Why Am I Paying Fees When Using Crypto?
Why Am I Paying Fees When Using Crypto?
⛽️ A quick primer to gas fees, why they fluctuate so much, and how to avoid them
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This week, I’m going to experiment with a conversational style of writing.
Let’s imagine we’re having a conversation with Andrea, who’s new to crypto. Andrea has an account on Coinbase, where she bought about $600 in Bitcoin. Andrea also bought into the NFT hype: she recently spent 0.5 ETH on a mushroom art –
Andrea was ok with these purchases, but she wondered why $7 out of her $600 in BTC went to Coinbase for “transaction costs” and why her mushroom art actually cost 0.504 ETH because of $10 in “gas fees”. She wondered,
“Why am I paying fees when using crypto?”
The short answer? It’s costly to “write” to a blockchain.
In an older post on Bitcoin, I ~very loosely~ described a blockchain as “a public database that a group of computers…maintain”. Keeping this database accurate and secure isn’t easy, and there are a lot of computations and checks that go into ensuring that.
Fees cover the cost of electricity for all the computers doing those checks. They’re the backbone of the crypto ecosystem.
Without fees, miners won’t have incentives to add new transactions to the blockchain. Also, attackers could spam the network and add illegitimate transactions.
Andrea gets that. But recently, when she tried to mint her own NFT, it cost about $100 in fees! And an hour later, it dropped to $95. She asked,
“Why do the fees change so much?”
We’re going to jump into an analogy to explain this.
Say you’re driving a car and need to refill it with gas. The amount you pay for gas depends on two things: the price of gas and how much gas your car needs for a refill.
The price of gas varies on free-market effects – supply and demand. The price of “crypto gas”, i.e. fees, also depends on market effects.
If there are a lot of transactions waiting to be processed and fewer miners working on the processing, fees are higher. There’s simply too much demand to add a transaction to the blockchain. And vice versa.
“And why are the fees so high for minting an NFT?”
The amount of gas your car needs depends on how long of a trip you need to make. Similarly, the amount of “crypto gas” you pay for a transaction depends on how long or complicated it is.
A simple transfer of tokens, like sending 0.5 ETH to a friend, won’t cost too much in fees. The “message” you’re writing to the blockchain is simple.
On the other hand, minting an NFT involves a lot more data to be stored on-chain. The “message” includes the price, a link to the NFT art, etc. Bigger messages take up more space on a block and thus require more gas.
Simple transactions are like a short trip to a nearby grocery store. You need much less gas, so it’s cheaper. Complex transactions are longer trips that end up being more expensive.
Okay, so Andrea gets why we pay fees when using crypto, why they fluctuate so much, and why they can be so high sometimes. But she doesn’t really care about any of that.
Andrea’s thinking to herself, “I’m just interested in NFTs because I think they’re cool. I’m not concerned with the security checks happening under the hood.”
Presumably, she would wonder,
“How do I avoid fees?”
The basic idea is simple: wait until gas fees are cheaper, or “write” less to the blockchain. Let’s cover both.
1. Wait until gas fees are cheaper
I wrote above that gas fees fluctuate over time, depending on demand.
Ethereumprice has a good chart with historical data on when Ethereum fees are at their lowest:
Generally, fees tend to be at their lowest on weekend nights in US timezones.
2. “Write” less to the blockchain
Many platforms “bundle up” transactions together and compress them to write less data to a blockchain.
The details on how this works get complicated and are rife with terms like “L2 chains”, “sidechains”, etc. What Andrea needs to know are the options she has. Here are two examples —
Polygon is a “sidechain” platform built on top of Ethereum. It is much more scalable and users pay < $1 in fees per transaction.
Lightning Network is an “L2 protocol” that makes Bitcoin transactions faster and cheaper. Users pay only a few cents per transaction.
That was a lot to digest! Even though Andrea gets how she can pay lower fees, she realizes she can’t fully avoid them. As the saying goes, there’s no such thing as a free lunch.
It’s hard to scale blockchains (and lower their fees) without compromising on security. Fortunately, though, some of the most brilliant minds are working on this exact problem.
We’re still in the dial-up modem era of the crypto ecosystem and many kinks are still being worked out. In a few years, it won’t be surprising to see mainstream solutions that charge zero fees. An ideal world would be one where Andrea doesn’t even have to read this post!
A blockchain is better understood as a log of messages rather than transactions. Remember that a transaction is also just a message of transferring value from one address to another.
Chart Source: Ethereumprice
Cover Image Source: Pinterest