The days in which Bitcoin was the world’s only blockchain are long gone. There are hundreds of digital assets right now, and each one is a different blockchain, even if some are not 100% independent than others (for instance, many coins are based on Ethereum’s ETH20 technology, some others on Tron’s TRC20).
So the panorama can be confusing because it takes quite a bit of technical knowledge to understand exactly how each blockchain differs from others (especially when it comes to the consensus protocols). But one question still lingers in every user’s mind: how much will my transactions cost? We’ll endeavor to explain to you exactly that in this article.
Transaction fees: Why do we need them?
A blockchain is comprised of lots of independent nodes working in tandem and reaching consensus according to each network’s protocol. Independence is critical here because it implies that there must be some kind of incentive for those who run and support a node. That incentive usually comes in the form of tokens which come, at least in some proportion, from user transaction fees.
So we need the fees because that’s how we support every blockchain’s infrastructure. And that’s not cheap if you realize that Bitcoin alone is burning more electricity that some countries in Europe.
But that’s not all. Fees are useful also because they prevent users from wasting a network’s resources. For example, it’s not a good idea for hackers to try and do a DoS attack if they have to pay for every single request. So fees keep the network secure and available for significant projects.
So fees are not just an arbitrary thing, They matter a great deal. Now that we’ve (hopefully) persuaded you that fees are important (even good for you), let’s find out in some detail what is the deal offered by three of the most essential blockchain networks.
Ethereum is the first and quintessential second-generation blockchain. That means it created the first smart contract platform using the Proof of Work consensus protocol in which miners run the most important nodes. There are no limitations on the number of miners that can join the network.
They all compete between themselves to solve a mathematical problem (a cryptographic collision in a hash function that will create the next block). The miner who solves it first gets a reward for creating the next block. That needs specialized hardware and lots of power. So miners need to buy hardware and pay for their electricity which is why the rewards must be significant.
In the Ethereum environment, a transaction’s cost equals Gas times the gas price.
Gas: Ethereum needs to know the amount of computer power and storage it must provide to save and complete the transaction. That’s called “Gas.” If your transaction is a simple exchange of tokens, it will be cheap, but if you’re interacting with smart contracts and de dApps, it will be different.
And it could be tricky because the gas amount is computed only after the transaction is done. If you should want to know beforehand how much each of your transactions will cost you will need to ask the dApp provider how much the price has been in the past for similar operations.
Gas price: that’s how much you pay for every unit of gas/computing power, and it depends on your transaction. It’s paid in the native token (ETH in this case). Then miners rank pending transactions by price for blockchain inclusion. Miners get a better deal by processing higher gas prices, so more expensive transactions are completed sooner. The price changes all the time, and if you don’t choose it correctly, your transaction can be left in the Ether (no pun intended) for days.
There’s no doubt that Ethereum is a bonafide decentralized blockchain. But its protocol lacks scalability, and it can be very expensive, or slow, or both, especially when the network is loaded which happens often because of the most trivial reasons, such as betting games.
PAO uses Proof of Authority (PoA) as a consensus protocol, hence the name. Unlike Ethereum, the number of miners is limited. Each validator (block producer) builds a block each time. This makes this chain light, efficient, and quick.
Fees are computed in POA using the same formula as Ethereum’s: it’s gas times a fixed price.
Gas: It’s the same definition as with Ethereum.
The difference between POA and Ethereum has nothing to do with the gas definition. The thing is that POA does all the tricks a decentralized blockchain can do while keeping things simpler. The PoA consensus allows for lower gas prices and for a straightforward transaction system. It’s designed to allow horizontal scalability, but not necessarily high loads.
Yet another consensus protocol for yet another blockchain. In this case, it’s called Delegated Proof of Stake (DPos), and it’s at Tron‘s blockchain’s heart. A limited number of privileged users (known as Super Representatives and elected by the community in a worldwide voting process) are the ones who create the blocks, one at a time. This design has allowed Tron’s blockchain one of the world’s fastest, safest, cheapest, and more reliable.
There are two ingredients needed to calculate Tron’s fees. They’re called Bandwidth and Energy. You take both of them and multiply it times a fixed price.
Bandwidth: this is the piece of the network (so to speak) needed to execute and save your transaction. The price is fixed (almost negligible) for simple financial transactions, but it can vary for dApps and smart contracts. But unlike Ethereum and POA, it can be easily calculated in advance if you just know the size (in bytes) your transactions needs.
Tron’s network allows for a bit of free bandwidth for everybody, roughly equivalent to 15 financial transactions.
Energy: The network needs a certain amount of power to compute and execute your transaction. That’s called “Energy.” If you’re asking for a simple transaction, then the Energy amount you need is zero. But smart contracts and dApps do need a bit of energy (just as Gas in Ethereum), and different transactions cost different amounts.
It’s not as straightforward as with Bandwidth because the SR knows the energy price only after the transaction is completed so, again, you need to have some idea of how previous, similar transactions, cost so you can know how much you’ll need to pay.
Freezing: this is Tron’s extra ingredient. If you freeze some of your Tronix coins, that will get you a bit of free Bandwidth, Energy, and also the ability to vote for SR’s which are often willing to reward voters with free tokens. The more coins you freeze, the more free transactions you get. Freezings also make the token scarcer, so it helps to drive its price up, so it ends up helping users, hodlers (if Tron has any) and SRs.
Tron’s system could seem quite a bit more complicated than the previous two. And it is. But it’s also faster, cheaper, it ensures a number of free transactions for all users.
Even if you overdo things and have to pay for transactions, it’s way cheaper than Ethereum or POA, and it also rewards SRs. Last but not least. These rewards facilitate vertical scalability in the network (unlike POA which is horizontal, or Ethereum, which is basically non-existing).
Image courtesy of Pixabay.