What Are Blockchain Transaction Fees and How Do They Affect Your Transactions?

| November 17, 2023

Share this article

Blockchain Transaction Fees

Transaction fees play a pivotal role within blockchain networks, serving dual crucial functions. Firstly, they act as incentives for miners or validators who play a pivotal role in confirming transactions. Simultaneously, these blockchain cryptocurrency fees function as a protective barrier for the network, mitigating the risks posed by spam attacks.

The size of blockchain transaction fees can vary, contingent upon the level of network activity, with market dynamics exerting their influence on the fees you encounter. While elevated fees may impede the broader adoption of blockchain technology, excessively low fees can raise legitimate security concerns.

Purpose of Blockchain Transaction Fees

To execute a successful and legitimate blockchain cryptocurrency transfer, each transaction must be incorporated into the blockchain, which serves as the official, public ledger of all completed transactions.

This essential task necessitates computational power provided by miners, who are operators of powerful computers within the network responsible for confirming transactions. The continuous computational efforts of miners in verifying and validating Bitcoin network transactions are integral to imbuing the network with its unique decentralized attributes. In essence, the network’s existence depends on their contributions. Miners receive financial compensation for their substantial computational power and energy investments in supporting the network. With the addition of each block (comprising a collection of transactions) to the blockchain, miners are rewarded with a block reward, in addition to the fees accompanying the transactions that were successfully confirmed and included in the block.

Factors Affecting Blockchain cryptocurrency transaction Fees

One of the core factors that affect transaction fees is the miner’s activity. Miners are motivated by a financial incentive to prioritize the validation of transactions with higher fees. While the confirmation time of any given transaction between digital asset custody services depends on multiple factors, including transaction size and network conditions, it is generally the case that transactions with higher fees will tend to confirm more swiftly than those with lower fees.

Your software and hardware wallets for cryptocurrency will automatically determine the appropriate fee for sending your selected cryptocurrency. For instance, the fee for sending ether remains fixed (you can review the ether sending fee by selecting “Send” and designating Ether as the currency). In contrast, the fees for sending bitcoin, bitcoin cash, and stellar are dynamic, and your wallet calculates them after you input the desired amount for the transaction.

Calculation of Transaction Fees

Put plainly, a blockchain fee is a small quantity of cryptocurrency that users offer to execute a transaction within the blockchain network. This fee is remitted to the network’s miners who support institutional crypto staking functions, who are responsible for affirming and legitimizing the transaction before integrating it into the blockchain ledger.

The precise sum of the blockchain fee fluctuates and depends on factors like the specific blockchain cryptocurrency in use, the level of network congestion, and the transaction’s size. Typically, these fees are expressed in the same cryptocurrency being transacted, such as Bitcoin, Ethereum, or Litecoin.

Bitcoin

Bitcoin established the model for transaction fees. It is one of the templates adopted by numerous cryptocurrencies today. Satoshi Nakamoto recognized that these fees serve a dual purpose: safeguarding the network against extensive spam attacks and stimulating positive behavior.

Within the Bitcoin network, miners earn transaction fees while they confirm transactions and add them to a new block. This collection of unconfirmed transactions is referred to as the memory pool or mempool. Naturally, miners accord priority to transactions with higher fees, which users willingly offer when sending their BTC to another Bitcoin wallet.

In essence, individuals with malevolent intentions seeking to disrupt the network must also pay a fee for each blockchain cryptocurrency transaction. If they set the fee too low, miners are likely to disregard their transactions. Conversely, if they opt for a suitable fee level, they incur a substantial economic cost. Thus, transaction fees serve as a straightforward yet effective spam filter.

When initiating a Bitcoin transaction through a Bitcoin wallet, you’ll typically encounter an option to select your fee rate. This fee rate is quantified in satoshis per unit of data utilized by your transaction on the blockchain, often abbreviated as sats/vByte. The total fee incurred by your transaction is determined by multiplying this rate by the size of your transaction.

In historical context, transaction fees have typically ranged from $0.50 to $2.50. However, during periods of heightened demand for block space, transaction fees tend to experience upward spikes. To secure immediate transaction confirmation, the optimal fee rate may fluctuate depending on the factors mentioned. A recommended approach for ascertaining the ideal fee rate is consulting a preferred block explorer, such as mempool.space. It’s crucial to acknowledge that fee estimation algorithms can sometimes falter. If you require expedited confirmation, it’s prudent to err on the side of caution and opt for a higher fee.

In a mathematical context, transaction fees represent the discrepancy between the amount of Bitcoin sent and the amount received. Conceptually, these fees symbolize the urgency with which a user desires their transaction to be validated on the blockchain.

Ethereum

Ethereum’s transaction fee system operates differently from Bitcoin’s, with fees contingent on the computational work required for transaction processing, known as “gas.” Gas is also priced in ether (ETH), the network’s native cryptocurrency.

The gas required for a specific transaction remains constant, but gas prices can fluctuate, directly influenced by network congestion. When you pay a higher gas price, your transaction is more likely to receive priority from miners. The total gas fee includes the cost of processing and an incentive for transaction validation. Additionally, it’s important to consider the gas limit, which establishes the maximum price you’re willing to pay for a particular transaction or task.

To clarify, the gas cost represents the work required, while the gas price corresponds to the payment for each unit of work. The interplay between these two factors and the gas limit collectively determines the total fee for Ethereum transactions or smart contract operations.

As an illustrative example, consider a random transaction on Etherscan.io. This transaction required 21,000 gas and had a gas price of 71 Gwei. Consequently, the total transaction fee amounted to 1,491,000 Gwei or 0.001491 ETH. With Ethereum’s transition towards a Proof of Stake model (such as Casper), there’s an expectation that gas fees will decrease. This is because the network will require significantly less computational power to validate transactions. Nevertheless, network congestion can still influence transaction fees as validators prioritize higher-paying transactions.

Why are institutions impacted the most by high transaction fees?

In most cases, blockchain transaction fees are primarily governed by two key factors: First, the “size” or data volume of the transaction. Second, the level of demand from users for block space. The greater the urgency an institution or individual has for their blockchain cryptocurrency transaction to be confirmed, the more they are willing to pay in fees.

Each block in most of the blockchain network can hold a maximum of 4 megabytes (MB) of data, which imposes a restriction on the number of transactions that can be accommodated in a single block. Larger transactions consume more block data, and as a result, transactions with larger sizes generally incur higher fees on a per-byte basis. Higher transaction fees mean higher cost per transaction for institutions. 

 

How can institutions integrate with the right wallet infrastructure solution to reduce their overall transaction fees?

The best cryptocurrency wallet India offers institutions the flexibility to tailor their transaction fees. To illustrate, here’s how blockchain transaction fees are managed by a multisig and multi party computation wallet provider: First, on the “Enter send amount” screen, select the “Network fee” icon. Second, Choose from one of three available options: opting for a lower fee, which, in turn, extends the transaction’s processing time or strike an optimal balance between cost and speed or prioritizes speed over cost, ensuring swift transaction confirmation.

The best software and hardware wallet for cryptocurrency continuously tracks the prevailing market rate for gas, determining the ideal gas price for each preset mode. Furthermore, you retain the option to manually customize your ‘gas price’ for individual transactions. Keep in mind that gas prices fluctuate in response to blockchain network congestion, so the timing of your transaction’s validation hinges on the current market rate for gas.

About Liminal Gas Fee Saver

With best cryptocurrency wallet India and across the globe, Liminal wallet, you get acess to extensive gas saver algorithm that is designed to save a significant amount (upto 15%) of transaction fee for institutional transactions. It enables organizations to leverage customized fees capabilities and numerous other additional benefits. This can prove invaluable for facilitating transaction confirmation, especially during congested periods when the cost of transaction is relatively high. 

Conclusion 

Blockchain cryptocurrency transaction fees represent a crucial component of the crypto-economics underlying blockchain networks. They serve as incentives to incentivize users and sustain network operations, while also acting as a safeguard against malicious activities and spam. 

Nevertheless, the substantial increase in the best cryptocurrency wallet holders and network traffic has led to notably higher fees in some cases. The inherently decentralized nature of most blockchains presents challenges for scalability. While some networks manage to achieve high scalability and transaction throughput, this often necessitates trade-offs, potentially compromising security or decentralization.

Nevertheless, a dedicated community of researchers and developers is actively engaged in devising enhancements with the aim of fostering greater inclusivity of cryptocurrencies across the globe.

FAQ

What is the main reason why blockchain is very popular in the financial sector?

Blockchain cryptocurrency technology brings about a substantial reduction in paperwork and errors, resulting in significantly lower operational and transaction expenses. It eliminates the requirement for intermediaries or third parties to validate transactions. The blockchain technology such as crypto asset management, digital treasury crypto platform, Crypto custodian platforms, and crypto regulation transforms the way your sensitive financial data is handled and safeguarded.  

How can blockchain change the banking industry?

Blockchain cryptocurrency leverages cryptography to guarantee that solely authorized parties can access and authenticate transactions. This technology holds the potential to improve the operations of banks, ensuring security, attaining efficiency, and leading to cost reductions.

How the impact of the blockchain goes beyond financial services?

A significant portion of the enthusiasm surrounding blockchains and digital wallets for cryptocurrency has centered on their capacity to bring about fundamental transformations within the financial services sector. This includes reducing the expense and intricacy of financial transactions, opening up opportunities in previously underserved markets, and enhancing transparency and regulatory compliance.

What is the impact of blockchain technology on accounting and finance?

Blockchain cryptocurrency technology empowers the utilization of smart contracts, which are self-executing contracts containing predefined rules stored on the blockchain. Smart contracts have the capability to automate diverse accounting tasks, including invoice processing, payment settlements, and financial reconciliations. Smart contract powers a wide range of cryptocurrency custodians, crypto treasury management and cryptocurrency asset management platforms.

What is the importance of Blockchain technology to financial reporting?

The fundamental objective of blockchain is to instill trust. The blockchain cryptocurrency infrastructure ensures that a transaction has taken place, and the payment has been made, especially in situations where the parties involved are not known to each other and, thus, untrusted.

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture