TFX – What is blockchain Network fee/Gas fee?

What is a consensus mechanism

In the blockchain space, a consensus mechanism is used to help maintain the operation of these decentralised, self-regulating systems. As public blockchains involve contributions from hundreds of thousands of participants in verification and authentication of transactions occurring on the blockchain, it is crucial that these publicly shared ledgers require an efficient and reliable mechanism, to ensure that these transactions are genuine and all participants agree on a consensus on the status of the ledger. This brings us to the consensus mechanism where it refers to a number of methodologies used to come to an agreement across a decentralised computer network. There are two major consensus mechanisms used by most cryptocurrencies currently, the older one being proof of work (PoW) and the newer one being proof of stake (PoS).

What is proof of work (PoW)

Firstly, PoW is used by popular cryptocurrency networks like Bitcoin and Litecoin. As its name would suggest, it requires a huge amount of processing power as miners around the world are competing to solve the maths puzzle in order to verify and update the blockchain. In turn, the winner will be rewarded with a predetermined amount of crypto. PoW has been proven to be a robust way of securing the blockchain since the machinery and power required are expensive. Hence, it would be impractical for anyone to meddle with any aspect of the blockchain as alterations made would require re-mining all subsequent blocks.

What is proof of stake (PoS)

Due to PoW’s energy-intensive process where it can have trouble scaling to accommodate the vast number of transactions, alternative approaches were developed, and the most popular of which is called proof of stake (PoS). Under PoS, block creators are called validators and they check transactions, verify activities, vote on outcomes and maintain records. However, to become a validator, a coin owner must “stake” a specific amount of coins, in exchange for a chance of getting to validate a new transaction, update the blockchain and earn a reward.

Why is there a gas fee

With all that said, you must be wondering how does blockchain network fee/gas fee tie into all this? As mentioned previously, regardless of which consensus algorithms are used, validating transactions on a blockchain network isn’t free. The cost for using a blockchain network service to perform any function is called gas fee. Furthermore, not all transactions in the blockchain are made equal. The amount of gas needed depends on the different types of operation or interaction being made on the blockchain. Gas fees are also determined by factors like network traffic, and supply-and-demand logic..

Let’s picture that there are several trucks carrying different amounts of weight and all trucks will require different amounts of gas to complete the same trip. The heavier the truck, the more gas it will need to travel the same distance. Now let’s apply this logic to blockchain, the cheapest transaction that can be executed on Ethereum blockchain is to transfer ETH. We can think of this as the work done by a low weight truck. Sending 1 ETH from one wallet to another requires 21,000 of Gas for the transaction to be executed. Whereas if I were to transfer a Non-Fungible Token, it would require about 86,000 units to do so. Therefore, we can see that the heavier the transaction, the more gas it requires.

Gas fees are paid by end users to the miners for transaction validation in PoW blockchains, whereby the winner earns the newly created cryptocurrency distributed from the block reward and any fees attached. For PoS blockchains, gas fees are rewarded to validators who first hold and stake a certain amount of cryptocurrency to the network for a chance to be selected.

How much does it normally cost

Here is a rough estimate of what gas fee looks like in reality:

The above gas fees are for reference purpose only. You may refer to https://gasfeesnow.com/ for the most updated gas fees.

ERC-20 normally has a much higher gas fee, hence some people will gravitate towards TRC-20 to avoid some of the expenses.

To conclude, gas fees are important in maintaining the integrity of the information across the blockchain as this incentive is given to honest actors and concurrently deters bad actors. This design allows for blockchains to use predefined rules to autonomously secure records without the need for intermediary institutions.