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Transaction Fee Meaning

Nov 23, 2023 | Updated Nov 23, 2023
A transaction fee is a payment that users make for using services on a blockchain or an exchange.

What are Transaction Fees? 

Transaction fees are paid when a user transfers cryptocurrencies from one exchange or wallet to another. The fees can also be incurred when you buy or sell cryptocurrencies on an exchange. Transaction fees usually fluctuate depending on how busy the blockchain is, but users who pay a higher transaction fee can get their transactions processed faster. This is because miners who receive these fees are incentivized to validate their transactions faster. Centralized exchanges charge a fixed fee for buy and sell orders and give fee discounts based on the volume of the trade.

In traditional financial systems, transaction fees are charged by the intermediaries like Paypal or a bank for services like wire transfers. Paypal currently charges 4% for international transfers. If you sent $1000 via Paypal, you would be charged $40 as the transaction fee. A similar transaction on the Bitcoin network will cost approximately $5 while a volume of $10,000 will cost you $10. The transaction fee on Bitcoin is determined by the size of the transaction (in bytes) and not the volume. Using the network during periods of low traffic will incur even fewer fees.  

Why do Transaction Fee Exist in Blockchains?

Transaction fees were originally added as a security feature on Bitcoin to prevent transaction spamming. The idea was that if users paid to use the network, they were less likely to engage in costly malicious activity. The decentralized nature of the blockchain also means that transaction fees are the only way to pay the miners and validators on the network.. 

On the Bitcoin network, miners receive transaction fees after successfully confirming a transaction to a new block. They select the transactions to validate from a pool of unconfirmed transactions known as the memory pool (mempool). Miners typically prioritize transactions that have a higher fee attached to them. Miners on Bitcoin unlock new tokens by validating new blocks, but when the maximum Bitcoin supply of 21 million is reached, transaction fees will likely be the only incentive for miners. 

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