Transaction Fee

A cost paid to process and validate actions on a blockchain network, such as Ethereum, varying based on network demand and complexity.

What is Transaction Fee?

A transaction fee is a payment made to compensate network validators for processing and confirming transactions on a blockchain, such as Ethereum. These fees are required for actions like transferring digital assets (e.g., sending ETH), interacting with decentralized applications (dApps), swapping tokens, or purchasing NFTs. On Ethereum, transaction fees are denominated in ETH and are closely tied to the concept of gas, which measures the computational effort needed to execute a transaction or smart contract. The fee is calculated as the product of the gas used and the gas price (in gwei, a fraction of ETH), which fluctuates based on network congestion.

Since Ethereum’s shift to proof-of-stake with the 2022 Merge, validators prioritize transactions with higher gas prices during periods of high network activity, leading to increased fees. For example, during peak DeFi or NFT activity, fees can spike significantly, sometimes reaching tens or hundreds of dollars. To address high fees, solutions like Layer 2 scaling (e.g., rollups on networks like Optimism or Arbitrum) have emerged, processing transactions off-chain while leveraging Ethereum’s security, significantly reducing costs. Tools like EIP-1559, implemented in 2021, also introduced a base fee mechanism to make fee estimation more predictable, with a portion of fees burned to reduce ETH supply over time.