Do you hate transaction fees? If you’re like everyone else, you probably do. Transaction fees are part of the financial process. When you transfer money to secondary hands, there’s a third party or financial services company that must verify the transaction and do the moving. They garner fees for their services and ensure everything occurs normally.
Transaction Fees Are Causing Serious Issues
Transaction fees on the blockchain, however, are an ugly addition to what should have been a completely decentralized system in which the transacting parties held all the control. However, as things like the bitcoin blockchain have aged, they have gotten slower. It can now take several days, in certain occasions, for transactions to be added to the bitcoin ledger, and transaction fees exist as a means of pushing transactions harder to ensure they are recorded faster.
Maureen O’Hara, a professor economics, explains that there’s both a good side and a bad side to the addition of fees to the bitcoin space. She says:
Bitcoin now works essentially how markets work, because if you want something to happen faster, you have to pay for it. Transaction fees are not part of the original system – they just evolved. A system that’s designed by a computer scientist for security problems may not be well-designed to trade in the markets, so the development of fees is actually a good thing, but it also creates all kinds of problems.
Indeed, fees can sometimes assist transactions in getting recorded faster. However, they can often make transactions “impractical” in the words of O’Hara depending on the size of the transaction in process. For example, purchasing a $4 dollar drink with bitcoin is likely to take a long time to process. You can wait for it to occur naturally, or you can pay a $5 fee to get things moving faster. In this case, the fee is higher than the item itself, which defeats the purpose of paying in crypto.
One of the biggest challenges for bitcoin has been that the fees are too high for it to be used as a simple transaction account, and it takes too long. The number of bitcoin transactions that can be added in any given time is orders of magnitude smaller than, say, Visa cards.
How the Process Began
It appears fees began through one miner and then became the natural next step for several miners, who all felt the pressure to push things through on account of wanting to return to the extraction process. O’Hara explains:
If everyone is standing up, you’re not seeing any better than you were when you were sitting down, and if everybody’s paying a transaction fee now, then you may end up in the same situation that you were in before – the fees got high and you have to wait anyway.