If you’ve ever tried to send a Bitcoin or another cryptocurrency, you may have noticed that there is a transfer fee. Unlike traditional payment methods such as Visa, Mastercard, or bank transfer, these transfer fees are usually not represented as a fixed amount nor a % of the total transaction value – instead, the network fee is a floating fee that is defined by the user or the network.
In blockchain technology, miners (or in some cases, stakers) are in charge of validating transactions. The validation is what makes a transaction successful – and in order to incentivize these miners to validate the transaction, a small fee has to be paid to the network, which is then awarded to the miner who successfully validates a “block”. This is on top of the Bitcoin that is already awarded to the miner for the successful mining of each block.
With the existing technology of most blockchains prioritizing security and decentralization over speed, heavy network load – such as a large number of transactions at the same time – can sometimes cause a significant change in the average network fee paid. Because there is a large number of transactions waiting to be validated, but a limited number of miners who are able to validate them, the network automatically assigns and prioritizes the transactions which are willing to pay the highest fees. Most wallets and services automatically set their network fee to an amount necessary for the transaction to be successful in this case, also known as a “dynamic fee” – although you can always override this with your own settings in most popular wallet options.
What happens if the “fee” I set is too low?
If the amount of network fee offered is too low, the transaction will not be mined by any miners as it would not be profitable to do so. In this case, the transaction may be temporarily sorted into a waitlist for a short period of time, or it may be ignored entirely by the network and passed in favor of other transactions paying a higher fee.
While this seems like a huge flaw in blockchain technology, the scalability of the network is at risk if the arrangement is made in some other fashion. For high-security transactions that require what is called “finality” – or true, final verified status – it is worth ensuring that the transaction is mined with the correct network fee.
You may also belong to one of two groups:
I don’t mind waiting longer for a transaction and paying less.
Miners often prioritize transactions with higher fees, but that does not mean that they do not mine transactions with lower fees – they simply slot them into the off-periods in a waitlist for when big transactions are not happening. This means that you can select a lower network fee but may have to wait additional minutes – or sometimes even hours – to have your transaction validated.
However, there is always the risk that the miners ignore your transaction if your offered fee is way below the network average.
I need my transaction to be fast and I’m willing to pay for the speed.
If you pay above the average network price, miners will prioritize your transaction and usually place it into the next block immediately – making your transaction receive confirmations quicker.
What are “Confirmations”?
Confirmations refer to the number of mined blocks since a transaction was made. The more blocks are built on top, or “attached” to the end of the blockchain, the more improbable it is for the network to be successfully hijacked by a malicious actor, as the way the blockchain is structured means that the amount of time passed since a successful validation makes it more computationally intensive to reverse the validation.
Some exchanges require a certain number of confirmations to be made before they credit cryptocurrency to your account, in order to ensure that there is minimal chance of a network attack taking away your coins.
How expensive are network fees at a certain time?
For the two most popular cryptocurrencies, Bitcoin and Ethereum, you can use the following websites to get a recommended network fee for payment:
https://bitcoinfees.net/ – for Bitcoin
https://ethgasstation.info/ – for Ethereum
However, for most users, the network fee is automatically set by the wallet they are using, and if network congestion is a problem and fees are high, the wallet will usually have an automated warning to let the user know that they are paying higher-than-usual fees.
Most blockchain fees are extremely low, and as they are not represented as a percentage of the total transaction, it can be worth using blockchain networks to send large sums of money. For example, in June 2020, 2.2 billion dollars worth of Bitcoin was transferred by a huge holder between wallets for a shocking total of just $7!
For Ethereum, the fees can be even cheaper – there have been moments in history where the average network fee was just 1 gwei, or less than $0.001 per transaction – although the migration of the popular USD stablecoin Tether to an Ethereum token (ERC20 format) has made the network more expensive to use in recent months.
Best times to purchase cryptocurrency to save on fees
You can find out more about the best places, timings, and opportunities to purchase cryptocurrency by visiting our website, Oobit.com, which is a gateway that guides users through the complex world of cryptocurrencies and blockchain!