Fees as Anti-Spam
A feature of cryptocurrency networks, is that I can personally automate transactions. Anything that is digitally automated can be repeated billions of times with just a few lines of code. This is actually a vulnerability for most computer systems. If I manage to send a trillion requests to Facebook, then I may be able to crash Facebook’s computers from overloading it with requests. The designers of cryptocurrency took this into consideration when designing the bitcoin network.
What they did was make it cost money to use the network. Not a lot of money, actually far less than it costs to send a transaction in a bank. Most of the time it costs fractions of a penny to send money on most cryptocurrency networks. The effect though, is that it incentives proper use of the network, and makes it expensive to conduct an attack. Suddenly a trillion transaction attack will cost a large amount of money to execute. In this way, fees actually work for the network, rather than against it.
Fees are Earned by Participants
In this explanation, participants are any individuals that receive compensation for work done on the network. Across the cryptocurrency spectrum, fees are used in many ways. So we will have to tackle this definition broadly. In general, the fees that are collected by activity on the network are redistributed to the individuals that are contributing something to the network.
Typically the individuals that are running some sort of hardware, or governance software are the ones to receive the fees. This is actually how networks have managed to make a case for long-term sustainability. Fees are automatically charged, collected, and redistributed according to algorithms defined in the network’s code. The network has absolutely no incentive for itself to make a profit, so all fees are typically redistributed immediately throughout the network.
What Fees do I Pay On Cryptocurrency Networks?
This depends on the network that you’re using. Most networks handle fees slightly differently than the next. So we’re going to divide the types of networks into two categories, and tell you how they work in each instance.
Bitcoin (Or Similar) Network
There are a lot of cryptocurrencies that are designed very similarly to bitcoin. Therefore, it is easy to say that the majority of networks work in the following way.
- Users don’t pay to create a wallet, or address.
- Users don’t pay to receive money.
- Users pay to send money.
That’s actually it. When you put it like this, you can see that cryptocurrency networks are extremely simple and transparent, especially when it comes to their fee structure. What is more complicated, is how much the fee actually ends up being. Most cryptocurrency networks are able to keep the fee under a penny, but the popular networks like bitcoin and ethereum are subject to network congestion which causes fees to rise.
When there is lots of activity on the network, then people can attach a higher fee to their transaction to get them validated quicker. In periods of high congestion, this causes fees to rise to half a dollar, to as high as a couple of dollars. For small transactions like your daily coffee, this is obviously too much money. However, a couple of dollars to send a billion dollars is a massive improvement on the banking system, as your billion dollars would be subject to at least one fee, and it would likely be percentage based. Sending large amounts of money in cryptocurrency is always several orders of magnitude cheaper than sending money with banks.
EOS (Or Similar) Network
EOS is a fundamentally different network than bitcoin and ethereum. EOS uses an “account” model, wherein you have an account name. The reason why this makes EOS different is how your account is used within the network. EOS is governed by a group of elected accounts.
People use the EOS token in their accounts to vote for who they want to be governing the network. Furthermore, there are no transaction fees to send and receive anything on EOS. This makes spam cheap. The deterrent is making it cost money to create an account. This only partially works though because it doesn’t stop a single account from spamming. It only stops billions of spam accounts from being created.
Exchanges operate a lot more like banks. They charge fees for just about everything because they are a for-profit entity. Cryptocurrency networks on the other hand are more like public utilities. Exchanges won’t typically charge you money to sign up, and there is no yearly maintenance fee. They will however charge you a fee for trading one currency for another, or sending cryptocurrency off of their platform. These are actually reasonable things to charge money for, as the exchange is providing a service that is vital to the prosperity of cryptocurrencies everywhere. Exchanges are the entities that enable you to buy bitcoin with government money (also known as fiat).
Maker and Taker Fees
The two most common types of fees on exchanges are maker and taker fees. Every exchange implements this fee structure differently, but this is where the exchange makes the bulk of their money. A maker fee is the fee charged to the individual that actually creates a trade order. The taker fee is charged to the individual who decides to buy or sell from an existing order on the order book. The order book is where all of the trades sit, until they have been executed. If no one takes the trade that someone has made, the order will sit for as long as the maker decides. The maker and taker fees vary from exchange to exchange.
Some exchanges charge for maker fees, and not for taker fees. Other exchanges offer discounts if you are a frequent, or high volume trader. Exchanges are able to significantly differentiate themselves by creating ever more appealing fee structures for their exchanges. Percentage points really start to add up if you’re trading with thousands, or millions of dollars.