Why are Transaction Fees so High?

There are a few things to know about transaction fees and how computational power factors into the cost. Neither this post nor any other post on cryptofal.com should be taken as financial advice. It is not.

A lot of discussions have been had about the high transaction fees on blockchains like Ethereum and Bitcoin but why are they so expensive?

There are a couple of reasons why this is the case. The main reason for this is the block sizes. The other is that smart contracts take more computational power to execute depending on the type of transaction.

Bitcoin, for example, has a block size of 1MB and since there are so many people creating transactions it becomes a fight for that space. The higher you set your fee the more likely the validators are to accept that transaction first. This creates a bit of a bidding war to get the transaction processed as quickly as possible. In the early days of BTC transaction fees would be extremely low or zero because there was not much usage on the network; however, now the increased popularity of the network means that validators have a lot of transactions to choose from and of course, they will choose the highest “bidder” first.

For Ethereum, it is a little bit different since it is a smart contract platform. The gas fee is charged based on how much computational power it will take to process that transaction. This also depends on the type of transaction being executed. A simple transaction like sending ETH from one wallet to another costs a small fee. Minting an NFT will run you a much higher fee since it is a more complex transaction and requires more computing power. Other factors also play into this, such as how much traffic is on the network.

If you are trying to make a transaction during a high-traffic time it will be more expensive. This is because the network is under a lot of stress and transactions get backed up. In the US your best bet at the moment is to do your transactions early in the morning or late at night to avoid astronomical fees.

Projects like Iota have no transactions fees but that is because it is not a blockchain technology it is a Directed Acyclic Graph (DAG). While it operates very similar to a blockchain the key difference is a DAG is a network of individual transactions linked to multiple other transactions. There are no blocks of transactions in DAG networks. Basically, a Blockchain validates transactions block by block and a DAG uses each transaction to provide validation for the next.

Transaction fees can be a barrier to entry for many people, but the technology is still very early and it is tough for the developers to scale at the rate that they are growing. This is especially true on Ethereum since many of the major Dapps that people use are built on Ethereum. Scaling solutions like Polygon are options for people as well to mitigate some of the fees on ETH but can be a pain for people who are not well versed in the space. As crypto continues to grow there will be even more innovation that could potentially reduce the burden of these fees.