Blockchain Transaction Fees vs the Traditional Space

For a long time, public blockchains were seen only as direct competitors to traditional centralised financial transaction handlers like Visa or Mastercard. There are two crucial factors that are usually taken into consideration when these two are compared: the number of transactions per second a system could handle and the cost per transaction.

While definitive figures tend to vary a lot, one thing is certain: until recently, no blockchain protocol could even come close to Visa’s TPS (transactions/second). Now Solana and other protocols are close to matching their speeds. Still, the most prominent chains like Bitcoin and Ethereum are lagging big time. To understand the scale, VISA is capable of tens of thousands of TXs/second, while for Bitcoin, this number is around 5 TXs/second, and 15 TXs/second for Ethereum.

Based on those numbers, you may ask why anybody should bother with blockchain technology. Well, we are experiencing a huge paradox: blockchain, even being way slower than its traditional counterparts, could provide you, besides other perks, faster and cheaper overall experiences for sending and receiving funds. Perhaps for now, it is still more convenient to use a debit card to pay for your groceries. Still, only through crypto can one move assets worth 1 billion dollars in a few minutes disregarding any jurisdiction for a fee of around $2.

I know that this example sounds irrelevant (still, it happened), usually people don’t have this kind of money, so why would this matter? The advantages are indeed mostly seen when operating with big numbers, but as an example, it is still a very convenient way for individuals working abroad to send funds back to their families.

Anyway, TPS is not the main focus of this article, but rather a by-product of it. TX fees (transaction fees), sometimes referred to as gas fees, is where the real deal is. In the case of Visa, the cost of a transaction is imposed by the company, with a degree of flexibility that will let them negotiate slightly different costs for different clients. In the case of blockchain protocols, the cost of TXs is usually settled dynamically, based on the degree of demand existing on the network.

As mentioned above, blockchains have a low number of transactions per second, so if you want your transaction to be processed quicker, you have to “tip” the network in order to prioritise yours. The process varies from protocol to protocol, but you will almost always encounter a mechanism based on the current demand to validate transactions on the
blockchain.

This mechanism sometimes leads to insane costs per transaction when the network is flooded with demands. So it’s somehow ironic that one of the promoters of low transaction fees is no other than Vitalik Buterin, the founder of Ethereum, a chain, that is the most notorious when it
comes to prohibitive fees.

Transaction fees need to be under $0.05 to be genuinely acceptable! Vitalik posted this in reply to a tweet by Ryan Sean Adams. Adams’s tweet shows the currency transaction fees for swapping tokens and sending ETH on layer 2 networks.

Needs to get under $0.05 to be truly acceptable imo. But we're definitely making great progress, and even proto-danksharding may be enough to get us there for a while!

— vitalik.eth (@VitalikButerin) May 3, 2022

How low can they go?

The fees on Ethereum’s Layer 2 are technically non-existent compared to the astronomical values that Ethereum Layer 1 can reach, especially during times of hyped-up token or NFT drops.

For example, during Yuga Labs’ latest sale – where they sold Land for their Otherside Metaverse – users paid around 2 ETH (or $6000) just for the gas fees to mint their Land NFTs.

Some people called for a lack of optimisation in the smart contract utilised to mint these NFTs.

So, where does Ethereum L1 stand?

The fees on Ethereum’s Layer 2s’ are technically non-existent compared to the astronomical values from Ethereum Layer 1 can reach, especially during times of hyped-up token or NFT drops.

For example, during Yuga Labs’ latest sale – where they sold Land for their Otherside metaverse – users paid around 2 ETH (or $6000) just for the gas fees to mint their land NFTs.

Some people called for a lack of optimization in the smart contract utilized to mint these NFTs.

Nearly $100M has been spent on gas for the BAYC land sale in one hour. This is money that could have gone to Yuga or stayed in user's pockets.

The contract had nearly zero gas optimizations. I'll explain a few gas optimization tricks that could have saved many millions below 👇 pic.twitter.com/CsYvWdEQKc

— Will Papper ✺ (@WillPapper) May 1, 2022

Is Ethereum heading in the right direction?

The fact remains that until Ethereum fully transitions to Ethereum 2.0, utilising Proof of Stake, sharding, and other techniques, the gas issue will still be relevant from time to time.

As Vitalik Buterin mentioned in his original tweet, progress has been made across the Ethereum network. The high gas fee issue that Ethereum has endured over the last years is only a sign of widespread adoption that the network has had by developers and users alike.

When looking at existing projects on Ethereum and ones being built on it, other blockchains seem to have been left slightly behind. This is all, of course, due to Ethereum’s first-mover advantage.

It won’t be easy to get developers building on Ethereum for years to move over to a different chain.

When will blockchain become the norm?

As I pointed out in the first part of the article, traditional transaction providers are currently ahead in the higher TPSs and seemingly lower cost per transaction for the final user. The first attribute has already started to lose its advantage. The second one could also become irrelevant very quickly; there already are initiatives on chains like Arweave that are offering zero TX costs.

1/ We’re pumped to announce our collaboration with @BundlrNetwork and @ArweaveTeam on a new way to submit transactions to the permaweb.

In short: developers can now make ArConnect transactions FREE.

Read on to learn more! 👇 pic.twitter.com/tpJA9dhbix

— Verto (@vertoexchange) March 7, 2022

Pair those evolutions with the high fees that the four major credit card providers charge their vendors, and you might find an answer: in the future, switching to blockchain platforms (or even using DeFi altogether) may make more sense for the vendors and provide more income for big and small businesses alike.