Network Fee Meaning
What Is Network Fee?
Every time you trade or transfer cryptocurrencies on a blockchain, it requires computational power to validate each trade. A network fee rewards the miners or validators who commit their resources to validating these transactions. It is often paid by individuals, businesses, institutions, and crypto exchanges when using a blockchain network.
A network fee refers to a pricing system that determines the cost of performing an action on a blockchain, ranging from sending crypto from one wallet to another to using a dApp. This cost is used as an incentive for the miners or validators who help maintain the network’s integrity. Network fees are also necessary to prevent the network from becoming overwhelmed with transactions. This involves disincentivizing malicious actors from spamming the system with useless transactions.
In proof-of-work algorithms, network fees are one of the two components of a block reward. It is often paid in the respective blockchain’s native currency. For instance, the network fee for Bitcoin is paid in BTC, and the network fee for Ethereum is paid in ETH.
What Factors Are Used to Determine Network Fees?
Under normal conditions, users may pay higher network fees to get their transactions validated quickly. This is because miners and validators generally choose to confirm transactions with higher fees over those paying lower network fees.
In addition, the actual fee varies based on the network. Network fees may also depend on:
- Network congestion: As a network experiences high transaction volume, users can pay higher fees to have their transactions prioritized.
- Computational complexity: As an action becomes more complex, the computational resources needed to process it also increase. The extra resources translate into higher network fees.