What is a Transaction Fee?
Total Cost of Ownership
Most public distributed ledgers involve a novel financial model that doesn’t involve pre-arranged software licenses or contracts, financial obligations to the end user, and monthly or annual bills or subscription fees. Instead, public distributed ledgers operate on a purely on-demand pay-as-you go basis, otherwise known as a coin-operated business model.
Charges for using public Distributed Ledger Technology (DLT) are levied in terms of transaction fees and, in the case of smart contract-enabled distributed legers, in the form of fees that cover the cost of the compute, storage and network resources needed to support a smart contract’s execution. Smart contracts turn DLT into an application platform that programmatically unlocks the unique capabilities of blockchain technology. With a focus on digital transformation, business innovation and industry disruption, enterprises and other businesses rely on this programmability to customize DLTs to support use cases to which distributed ledger capabilities are uniquely suited.
Adhering to the aforementioned coin-operated model, the fees (known as gas fees on some ledgers) charged by a DLT are paid for in the cryptocurrency or “token” that is central to the given DLT at the same moment that the service is rendered. Similar to the way that businesses keep cash on hand to cover ad hoc operational expenses, organizations that rely on public DLTs must keep enough of the appropriate cryptocurrencies in reserve to cover on-demand payments. Holding cryptocurrencies in this way could involve financial and regulatory complications, but those complications should be manageable for most organizations.
The fees charged by a DLT fall into three categories: computational fees, incentive fees and ancillary fees. Understanding the details of each category is important to enterprises hoping to model and optimize the total cost of ownership (TCO) of their DLT implementations. It’s important to note that the formula for determining each of these fees may be different from one public distributed ledger to the next.
The fees for supporting and executing smart contracts go beyond the cost of simple transactions by incurring charges based on how the code executes, how variables are used and how functions are structured. Similar to how applications can be optimized to use computer resources, following best practices in smart contract design will result in optimization of DLT resource consumption as well as the ensuing costs.