In transacting with crypto, one of the major things to take into consideration is the crypto transaction fees. This article exposes how to slash your Crypto transaction fees.
Trading cryptocurrencies will always incur some transaction costs. The cryptocurrency exchange you’re using most likely charges its costs, and you can’t avoid the fee structures built into the coins themselves.
But what are these fees, how high can they go, and can they slash them? Let’s have a peek.
Understanding Crypto Transaction Fees
Crypto transaction fees are critical to operating and maintaining decentralized networks like Bitcoin and Ethereum.
These fees are incentives for miners or validators, who use their computer capacity to validate and process transactions before adding them to the blockchain.
Network costs guarantee the system runs efficiently and securely by discouraging spam transactions and criminal behaviors while encouraging miners/validators to prioritize transactions with larger fees.
This, in turn, creates a competitive economy where users can prioritize their transactions based on the fees they are willing to pay.
How are cryptocurrency fees calculated?
Varying levels of intricacy, data size, and urgency often decide crypto fees on smart contract-enabled blockchains.
Transactions that require more data to perform and are computationally tricky will incur a higher base charge.
More complicated activities take more computational resources on networks like Ethereum, where smart contracts are executed, increasing fees.
Similarly, transactions with more extensive data volumes require more space in a block, resulting in higher fees. This is why sending a larger quantity of Bitcoin typically costs more.
Urgency is also important; customers who want faster transaction confirmation times generally pay more outstanding fees to encourage miners/validators to prioritize their transactions.
This results in a dynamic fee structure that allows consumers to balance cost and speed while promoting the blockchain network’s overall health.
In other words, transactions will be more expensive when there is a lot of network activity.
Transactions on Ethereum require gas to execute. Gas is paid in Ethereum’s native currency, ether (ETH).
However, the price is expressed in gwei, which is equivalent to 0.000000001 ETH, because it is more human-readable to say a transaction costs 5 gwei rather than 0.000000005 ETH.
Why Should You Pay Crypto Transaction Fees?
Cryptocurrency transaction fees are critical to the operation and sustainability of blockchain networks. Here’s why you need to pay these fees:
- Compensation for miners and validators
- Prevention of spam transactions
- Prioritizing transactions
Compensation for miners and validators
Transaction fees provide an incentive for miners and validators to complete transactions. These fees reimburse them for the computer power and electricity used to secure transactions on the blockchain.
Prevention of Spam Transactions
Fees serve as a deterrent to spam transactions, which would otherwise overwhelm and turn off the network.
Only serious transactions are handled by demanding a fee, which helps preserve network performance and security.
Prioritizing Transactions
Transaction costs may fluctuate during peak traffic periods. Users willing to pay a greater price will have their transactions processed faster, resulting in a competitive and efficient transaction queue.
The Effect of Crypto Transaction Fees on Adoption and Usage?
The impact of transaction fees on cryptocurrency acceptance and usage is enormous and complex.
These fees impact the accessibility and cost-effectiveness of cryptocurrencies for small and large transactions.
High costs can dissuade new users and limit the utility of cryptocurrencies for modest payments while also making scaling difficult as the network grows.
In contrast, adequately controlled fees can improve the user experience and extend the attractiveness of cryptocurrencies as a viable alternative to established banking institutions.
Why Certain Cryptocurrency Transfers Cost More Than Others
The amount of data in a blockchain transaction and its processing complexity are both factors that influence it. On smart contract-enabled blockchains, computational complexity is frequently the most essential consideration.
For example, transmitting a token from one address to another is less expensive than trading a token on a decentralized exchange (DEX), which is less costly than minting an NFT.
Here are some reasons why some crypto transactions cost more than others;
- Sending cryptocurrency
- Swapping on a DEX
- Minting an NFT
Sending Cryptocurrency
A simple transaction, such as sending a cryptocurrency from one address to another, typically needs little computational effort and hence incurs a lower charge.
This simple operation does not require sophisticated computations or smart contract interactions.
For example, if you send Ether (ETH) from one Ethereum address to another, you conduct a straightforward transfer operation requiring little computing effort.
Swapping on a DEX
Transactions on decentralized exchanges such as Uniswap or SushiSwap are usually more expensive. These activities need interaction with smart contracts, which are more computationally costly than basic transfers.
When you exchange tokens on a DEX, your transaction interacts with a liquidity pool smart contract. It entails transferring tokens, calculating the exchange rate, updating the liquidity pool balances, and paying fees to liquidity providers.
Minting an NFT
Creating a new non-fungible token is typically the most expensive sort of transaction. When an NFT is minted, a new, distinct token is issued on the blockchain.
This method requires writing a large amount of data to the blockchain, which is computationally intensive.
For example, issuing an NFT on the Ethereum network might be costly because each unique token requires smart contract interaction.
How To Slash Your Crypto Transaction Fees
Reducing transaction fees is essential for anyone who conducts frequent cryptocurrency transactions.
Understanding how fees work and what factors impact their amount can help you save money over time. This is dependent on the wallet. Many centralized Crypto exchanges provide no control over network fees.
Instead, they charge a preset amount. In other words, the exchange gains when users withdraw cryptocurrency. This is a typical revenue-generation technique for centralized Crypto exchanges.
However, most self-custodial wallets allow you to choose your own cost for cryptocurrency transactions. The Bitcoin.com Wallet software, for example, provides three handy fee choices for Bitcoin and Ethereum and the ability to specify custom fees.
However, we have provided some specific techniques to help you slash Crypto transaction fees:
- Choose the right moment to transact
- Adjust transaction fees manually
- Utilize layer-2 solutions
Choose the Right Moment to Transact
- Low network congestion: Transaction prices can vary greatly based on network activity. Transacting during periods of low congestion can result in lower fees. Blockchain explorers, for example, can help you watch network traffic and decide the best moment to transmit your transaction.
- Off-peak hours: Transaction costs are generally lower during off-peak hours, such as late at night or early in the morning, particularly on networks with sizeable daily trade volumes.
Adjust Transaction Fees Manually
- Customize fee settings: Many crypto wallets let you select the transaction charge you’re willing to pay. When you’re not in a rush, choosing a smaller price is a valid option; however, it may result in a longer confirmation time.
- Use fee estimator tools: Using integrated tools in your cryptocurrency wallet or third-party services, you can advise an appropriate charge based on current network conditions and your level of urgency. Frequent traders on Bitcoin exchanges can benefit from closely monitoring the exchange rate to take advantage of cheaper fees imposed during peak trading hours.
Utilize Layer-2 Solutions
Consider Layer-2 solutions for networks like Ethereum that handle transactions outside the primary blockchain.
The Lightning Network drastically reduces Bitcoin transaction fees by allowing off-chain transactions. Fees are significantly lower using solutions like the Lightning Network for Bitcoin and platforms like Polygon for Ethereum.
By implementing these tactics, you can reduce the costs connected with cryptocurrency transactions, making your operations more efficient and cost-effective.
Always stay current on the newest advances in blockchain technology, which may provide new solutions to reduce fees.
Moving on, let us look at some types of crypto transaction fees.
Types of Crypto Transaction Fees
Cryptocurrency transaction costs can vary significantly between networks and transactions. Understanding these distinctions is important for users who want to control their transaction fees efficiently.
The following are the primary types of fees related to Crypto transactions:
- Network fees
- Transaction fee structure
- Maker and taker fees
- Smart contract execution fees
Network fees
Network transaction fees, miner or validator fees, are paid directly to the miners or validators responsible for processing transactions on the blockchain network. These fees;
- Ensure that transactions are recorded in the blockchain.
- Depending on the current amount of congestion on the blockchain and the size of the transaction’s contents.
- Incentivizes miners to include a transaction in the next block, particularly during periods of significant network activity.
Transaction fee structures
Different cryptocurrencies have distinct fee structures that are dictated by their blockchain systems. Common structures consist of;
Flat Fee
Some blockchains or exchanges may charge a fixed fee for all transactions, regardless of size or complexity.
Dynamic Fees
Most major blockchains, including Bitcoin and Ethereum, calculate fees based on transaction volume and network congestion. Users can frequently opt to pay a greater cost for speedier confirmation.
Percentage Fees
Some platforms, particularly exchanges, levy fees based on a percentage of the transaction value. This is especially prevalent in trades involving cryptocurrency exchanges or crypto-to-fiat currency conversions.
Maker and Taker Fees
These are the specific fees that Crypto exchanges charge during trading activity. Makers are traders who offer liquidity by placing a buy-limit order below the last trade price and a sell-limit order above it.
Takers diminish liquidity by placing an order that matches (or ‘takes’) the maker’s orders.
Maker Costs
These are often smaller than taker costs and are charged to traders who add orders to the order book, helping to ‘make’ the market. Makers boost market depth and liquidity, which benefits the entire trading environment.
Taker Costs
These costs are levied on traders who fill (‘take’) orders from the order book, reducing liquidity from the market. Taker costs are typically greater since they limit market depth and liquidity.
Smart Contract Execution Fees
Smart contract execution fees, such as Ethereum, are peculiar to blockchains that support them. The fees:
- Are required to compensate for the computational resources expended to carry out sophisticated contract functions.
- Can vary substantially based on operational complexity and current gas prices, which indicate how much processing power is needed.
- Are crucial in preventing network spam and ensuring that developers design efficient programs.
Understanding these fee kinds and their ramifications can help consumers make more informed decisions about when and how to transact on various cryptocurrency networks.
This could result in significant charge savings while also ensuring prompt transaction processing.
Crypto Transaction Fees Schedule For Cryptocurrency Exchanges
Each trading platform sets its own rules and fee structures for Crypto transactions. Let us compare and contrast some of the most popular cryptocurrency exchanges to emphasize the similarities and differences.
Binance
Binance is the world’s largest cryptocurrency trading platform. Like a stock brokerage, the trading platform provides a variety of trading methods.
Transaction fees are greater for “Takers,” who place market orders that are filled instantly at the current market price.
“Makers” use limit orders to set a precise target price, which may take longer to execute but incur a reduced transaction charge. Makers give liquidity to other traders, whereas takers consume assets from the same liquidity pool.
Binance’s transaction fees depend on your trading volume over the last 30 days, and you must also own an increasing number of Binance Coin (BNB -1.68%) stablecoins to qualify for reduced fees.
On top of this structure, Binance offers a 25% fee savings when you pay using your Binance Coin holdings.
For example, suppose your first Binance order is valued somewhat more than $100,000 of your favorite cryptocurrency, excluding the Binance Coin discount.
This will cost you $100 in transaction costs, whether you placed a market or limit order. A second order of the same value will qualify for the VIP 2 pricing tier (if you have at least 100 Binance Coins in your portfolio).
A limit order with the Binance Coin discount would reduce transaction fees to $60.
Coinbase
One of the most well-known cryptocurrency platforms in the United States is Coinbase (COIN 9.69%). Coinbase, like Binance, charges reduced transaction fees for users with bigger 30-day trading volumes, with Takers paying more than Makers.
However, because this platform does not offer discounts based on a native stablecoin, Coinbase’s pricing schedule is slightly more straightforward.
Coinbase charges significantly cheaper costs for a small number of certain trading pairs.
When exchanging stablecoins against other stablecoins or stablecoins against fiat currencies, Takers pay a transaction cost of 0.01%, whereas Makers pay no fee.
The same discount applies whether you exchange Bitcoin for Wrapped Bitcoin (WBTC -0.75%) or vice versa.
Returning to our Binance example, you’ll notice that Coinbase is slightly more expensive. The first $100,000 trade with no volume-based rebates costs $600 for liquidity Takers and $400 for limit-order Makers.
The second order is $200, or $100 for Takers and Makers. Binance’s Maker fees fade to zero at a monthly trading volume of $10 million, whereas Coinbase’s fee-free tier begins at $300 million.
Coinbase is simple to use and has customer-friendly features, but you may find substantially lower transaction costs elsewhere.
Robinhood
Robinhood (HOOD 0.31%), a famous stock broker, also provides trading services for a few cryptocurrencies. According to the firm, cryptocurrency trading on Robinhood is commission-free, with a 0% cost for all orders.
While Coinbase and Binance profit from transaction fees, Robinhood makes money in various ways. First, it does not perform cryptocurrency deals on its own.
Instead, the company sends incoming cryptocurrency orders to market makers in exchange for transaction rebates, which are not passed on to customers.
In addition, cryptocurrency orders are not filled at the current market price. Instead, you’ll acquire crypto tokens from Robinhood at a somewhat higher price and sell them for a lesser price.
The discrepancy between effective transaction prices and current quotes is often around 0.4%, similar to the fees levied by Coinbase or Binance.
The Future of Crypto Transaction Fees
As the Crypto ecosystem evolves, many major themes have the potential to alter the structure and magnitude of Crypto transaction fees drastically.
Understanding these potential changes is essential for anyone working in the cryptocurrency field.
Advancements in Blockchain Technology
Scaling Solutions
Ethereum sharding and the continuous development of Layer-2 solutions are innovations to increase transaction throughput. These developments have the potential to drastically lower fees by alleviating network congestion, which is a primary cause of charge increases.
Improved Efficiency
As blockchain protocols grow more efficient, transaction processing speeds increase, potentially reducing the need for higher fees to prioritize processing. Techniques like state channels, sidechains, and off-chain transactions can increase efficiency.
Increased Acceptance and Mainstream Integration
Market Expansion
As more businesses and individuals use cryptocurrencies for everyday transactions, we may see a spike in network traffic, which may drive fees up unless effectively managed by technological developments.
Diversification of Use
With cryptocurrencies being used in broader applications, from microtransactions in gaming to large-scale financial settlements, specialized solutions may emerge to optimize fees for different transactions.
Regulatory Reforms and Institutional Involvement
Government Oversight
Potential regulation may present both obstacles and opportunities. To improve user safety and market stability, legislative frameworks may require a fee cap or the implementation of uniform fee structures.
Institutional Adoption
As more financial institutions use blockchain technology, there may be an increase in demand for professional, compliant, and potentially higher-cost services, influencing the entire fee landscape.
These trends point to a dynamic future for crypto transaction fees, with potential savings from technology developments balanced by hikes due to broader acceptance and governmental engagement.
Navigating this ever-changing landscape will require staying informed and adaptable.
Final Thoughts
You can never avoid Crypto transaction fees altogether, but you can choose to use services with lower price structures. These fees can add up quickly if you trade frequently in cryptocurrency.
Fee-free options include Robinhood, eToro, ShakePay, and BlockFi. BitMEX and FTX are exchanges that charge transaction fees of less than 0.1% for both Makers and Takers.
However, as previously said, every trading service will make some money from your cryptocurrency orders.
In some test runs, the difference between the lowest and most expensive options was up to 2%, while in others, it was only a rounding error.
Smaller investors benefit more from selecting the proper provider than wealthy traders.
As you choose reputable and trustworthy cryptocurrencies, your trading platform should back up its low transaction fees with solid data security, comprehensive coin screening capabilities, and a stable financial infrastructure.
While seeking the best combination of these critical traits, consider investing in safer asset types like equities.
When well-known organizations dabble in the crypto space, you can acquire exposure to the same exciting but dangerous market by investing in these companies instead.
