Why are there transaction fees for Bitcoin and Ethereum, but none for the EOS blockchain?
In his legendary whitepaper Satoshi Nakamoto envisioned bitcoin to be a “peer-to-peer electronic cash system” implying that the new cryptocurrency he created will be used for transactional purposes. 9 years has passed since the bitcoin genesis block has been released and we all have come to realization that bitcoin’s transactional value is actually non-existent. Bitcoin may be a great store of value, but for the small transactions it is certainly not an effective medium of peer-to-peer payments.
There are two main reasons for this:
- high transaction fees and
- low TPS (transactions per second)
Both of these operate hand-in-hand. With low transactional throughput, the increase in supply of transactions (as we saw with a climax at the end of 2017 when bitcoin reached an all time high price of nearly $20K) will lead to the Bitcoin blockchain operating at full capacity.
When only a limited amount of transactions can be processed, those individuals who want to cut the line and get their transactions processed first will be willing to pay higher fees. If you ever bought your way into a fancy night club — with a red rope and a line to get inside stretching for a block — by bribing a bouncer at the entrance, this is exactly how this works. BTC price began skyrocketing in late 2017 and bitcoin went mainstream. Every Uber driver and McDonald’s employee talked to their customers about buying Bitcoin, the blockchain got flooded with transactions and increase in supply lead to skyrocketing tx fees as we experienced in Dec-Jan 2017 (see graph below):
High Transaction Costs:
Same increase in tx fees has happened on the Ethereum blockchain as well. Except here it was at least partially triggered by … a game. Cryptokitties…
As the game started having an overnight success, it quickly flooded the Ethereum network up to its full capacity, which led to transaction processing delays and increase in tx fees.
Why are there transaction fees in the first place??
When Bitcoin was originally launched transaction fees were actually very small. But they have been on the rise lately. Is the sole reason for that an increase in the number of transactions ? Not quite. Another reason lies in the tokenomics of Bitcoin. Satoshi designed it in such a way that only 21 million bitcoin total would ever be issued.
The bitcoin protocol called for halving of the reward for adding a block every 210,000 blocks (approximately every four years). The reward started at 50 BTC, then halved to 25 BTC at the end of 2012, then to 12.5 BTC in 2016. The block rewards were higher and the number of miners was low. Overtime, the block reward has decreased to a quarter of the original size while the number of miners fighting for the reward has increased exponentially. Yes, the price of 1 BTC has also skyrocketed over time, but so did the cost of mining. In 2009 a miner could have mined a bitcoin block on a PC in the comfort of home and get a reward of 50 BTC for doing so. Nowadays, in order to participate in mining of 1 block with a 12.5 BTC reward promise, one needs to invest in an ASIC farm at a cost of tens or even hundreds of thousands of dollars just in equipment expenses. Utility fees paid for maintaining such mining farms are very high now as well.
Why aren’t there any transaction fees on the EOS blockchain?
Unlike with bitcoin, EOS uses Block Producers to release new token blocks and record transactions into the block. At all times there are always only 21 block producers in existence. Also, the reward to those block producers remains fixed over time as per the design of the EOS Blockchain. The top 21 active block producers will earn a 0.25% per block reward on a pro-rata basis to the number of blocks each one produces. All block producers (active + standby) will also earn a 0.75% per vote reward on a pro-rata basis to the total number of votes they receive.
That stability eliminates competition among Block Producers (miners) for the reward and removes the need for additional incentive to those Block Producers in a form of transaction fees. And this is why you and I can enjoy zero transaction fee processes on the EOS Blockchain.
