We all know that transaction fees associated with crypto transactions can cause users to spend too much, or even avoid doing transactions all together. The fees in crypto have been a barrier for some entering the asset class. Let’s take a minute to discuss how these fees are categorized and function on both bitcoin and ethereum.
Bitcoin Protocol:
- Fee Calculation: Bitcoin transaction fees are calculated based on the size of the transaction in bytes and the priority level of the transaction (how quickly you want it to be confirmed). Transactions with higher fees are usually processed faster by miners.
- Block Space: Bitcoin blocks have a limited size, which limits the number of transactions that can be included in each block. As a result, there is competition for block space, and users who offer higher fees have a better chance of getting their transactions confirmed sooner.
- Satoshis per Byte (sats/byte): Bitcoin fees are often measured in satoshis per byte (sats/byte), where a satoshi is the smallest unit of Bitcoin. Users can set the fee rate when sending a transaction, choosing from different levels of priority.
- Dynamic Fees: Bitcoin fees can vary greatly depending on network congestion. During periods of high demand, fees tend to increase, and during lower demand periods, fees can be relatively lower.
- Fee Market: Bitcoin’s fee market is determined by supply and demand dynamics. Miners prioritize transactions with higher fees because they earn more rewards by including them in blocks.
Ethereum Protocol:
- Gas and Gas Price: Ethereum uses a concept called “gas” to measure the computational effort required to execute operations or smart contracts. Gas is paid in Ether (ETH). Users specify a gas price (measured in Gwei, a subunit of ETH) when sending transactions. The higher the gas price, the more likely the transaction will be included in the next block.
- Gas Limit: Users also set a gas limit, which is the maximum amount of gas they are willing to pay for the transaction. If the gas used exceeds the gas limit, the transaction fails, but the user still pays for the gas used up to that point.
- Smart Contracts: Ethereum’s fees are more complex because they can involve executing smart contracts, which can have varying levels of complexity and computational requirements. More complex smart contracts generally require more gas to execute.
- Network Congestion: Similar to Bitcoin, Ethereum experiences periods of network congestion that can result in higher gas prices. During high demand times, users might need to bid higher gas prices to ensure their transactions are processed promptly.
- Fee Market: Ethereum’s fee market operates based on the interaction between users setting gas prices and miners selecting transactions with the highest gas prices to include in blocks.
Now that we covered how fees are categorized and function, let’s jump into the best way to avoid getting stuck paying high fees on your bitcoin and ethereum transactions. Here are some strategies you can consider to potentially avoid paying high transaction fees on the Bitcoin and Ethereum networks.
Use a Fee Estimation Tool: Before sending a Bitcoin transaction, use a reliable fee estimation tool to get an idea of the current fee levels and recommended fee rates for different confirmation times. This can help you choose a fee rate that balances cost with transaction speed.
Choose Off-Peak Times: Bitcoin network congestion can lead to higher fees. Consider sending transactions during off-peak times when network activity is lower, which may result in lower fees. The two primary markets are Asia and the USA, so avoid times right around the start or the end of the workday for either of these markets and you will likely have less network congestion.
Use SegWit Addresses: Segregated Witness (SegWit) addresses help reduce the size of transactions, allowing you to pay lower fees. Many wallets and exchanges support SegWit addresses.
Batch Transactions: If you’re making multiple Bitcoin transactions, you can save on fees by batching them together in a single transaction.
Wait for Lower Fees: If your transaction is not time-sensitive, you can wait for periods of lower network activity to send your transaction. This could result in lower fees.
How to avoid paying unnecessary transaction fees on Ethereum transactions:
Gas Price Estimation: Use a gas price estimation tool or your wallet’s built-in feature to estimate appropriate gas prices for your Ethereum transactions based on current network conditions.
Gas Optimization: When interacting with smart contracts or decentralized applications (dApps), look for opportunities to optimize gas usage by choosing more efficient contract interactions.
Gas Limit: Set an appropriate gas limit for your transactions. Be cautious not to set it too low, as insufficient gas can result in transaction failures. Also, be advised that even if your transaction fails, you still have to pay gas.
Use Layer 2 Solutions: Layer 2 scaling solutions like Optimistic Rollups and Plasma can help you perform transactions and interact with dApps with lower fees and faster confirmation times. L2 solutions are gaining popularity as various protocols are converting from a native chain to an L2 to gain popularity and usability.
Wait for Off-Peak Times: Similar to Bitcoin, Ethereum network congestion can lead to higher gas prices. Consider performing transactions during periods of lower network activity. Much like equities markets, most trading activity is right in the morning or at the close of the market. So avoid times associated with the start or the end of the workday for the USA and Asia markets.
Use Gas Tokens: Some projects have introduced gas tokens that allow you to pre-purchase gas when fees are low and use it later when fees are higher.
Consider Alternatives: Depending on your use case, you might explore other blockchain networks with lower fees and faster transaction times, although this may involve converting your assets.
Remember that the cryptocurrency landscape can change rapidly, and the strategies that work best for fee optimization can vary over time. It’s essential to stay informed about current network conditions and fee dynamics by consulting reliable sources including crypto industry news sites and tools before conducting any transactions.
By Steve
