If you are used to using cryptocurrencies such as Ethereum, you surely know that the cost of commissions per transaction has recently skyrocketed. But have you ever wondered, exactly, why the cost to pay is so high compared to that of Bitcoin? And most importantly, have you ever wondered what the differences are between Ethereum fees and Bitcoin fees? Well, in this article we will find out together!
Fees and commissions: the basics
Before we look in detail at how the fees of the two best-known cryptocurrencies in the world work, it's good to do a little introduction on what commissions are and why they have to be paid compulsorily.
If we wanted to put it in simple terms, we can compare the fees for cryptocurrencies to those that must be incurred when a bank transfer is made. If, for example, you want to send €100 to your friend, you may have to pay €1 or €2 depending on the payment circuit you use.
Similarly, the moment you send, convert, or sell cryptocurrencies, you will have to incur fees that help confirm the transactions within the blockchain. These fees, in technical terms, are called fees, and how they work varies based on the type of asset you're using.
Specifically, a quick way to understand how fees can work is to illustrate the difference between fees to be incurred for ETH and those to be incurred for BTC. Once you understand how they work, you'll have a much clearer picture of how cryptocurrencies work.
Bitcoin fees: how do they work?
To understand how Bitcoin fees work, it is important to understand the figure of the miner. The miner is the one who, by offering computing power, helps the blockchain to confirm new blocks, to which transactions are added. The moment a block is confirmed, the miner receives a reward, to which are also added the fees paid by those who have used the network to make transactions.
So, if you're wondering where the fees go, part of it goes to the miners who, by the way, can decide to consider one transaction over another depending on the amount of fees that will be paid. Bitcoin fees, in fact, can vary not only based on the size of the transaction, but also based on what the miner prioritizes.
Not surprisingly, the Bitcoin fee system is referred to as an auction system. Since each block can contain a certain amount of transactions, the miner will give preference to transactions with the highest fees, which will be added to the blockchain sooner than those with the lowest fees. If, for example, there is high traffic within the network, the fees will definitely be much higher.
Why is the transaction not processed?
Situations may happen where the transaction is not processed and even after a few days, the Bitcoins do not arrive at their destination. This can happen often, especially if the network is clogged. However, one of the main reasons why a transaction fails is the cost of Bitcoin fees, which might be too low. Let's try to explain it further.
If, for example, the average Bitcoin fee cost at a busy time is 100 satoshi per byte and you are only paying 20 satoshi per byte, your transaction will be confirmed later than the others. Also, if the fee price doesn't fall below 100 satoshi per byte anymore, your transaction might risk ending up in the mempool, which is a kind of memory for all transactions that are not confirmed.
Is it possible to estimate the Bitcoin fees to be paid?
To understand approximately how high the Bitcoin fees are right now, you can use this tool, where the cost in satoshi per byte is shown. It's worth noting that, in a 100-byte transaction for example, you'll have to multiply the number of bytes by the satoshi/byte. So, a 100 byte transaction with fees of 100 satoshi/byte would cost 0.00010000 BTC.
Ethereum fees: how do they work?
In the same way as Bitcoin fees, Ethereum fees are used to confirm new blocks to validate transactions, and upon validation of each, miners receive rewards, also known as block rewards. The key difference is that while Bitcoin calculates fees in satoshi/bytes, the unit of measure for Ethereum fees is gas.
Gas is used to determine the computing power that needs to be used to perform certain operations on the Ethereum blockchain, be it transactions or smart-contract executions. Unlike Bitcoin, whose fees are only paid to execute monetary transactions, the Ethereum blockchain is able to give terms, making it useful for property exchanges as well.
In the case of a smart-contract, in fact, a seller can set certain conditions that the buyer must meet before confirming a transaction. This is precisely why decentralized finance is so successful, as no intermediary such as a lawyer or bank is needed.
How is the cost of a transaction determined?
As mentioned above, the cost of Ethereum fees is determined based on the amount of gas needed for a given transaction. For a transaction, for example, 21,000 gas is needed which, then, must be multiplied by the number of Ether a miner requires per gas. So, if a miner sets a cost of 0.00000005 ether per gas, a transaction would cost 0.00000005 x 21,000, or 0.00105 ether. Simply put, transferring money, at the current price, would require a fee of €1.70.
Unlike Bitcoin fees however, where the price varies basically based on traffic within the network, with the Ethereum blockchain you can set a gas price and a gas limit. With gas price, we mean the amount of gas you are willing to pay to perform a certain operation. By gas limit, instead, we mean the maximum amount of gas that you are willing to pay for an operation.
Furthermore, when executing a transaction, the miner may have 3 different options, especially in the case of transactions that have not yet been confirmed. In the first case, it may simply decide to accept the transaction as-is, charging the user the fee amount they selected.
Secondly, the miner may decide to give back part of the fees to the user, because the required computing power was less than the selected gas limit. However, the miner is free to reject the transaction the moment the user sends an amount of gas that is too low compared to the average market cost, just like it happens with Bitcoin fees.
In the latter case, the user will not receive the full amount back, as a small part will be retained by the miner to compensate for the power used for the process.
What are gwei?
To simplify the process of calculating Ethereum fees, the figure of the gwei, or the infinitesimal unit of Ether, has been introduced. One gwei is equivalent to 0.000000001 Ether, a bit like satoshi for Bitcoin. In this way, you can figure out how much a transaction can cost in terms of money even before you execute it.
To do so, you can use tools like Ethereum Gas Station, where the average recommended cost for a transaction, measured in gwei, is shown. In addition, the Ethereum fees to be paid for fast transactions, and those to be paid for standard transactions are illustrated. Obviously, you'll have to multiply the number of gwei by the gas required for a transaction and, if you prefer, consider the market value of the coin.
What about ETH 2.0?
With ETH 2.0 the situation is very similar, but there are some small differences. If in the system we have just seen the miner can decide which transactions to prioritize based on the cost of the fees, with ETH 2.0 a basic fee is taken into account that, depending on the average consumption of gas for each transaction, can go up or down.
Specifically, if the average gas consumption is greater than 10,000,000, the cost of the BASEFEE increases. Conversely, if the average consumption is less than 10,000,000, the base fee goes down. In this way, the system is able to self-regulate, avoiding that the miners set too high prices which, as it is easy to understand, vary only on the basis of the traffic within the network.
Conclusions
Understanding how Bitcoin fees and Ethereum fees work can be very complicated, especially for those who do not know certain technical terms.
However, once the mechanism is understood, it is possible to make an estimate of the commissions to be paid before making a certain operation.
Obviously, this does not happen in the case of exchanges, as each of them has different commissions.
In any case, keeping up to date can only benefit your mind and your portfolio, especially during periods of very high traffic like this one.
The fee on eth is cheaper. That is because a big price of btc.