How do Transaction Fees Work?
Transaction fees serve two essential purposes on blockchain networks and can be large or small, depending on the network activity. They are used to reward miners or validators who help confirm transactions and protect the network from spam attacks. Market forces can also influence the fees you pay. While high fees can slow wider blockchain adoption, very low fees can potentially bring security concerns.
Every digital asset transaction must be represented on its respective blockchain, the official public ledger of all transactions, in order to be considered complete or valid.
Miners take on the work of validating transactions and adding them to the blockchain using powerful computers that make up the network and keep it running. Miners spend large amounts of computing power and energy to validate transactions to receive a financial reward for doing so. With every block added to the blockchain, there is a bounty called a block reward, and all fees sent with the transactions that were included in the block are distributed to the relevant miners.
Miners are incentivized to prioritize the validation of transactions that include a higher fee because they will get a larger reward for completing the block. However, for someone looking to send funds and get a quick confirmation, the appropriate fee to include can vary, depending on several factors. While the fee does not depend on the size of the transaction a user is sending, it does depend on the network conditions at the time and the data size of your transaction.
Because Bitcoin blocks can only contain up to 1 MB of information, each block can include a limited number of transactions. Therefore, when a large number of users are sending funds during times of congestion, there can be more transactions waiting for confirmation than there is space in a block.
When a user sends funds, and the transaction is broadcast across the network, it initially goes to the memory pool (mempool) before being included in a block. From this mempool, miners choose which transactions to include, prioritizing the ones with higher fees first. If the mempool is full, the fee market may become competitive: users will compete to get their transactions into the next block by offering higher fees. Eventually, the market will reach an equilibrium fee that users are willing to pay, and the miners will work through the entire mempool in order. At this point, once the transaction volume has decreased, the equilibrium fee will go back down.
Transaction size is an essential consideration for miners. Smaller transactions are easier to validate; larger transactions take more time and take up more space in the block. For this reason, miners include smaller transactions. Conversely, a larger transaction will require a larger fee to be included in the next block.
Now that AscendEX users are familiar with how transaction fees work they can trade with a stronger foundational understanding.
