Transaction fee approaches

Comparing the different transaction fee approaches that a network could use for their fee model

Each transaction that a user wants to store on a distributed ledger will incur a certain amount of processing and storage cost. Transaction fees are charged to pay for nodes to verify and maintain this ledger of transactions and fees could also be used as treasury income to pay for maintaining and improving the network.

A network's adopted fee approach can have a profound impact on how fair and stable that ecosystem will be over the long term. Web3 ecosystems will mostly have community members that have varying amounts of wealth and that each use the network for different purposes and with different usage patterns. Transaction fees will influence these behaviours and usage patterns and are also a highly important factor for the long term adoption and sustainability of these networks. The transaction fee approaches a network adopts could be a defining factor why people use one network over another.

Approaches for transaction fees

The following are some example transaction fee approaches that could be used for paying for network operation or generating treasury income:

  • Fixed fee - A fixed fee amount is charged to create a transaction, the fee amount stays the same regardless of how big or small the transaction is.

  • Percentage fee - The fee is a percentage amount calculated using the total transaction value. The larger the value of a transaction the larger the fee.

  • Percentage finality fee - Transactions could be prioritised when users are willing to pay a higher percentage fee than the other submitted transactions.

  • Percentage demand fee - The fees to make transactions on the network are increased when the network has a high or excessive amount of transaction volume demand.

To compare these decision approaches a number of factors have been considered and then applied to each approach to try and determine the strengths and weaknesses of each one.

Key takeaways

  • Unfairness of fixed fees - The wealth that exists in any ecosystem will likely not be split equally between its users. It will often be the case that there are some individuals that are far wealthier than others and there will also be individuals who are far poorer than everyone else. Similar to existing fiat systems this factor translates into different user behaviours and spending habits due to the wealth that each user has available to them. Fixed fees would simply mean that the wealthier individuals that can make larger transactions would be paying less proportionally for their transaction fees than the poorest individuals in the ecosystem. The richest would pay the least in fees proportionally and the poorest would pay the most. This is inherently unfair as the poorest individuals would now be paying the most in fees proportionally to their usage of the network. The richest individuals would be receiving the same security and safety benefits from the network to protect a larger amount of assets. The poorer individuals would be paying proportionally more in fees to the network to secure the assets of people who have paid less than others proportionally. A fixed fee approach could become a contributing factor towards an increasing wealth gap between the rich and poor over the long term. As well as fixed fees some other fixed fee approaches to mention are fixed finality fees and fixed demand fees. These have been excluded from the comparison due to the same fix fee issue of them being unfair for poorer users in the network.

  • Necessity of fixed fees - Although fixed fees are inherently unfair to the poorest individuals in a network the requirement to use a fixed fee approach is not easily avoided. If transaction fees are percentage based and proportional to the value of the transaction the easy attack vector that emerges is that people could flood the network with extremely small transactions that have a tiny fee. The network will only be able to handle a certain amount of transaction volume and also will require a certain level of income to pay for the processing and storage costs. Fixed fees are likely a necessary part of the solution for preventing the network from being spammed. This necessity for fixed fees can help to highlight the importance of creating scalable networks. Highly scalable networks would more easily be able to reduce their fixed fees to a very small amount. In these scalable networks even a small fee could be enough to pay for the operational costs of verifying and storing a large number of transactions. The lower the minimum fixed fee is the more egalitarian the network becomes due to the reduction in impact the fee has on poorer individuals.

  • Percentage fees are fairer and more egalitarian - Percentage fees treat assets equally by increasing the proportional fee as the value of a given transaction increases. This approach is fairer for individuals in a network as it respects the fact that every individual in the network will likely have a varying amount of wealth. These individuals will all be transacting with different amounts of asset value and at different frequencies. Although percentage fees are more egalitarian and fair for every user a minimum fixed fee will still likely be necessary to prevent spam and increase network stability.

  • Finality fees could be useful but they also introduce front running complexity - Allowing people to pay more to get their transactions prioritised and finalised is useful for situations where an individual needs their transaction to finalise much more quickly. Other users might not mind exactly when their transaction is finalised for other use cases. The main issues with adding this finality fee approach are that now every protocol and application will need to be aware of the fact that the order of any pending transactions can change at any moment due to people being able to outbid other user transactions. This could add complexity to the network as it might introduce incentives to front run certain transactions to generate some financial benefit from finalising faster than the currently pending transactions. An alternative solution to this problem of high fast finality requirement is to improve the speed and scalability of the network so it can handle the expected demand or more. Horizontally scalable networks that can increase the transaction throughput of the network by increasing the number of nodes could be one example where finality fees aren’t needed as a solution, instead these networks should be able to quickly finalise all the transactions that are submitted.

  • Demand fees can be effective for balancing the load of transactions over time - Demand fees are a potentially effective solution for responding to any sudden spikes in transaction volume that the network can’t handle at that given moment in time. Users that wanted to have a cheaper transaction or that didn’t have a high priority transaction would be more incentivised to delay their transaction until the demand fees are gone due to lower demand in the future. These incentives could be effective for balancing the load of the network so that a more steady and constant stream of transactions can be handled by the network.

  • Transaction fee approaches can be combined together - Both the fixed fee and percentage fee approaches above can be used simultaneously. As well as this the percentage finality fees and percentage demand fees could also be used with both or either fixed fees and percentage fees. All of these fee approaches could be used in combination if this was required!

Transaction fee approaches analysis

pageTransaction fee factors to considerpageFixed feepagePercentage feepagePercentage finality feepagePercentage demand fee

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