 
  • The payment gateway may also charge a gateway fee whenever you add USD or other fiat currency to your crypto exchange account.
  • Some NFT projects require holders to stake or interact with their NFTS in some way. Often, this involves a blockchain fee.

These charges ensure a thriving economy around blockchain technology. The revenue earned from these fees keeps the miners engaged while the crypto marketplaces or blockchain developers come up with more profitable features for the investors.  

How Does the Blockchain Calculate Its Fees?

When it comes to understanding how does the blockchain fee work, the bitcoin network fee and Ethereum gas fee are the global standards to follow.

1. Bitcoin Fee and Its Calculation

Bitcoin is the pioneering blockchain, and it has also established the network fee economy to keep the network free from spammers and frauds. As a result, whenever a bitcoin miner validates a new block they get a fraction of bitcoin for the task. 

Users of the Bitcoin blockchain pay the mining fee for buying, selling, and transferring bitcoin. When you send your transaction for an upcoming block to be validated, you need to bid for the bitcoin fee. Cryptocurrency wallets let you bid the amount you want. 

You can also bid zero fees for your transaction but it’s likely that the miners won’t pick your transaction for validation from the Mempool. Thus, you need to keep an eye on the mean bitcoin blockchain fee per transaction and also mind the transaction size. 

When the blockchain network is highly congested, the network fee also relies on the users who are willing to pay a premium price for a transaction spot in the next block. This usually happens when there is higher buying and selling activity in the cryptocurrency market.    

2. Ethereum Gas Fee and Its Calculation

What is a blockchain fee? Ethereum gas fee and its calculation
Ethereum, the golden standard for NFTs, also charges a fee following a different protocol than the Bitcoin blockchain

You can track gas fees on Etherscan

Ethereum, the golden standard for NFTs, also charges a fee following a different protocol than the Bitcoin blockchain. The fee considers the amount of gas or computing power needed to process a specific task on the Ethereum blockchain. 

The amount of gas for a transaction is constant. However, its value goes up and down depending on the network traffic. ETH, the native cryptocurrency of the Ethereum blockchain is the payment method for gas.

A fraction of ETH, gwei ( 1 gwei = 0.000000001 ETH), is the measurement of gas price. The gas fee is volatile, and you need to time your transaction to get the best gas fee.  You can check the price of gas or gwei on Etherscan.

Who Receives the Blockchain Network Fees?

A blockchain network, like the Bitcoin blockchain, is a decentralized space distributed between the 15106 active nodes, as per Bitnodes.

Though there is no cost for the distributed ledger, the nodes need to pay bills for internet, energy, and computing infrastructure. Therefore, whenever you are paying a fee for your bitcoin or ETH transaction, you are paying that to the nodes that validate your transaction. 

Blockchain fees exist to support transaction processing, removing fraudulent transactions, and most importantly, rewarding the miners who ads your transaction to the blockchain’s ledger. 

Sometimes, crypto marketplaces can also receive a part of the fee if you pay the miners through a crypto platform. This fee helps the platform to sustain its cloud and back-end infrastructure, so it can offer you market insights and automated transactions.   

Save on Blockchain Fees: Final Word

Blockchain fees are inevitable since this revenue plays a crucial role in maintaining the entire blockchain network. Though you need to pay a bitcoin fee on the Bitcoin blockchain or a gas fee on the Ethereum blockchain, there are ways to minimize the cost of fees by becoming a smart NFT minter or trader. 

Firstly, try and mint or interact with NFTs with gas or gwei is low (less than one hundred). Secondly, use Metamask to estimate how much a transaction will cost before approving it. Then you can factor gas fees into your trading expenses and cost of acquiring or interacting with an NFT. Finally, you could buy NFTs on a more gas friendly blockchain like Polygon or Solana, although the selection of NFTs pales in comparison. 

A few experimental blockchain projects don’t charge miners’ or validators’ fees since they run on the proof-of-stake consensus like NEO, EOS, and IOTA. Once these blockchains become popular in the NFT space, you may need to pay less when you decide to buy NFTs made on these decentralized networks.