The Impacts Of Transaction Fees On Cryptocurrencies

On the other hand, cryptocurrencies employ different types of charges that may be intimidating to novice users during the initial stages of trading. Generally, cryptocurrencies attract minimal fees to cater to both local and international payments.

However, in some scenarios, a crypto project can charge its users fees that may surpass the standard amount. As cryptocurrencies continue to boost the global economy, their transaction fee structures positively or negatively impact its sustainability.

Crypto Transaction Fees

A transaction fee represents the amount of funds a user pays to transfer crypto coins from one digital wallet to another in the crypto sphere. Crypto fees guarantee users that the transaction will undergo verification procedures successfully and remain a permanent record on the public blockchain.

The transaction fees vary based on the network condition and the average size of transactional information in a blockchain network. This fact implies that, unlike banks that compute transactional fees using percentages, cryptocurrencies highly rely on the status of a blockchain to generate transfer fees.

How Fees Differ on PoW and PoS Blockchains

The distributed ledger technology deploys various consensus mechanisms to maintain a crypto project’s transaction system. One of the validation processes includes the Proof of Work mechanism, which uses labor-intensive equipment to verify transactions. Here, miners participate in solving complex algorithms, and the winner stands a chance of adding a block onto the chain. Data suggests that crypto projects running on PoW mechanisms record higher transactional fees over a week.

Despite being the dominant digital currency in the market, Bitcoin has an approximate seven-day average fee of $1,405,189. What’s more, miners rely on block rewards and transaction fees to generate adequate incomes that will cover electrical and hardware charges. As it stands, the block reward is at 6.25 BTC, and since it continues to subside, the transaction fee may equally rise.

For Proof of Stake cryptos, transaction fees are relatively cheaper, mainly because PoS mechanisms do not run on expensive mining equipment compared to PoW methods. For instance, Cardano’s blockchain records a slight difference in the trading fees incurred after a week and after 24 hours.

Another crypto project, such as ETH, which recently moved from a PoW to a PoS ecosystem, also reveals similar results like Cardano. It recorded an average transaction fee of $5,664,791 within a day and $6,132,688 after seven days.

Instead of using costly mining equipment, a PoS system leverages validators who participate in locking their digital currencies to confirm transactions on a blockchain. PoS-based cryptos such as BNB award holders with a particular discount for paying fees using the native asset in some scenarios.

The Effects of Fees on a Crypto Project

Various market conditions such as supply, demand, and utility capabilities impact the status of a cryptocurrency. Transaction fees fall into the same category of factors as it drives the crypto community through the following paths:

Adoption and Price Actions

The transaction fee can either lead to mass adoption or rejection of a crypto asset. A high transaction cost will favor institutional investors more than retail traders, signaling a decreasing adoption rate and lower market activities.

Furthermore, it also discourages and reduces an investor’s confidence in adopting cryptocurrencies as the future of finance. Consequently, a decrease in crypto fees empowers retail and institutional investors to trade with digital currencies actively.

A more considerable buying and selling activity also increases the crypto project’s value and decreases when transactional charges skyrocket.

More Revenue for Miners and Validators

An increase in trading fees allows a crypto project to pay its blockchain nodes to enforce security within the ecosystem. Crypto platforms offer incentives to users who successfully mine/validate transactions.

While it may be advantageous to maximize profits from higher transaction fees, aspiring validators on a PoS blockchain will have to stake more to become nodes and confirm transactions.

Projects Leaving the Crypto Platform

New crypto projects always look forward to harnessing the power of blockchains that run similar platforms. Through a DLT network, a platform is assured of an immutable and safe system capable of sustaining massive transactions.

If the blockchain’s prices go up, it will directly affect the crypto projects residing on that public ledger. At the end of 2020, Ethereum encountered a similar scenario where projects built on its blockchain decided to migrate to other blockchains such as the Binance Smart Chain.

By mid-September the same year, the number of transactions on Ethereum’s blockchain attained an all-time high of 1.4 million, closely followed by high gas fee rates. Within no time, crypto projects moved from Ethereum to escape the rising gas fees, slower transaction and confirmation processes.

SegWit and Its Contribution to Crypto Fees

The Segregated Witness protocol was introduced to the market in 2017 to solve the scalability issues in blockchains. By using SegWit, a block capacity can expand to accommodate multiple transactions. As more transactions pass through the public chain and are stored inadequately large blocks, SegWit can accelerate the transaction speed and decrease a crypto project’s transaction fees.

A 2020 study suggests that BTC investors used transactions amounting to $500 million due to a sluggish adoption of SegWit and batching. The protocol plays a beneficial role in ensuring a crypto platform and its blockchain network run effectively to maintain a healthy transactional system.

Final Word

The adoption level, price, validator’s profits, and other factors can change drastically due to a crypto platform’s transactional fees. Ideally, there will be more market activity if the crypto fees remain at a standard level and less activity when charges elevate.

Regular transaction fee revisions need to be implemented by crypto projects to give users peace of mind when transacting at lower prices.

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