Whenever we talk about earning money, whether fiat or crypto, it is impossible not to mention fees. Although we know that cryptocurrencies have a decentralized culture (they are not backed by third parties such as large banks) we must bear in mind that there are several types of fees focused on cryptocurrencies.
What is a mining fee?
A mining fee is nothing more than a fee or commission aimed to keep miners motivated. This means giving them incentives to ensure their efficiency and the security of the network. This is achieved due to the mining fee.
The mining fee is a small economic amount, in cryptocurrencies, assigned to miners when processing a transaction. We can say that they are small payments that reward miners for their work.
Miners validate transactions, generating new blocks that will later be added to the blockchain and securing the network.
In the past, bitcoin did not include commissions or fees for processing transactions because they were not so numerous: since few transactions were carried out, the free space left inside the mining blocks was quite large.
Now, the bitcoin phenomenon has unleashed an immense number of transactions, reaching the point that the number of transactions within a block is greater than the amount it can process.
The limit size for adding transactions to a block is 1MB, and there is an average of 250 bytes per transaction, which limits the number of transactions to 4,000 per block, so subsequent transactions will have to wait for the next block.
How is the mining fee calculated?
The calculation involves several factors, including the size of the transaction being carried out within the block. The network activity at the time of the transaction is significant, as well as the time it takes to confirm the transaction.
Here we will explain in detail the factors for the calculation of the mining fee.
The transaction
The size of the transaction is one of the most relevant points to consider. Let's take bitcoins’ example, where the importance relies on the size of the transaction in bytes, instead of the amount of bitcoin used in the transaction. Therefore, the fee is not calculated based on the number of bitcoins moved, but on the size of the transaction.
The number of bytes it occupies within the blockchain is calculated according to the number of inputs and outputs in a transaction. The same happens with other cryptocurrencies like Ethereum or Litecoin.
The network
The state of the network at the time of a transaction is a determining factor when calculating the commission. A network that is heavily loaded is likely to require a higher fee to be paid, otherwise the time it takes to complete a transaction will be affected, taking up to hours to complete a single movement.
When the network is in a normal state, miners can process the remaining transactions, but if the network is congested, miners will prioritise those transactions whose fees are better (higher). They have the power to select which transactions are firstly added to a block.
Time
The time factor is important in terms of how long it takes to complete a transaction. The time taken to confirm a transaction can be shortened by paying a high commission for it, but this is not always the case.
Payment will mean higher priority for your transaction to be added to the next block in order to be mined, but it does not ensure that the process is immediate in any case.
The lower the fee, the longer the waiting time, as miners will choose those transactions that make the most profit.
Why are mining fees important?
Primarily, mining fees are important because they allow miners to be motivated to work. The work they do is important for the whole cryptocurrency network to continue operating correctly, so having motivated miners who are willing to work makes the processes much easier.
If fees did not exist, hackers could send little transactions to attack the network and its security would be at risk. In the same way, fees prevent attacks on the network from spam transactions.
SEE MORE - multibank.io
