What Does It Cost to Use Bitcoin vs. Ethereum?
Transacting on traditional payment networks and decentralized networks isn’t free, but who pays and what for is highly variable.
Updated June 15, 2022 • 4 min read
Traditional payment networks are built and managed by singular centralized processors like Visa and Mastercard, which can offer fast transactions and high volume, but come with disadvantages in regards to openness, privacy, and equitable access. In comparison, decentralized networks are open to anyone, and are maintained by individual nodes or validators that work collectively to validate all network activity in consensus. Although Bitcoin and Ethereum started with Proof-of-Work (PoW) consensus mechanisms, each functions differently, resulting in different crypto transaction fee structures.
The Price of Payment Networks
Centralized payment processors like Visa and Mastercard generate revenue by charging a small fee on every transaction executed on their respective networks. In most cases, this cost is included in the final price of goods and services by businesses, and is thus not apparent to consumers. Because of their relatively simple transaction processes, centralized payment network fees remain relatively stable. As traditional payments services see a single entity verifying all transactions in a private network, they are generally able to conserve bandwidth and ensure high throughput.
Blockchain networks like Bitcoin and Ethereum can be considered a decentralized equivalent of traditional payment networks like Visa and Mastercard. The decentralized nature of blockchains can offer key advantages like openness, fairness, liveness, and censorship resistance because they rely on a global network of nodes to verify every single transaction. Decentralized networks can also come with disadvantages in comparison to centralized providers. In particular, crypto transaction fees on specific blockchains can fluctuate in response to network congestion. Let’s explain how this works by breaking down the Bitcoin and Ethereum networks in regards to validators and nodes.
Who Validates Blockchain Transactions?
On decentralized networks, anyone can access a transaction from anywhere with the right software, and validator nodes provide the structure and processing power required to execute them. However, not every blockchain administers this system the same way. For example, both Bitcoin and Ethereum initially used Proof-of-Work (PoW) algorithms to reach consensus and validate transactions. This model requires that validators commit processing power to solve complex mathematical algorithms.
In short, the first validator that solves the algorithm receives all or some of the transaction fees collected from users. In the case of Bitcoin, validators also receive block rewards (more on this later). Below, we explore how the Bitcoin and Ethereum networks administer transaction fees and the factors that influence their volatility.
Bitcoin Transaction Fees
Bitcoin transaction fees are a crucial part of Bitcoin’s design. Specifically, these fees incentivize miners to validate transactions and support the “diminishing block subsidy,” which helps support network security and keeps miners incentivized. The diminishing block subsidy works by allocating more Bitcoin transaction fees to miners as block rewards fall over time.
The transaction fees charged by exchanges and brokerages are entirely separate from the costs necessary to process transactions on the Bitcoin blockchain. Notably, in 2010, a minimum transaction fee of 0.01 bitcoin (BTC) was set in the Bitcoin network source code, but was removed a year later as transaction volumes grew. In addition, as the market value of BTC has risen in USD amounts, the BTC transaction fees have fallen. In other words, when the USD price of BTC increases, the transaction fees denominated in BTC decrease, and vice versa.
Bitcoin Block Size
Bitcoin fees depend on the data volume of each transaction and network congestion. As of February 2022, each block of transactions can accommodate 4 MB of data. As a result, there is a limit to how many transactions can fit in a single block. Further, fewer can fit into the same block if one transaction is larger (in bytes).
Bitcoin Transaction Speeds
In the case of Bitcoin, BTC transaction fees are calculated in satoshis (also referred to as “sats” in short form) per unit of data that a transaction will use on the blockchain (sats/byte). As a result, the more data a transaction consumes, the higher the transaction fees. In most cases, crypto wallets will display the cost of a transaction depending on the processing speed. Again, these costs are separate from the fees charged by an exchange or brokerage.
For example, if you want your transaction approved immediately, the fee will be higher than selecting a slower transaction speed. When there is a backlog on the network, miners have an incentive to validate transactions with higher fee rates first; they earn more by doing so. In other words: miners will target transactions with a high fee-to-byte ratio.
Ethereum Transaction Fees
Gas fees are the Ethereum equivalent of Bitcoin transaction fees. Specifically, gas is the term used to describe the amount of ether (ETH) required to interact with the Ethereum blockchain. Like Bitcoin miners, these Ethereum transaction fees compensate miners for the energy necessary to validate network transactions. In addition, ether transaction fees ensure that it is too costly for malicious actors to continuously spam the blockchain. In general, there are three components to Ethereum transaction fees:
Gas units (limits): The gas limit refers to the maximum amount of gas a user is willing to pay for a transaction. Pay more, and the transaction will be processed faster. Spend less, and miners will validate it last, resulting in longer processing times. It's important to note that different transactions require different amounts of gas.
Base fee: The base fee is the minimum amount of gas necessary to execute a transaction on the Ethereum network. This base fee is dependent on network congestion. In other words, the demand for a transaction to be included in a block, regardless of the transaction type.
Tips: Users that want their transactions completed faster can provide a tip. Tips incentivize miners to confirm the transaction before others because they receive a tip on top of the gas fee. Because Ethereum miners can see which transactions offer a tip, they can choose the transactions with the highest tips to make more money.
As the name suggests, gas powers the entire Ethereum blockchain; nothing could happen without it. However, the downside is that only those willing to pay high fees will have their transactions processed quickly during network congestion. This dynamic results in "gas wars" that effectively bid up gas prices for everyone on the network.
The Future of Bitcoin and Ethereum Transaction Fees
Bitcoin transaction fees can often be lower than Ethereum’s ether transaction fees. This is because ether can be used to deploy transactionally intensive decentralized applications (dApps), whereas Bitcoin is used only for payments. In other words, Bitcoin was imagined as a payment network, while the Ethereum Virtual Machine (EVM) introduced an operating system environment for blockchain developers. As a result, Ethereum has become the de facto blockchain for dApp development, which leads to periodic increases in network activity.
Ethereum has started transitioning to the Proof-of-Stake (PoS) algorithm in response to this shortcoming. This model is designed to speed up transaction speeds and should dramatically reduce gas fees. However, there are always tradeoffs between decentralization, speed, and security — a challenge often referred to as the "Blockchain Trilemma."
Regardless of the network, both Bitcoin and Ethereum cost money to use. Historically, Bitcoin transaction fees have frequently been lower than those on Ethereum. However, Ethereum transaction fees are predicted to drop following the completion of the Ethereum Consensus Layer upgrade (formerly known as Ethereum 2.0).
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