Talkin’ SaaSy
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Talkin’ SaaSy

Why Transaction and Rent Fees Matter

Balancing Security and Usability

So one of the great things about blockchains is anyone can access and use them, they are permission-less, in that none of use need permission to use them. This presents both a tremendous opportunity for inclusivity and access, but it also presents a major challenge, how do we secure a network like this and keep it online?

If you have spent any time in crypto or blockchain you probably have heard of Ethereum. Ethereum is the second largest blockchain by market cap ($312B at the time of writing this article). Ethereum transactions are powered by what people commonly call “gas”. Gas is simply a fee that you or I or anyone else who wants to submit a transaction to the Ethereum network pays. That payment is broadcasted to the network where a group of nodes (nodes are just other folks computers, nothing to crazy here) accept your fee in return for validating your transaction.

This mechanism is meant to secure the network and prevent fraud since as a participant if you submit a fraudulent transaction, the validator who selects your transaction request gets to keep the fee you paid them and your transaction does not get included in the blockchain. It get’s expensive if you keep submitting fraudulent transactions but the issue on the flip side is that even good transactions can offer a higher “gas fee” to the network so that their transaction is selected first which results in the avg. price of an Ethereum transaction for everyone to increase. (At the time of writing this the avg. fee was around $15 per transaction)

The other issue with open and permission-less networks like Ethereum and other blockchains is that the nodes we discussed earlier are part of this open network so their IP addresses are known making them potentially vulnerable to DDoS attacks as well. This is where the fee structure also comes into place as as security mechanism. For those not familiar, a DDoS attack is when malicious actors take a network of computers and target a specific server or machine by flooding it with massive amounts of what seem like legitimate requests, but once this requests reach a critical mass, they can clog up your machine or network rendering it non-functional. Think of it like a pipe, shove enough stuff in there quickly enough you can clog it up and then nothing can pass through.

Given the high price of gas fees on the Ethereum network, submitting enough requests to perform a DDoS attack would be incredibly expensive for the attackers. While this does work as an effective deterrent, the trade-off has been that transactions fees are so high that they are prohibitive for most normal folks to conduct transactions on the network. So how do we fix this?

Enter the new generation Layer 1 blockchains like Terra, Solana, Algorand or Avalanche. These newer chains all offer lower priced or in some cases even fixed price transaction fees to make building on and transaction on the network more accessible to a larger group. They have rethought the consensus and node architecture as well to allow higher throughout on transactions meaning they can afford to have lower costs because more transactions per second are being processed. More transaction per second mean that any attackers on the network would need to submit more request per second to try and clog the network.

So while these networks focus on lower fees (for example, Solana charges a fixed $0.00025 per transaction) the increase in TPS means that any attacker will have to send an order of magnitude higher requests to potentially overwhelm the system.

Why are DDoS attacks particularly effective against distributed networks? Well unlike traditional applications which will have redundancies (backup servers with load balancers to direct traffic). In a distributed system, participants rely on the online status of the nodes to receive and relay messages. If an attack takes a node down, then that nodes network activity goes to other nodes which can slow them down due to the increased network activity and then you can see how quickly this can snowball.

Now the new fixed fee structure of these new L1 chains isn’t all sunshine and roses. It comes with a trade-off call “rent”. To ensure that there is proper incentive to nodes to participate in consensus and also store that state (storing state simply means store information on the ledger like “Ross has $100 in his account”) participants must pay “rent” to keep that information on chain. If we go back to Solana, with it’s low transaction fees you will find that there is a fair bit of rent the network charges to make up for it.

The network will charge you 0.10529088 SOL for every 15000 bytes of information which at the current price of a SOL being roughly $100 at the time of writing this, it means you have to pay $10 in rent for every 15000 bytes of data store on chain. Now this rent system is meant to act in a similar mechanism, the cost of storing state on the network should incentivize only good actors to want to use the network and store things, why would a bad actor want to waste $10 like that?

This is where the price of these new L1 tokens actually matters. Given that they charge variable rent, a year ago when Solana was around $2 per SOL that same 15000 bytes only cost $0.20 to store, now it costs $10 and if the price of a SOL were to reach $1000 then that same 15000 bytes would cost $100 to store. You can see how this tradeoff can make the network prohibitively expensive just like the variable transaction fees in Ethereum and Bitcoin.

In summary, this article today is meant to highlight the complexity in both the technical and economic balance that these distributed networks are trying to achieve. The price of their token and the model of their consensus is a balancing act of trying to keep the network secure and make any attack prohibitively expensive while also keeping the cost of using the network in check for users like you and me. While I don’t think there is a perfect solution yet today, I have met with several folks working directly on tis project and know that it is something top of mind for people and they are working to come up with solutions for both.

Originally published at https://talkinsaasy.beehiiv.com.

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Ross Andrews

Ross Andrews

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SaaS Founder, Operator and Product Builder. Working on a exciting new project, stay tuned 😎