Introduction
Since the first arrival of blockchain, the cryptocurrency industry has generated huge profits due to its extremely low transaction costs. Meantime, however, numerous problems have materialized, such as security problems, scalability issues and network congestions. Transaction costs, in particular, have become a headache for users of digital currencies since all transactions have to be paid in a fee that can be a discouraging factor for most users. Besides, those transaction fees have to cover the miners’ labor and are the main source of their income.
Background
Transaction costs are one of the most important factors in the blockchain network. Transaction costs include electricity, hardware, and human labor costs, among other things. Without miners, crypto transactions would not be possible as they provide the computing power to verify and record every transaction to the blockchain. The miners are compensated with rewards and transaction fees.
These transaction fees, also known as miner fees, are either fixed or vary depending on the type of transaction. These tariffs are determined based on the complexity of the mathematical problem, the number of nodes involved, the network’s congestion, among other criteria. In some cases, the miners may decide to reject your transaction if the fee is too low.
The miner fees paid for each transaction are added to the total block reward. This block reward is split between the miners, contributing to their income. All these costs are collected in the form of cryptocurrency, and can be interpreted as a form of liquidity to fuel the blockchain ecosystem.
Main body
The need for cost control has been a major driver of blockchain technology advancements since the start. The cost of infrastructure and hardware, especially in the early days of blockchain, greatly taxes the processing power of miners. This necessitates a reduction of operational costs for miners if blockchain technology is to become more prevalent.
That is why many blockchain-based solutions have focused on minimizing these costs to make the blockchain more accessible. Some of the solutions include proof of stake systems, vertical scaling, horizontal scaling and sidechains.
Proof of stake systems
The proof of stake system is one of the solutions that were developed to decrease the cost of mining. It is designed to replace the consensus mechanism previously used by transactions. Unlike proof of work, which requires miners to solve complex math puzzles to verify transactions, proof of stake enables users to stake their tokens in order to verify transactions and earn rewards.
The main advantages of proof of stake system is that it does not require miners to use expensive hardware or consume huge amounts of energy to validate transactions. The downside of this system is that it requires users to have a large amount of tokens to become a validator, which limits accessibility to the system.
Vertical Scaling
Vertical scaling is another cost reduction measure that has been gaining traction in the blockchain world. The biggest advantage of this approach is that it allows for an increase in the computing power of a blockchain system without having to increase costs. This scaling can be done either manually or automatically. If a blockchain’s codebase is updated, the system can support more transactions per second with no additional cost. This makes it a good solution for reducing costs as it can be done in a short period of time.
Horizontal Scaling
Horizontal scaling is another cost-reduction measure that is gaining popularity. Horizontal scaling is the process of making more nodes within the network in order to increase the computing power. This scaling is more popular than vertical scaling due to the fact that it is more efficient. The main advantage of horizontal scaling is that it can be done at a much lower cost than vertical scaling.
Sidechains
Sidechains are also becoming increasingly popular in the blockchain space. A sidechain is a blockchain that is connected to the main blockchain and allows users to transfer assets without having to use the main chain. This solution has a lot of potential as it reduces the network’s congestion and can significantly reduce the cost of transaction fees as well as reduce the cost of running the network.
Conclusion
In conclusion, transaction costs are a major issue in the blockchain space as they can be quite expensive. That is why it is important to find ways to reduce these costs. There are a variety of solutions such as proof of stake, vertical scaling, horizontal scaling and sidechains that have proved to be effective in cost reduction. However, more needs to be done in order to further reduce the cost of the blockchain.
