Gas, Tips and Fees on Ethereum & Cardano

Blockchain platforms are, at their core: a collection of computer software (lots of it), hardware, and communication protocols. Running all those things costs money. To pay for network operations, all public blockchain networks have a way of taxing activities on the system. The mechanisms they use to manage and calculate transaction fees are as varied as the applications they support.

Ethereum and Cardano, two of the most prominent blockchain platforms, have very different approaches to handling fees. These differences reflect their unique philosophies and technological frameworks. This comparative analysis looks at how fees work on Ethereum versus Cardano, and how these differences affect their users.

Ethereum: Dynamic Fees and EIP-1559

Ethereum, since its inception in 2015, has been a trailblazer in the blockchain space, introducing the world to smart contracts and decentralized applications (dApps). Its fee mechanism was revamped as part of Ethereum Improvement Proposal (EIP) 1559, which made a significant shift towards a more predictable and user-friendly fee model.

Gas Fees and Market Dynamics

Transaction fees on Ethereum are known as "gas" fees, which are payments made by users to compensate for the computing energy required to process and validate transactions. Gas fees are denominated in gwei, which is a fraction of Ethereum's native token, Ether (ETH). This fee is not fixed; it fluctuates based on network demand. This leads to periods of high fees during network congestion.

EIP-1559

The introduction of EIP-1559 in August 2021 transformed Ethereum's fee market. This proposal removed the auction system and implemented a dual-fee structure consisting of a base fee and an optional tip. The base fee is algorithmically adjusted, increasing or decreasing based on network congestion, aiming to standardize gas prices and improve the user experience by making transaction costs more predictable. Higher base fees are charged for blocks filled past 50%, although the network tries to keep each at or below 50% filled. The optional tip is a priority fee paid to miners (now validators, following Ethereum’s switch to Proof-of-Stake) for faster transaction processing. The base fee goes directly to the Ethereum network, and is burned, blockchain parlance for destroying or rendering the tokens unusable. In practice, cost hasn’t gone down much, especially during peak periods. Practically speaking, 1559's biggest contribution is more predictability and less volatility. An Ethereum wallet will show you what your cost will be, with real time updates every 10 to 15 seconds to reflect the current congestion of the network.

Cardano: Predictable Fees and the Minimum Cost Model

Cardano, launched in 2017 by one of Ethereum's co-founders, was designed with a focus on scalability, interoperability, and sustainability. Its approach to transaction fees is markedly different, emphasizing predictability and simplicity.

A Transparent Fee Structure

Cardano's fee system is designed to be transparent and stable, formulated as a simple equation: fee = a + b * size, where a and b are constants defined by the protocol, and size refers to the size of the transaction in bytes. This model ensures that users can easilYy calculate the cost of a transaction without worrying about fluctuating prices due to network congestion. For the average user just moving things from one blockchain wallet to another, you can expect a transaction fee between .17 to 0.30 Ada. When you start participating in Decentralized Financial products (DeFi), some complex transactions can cost an average fee of up to 0.8 Ada. As of this writing this is a range of 10 to 41 cents.

The Purpose Behind the Model

The rationale for Cardano's fee model is twofold: to ensure the sustainability of the network by covering the costs of transaction processing and to discourage spam transactions through a minimum fee requirement. This approach aligns with Cardano's broader goals of creating a balanced and equitable ecosystem for all users.

Flexibility vs. Predictability

The fundamental difference between Ethereum and Cardano's fee systems lies in their approach to network dynamics and user experience. Ethereum's EIP-1559 makes fees more predictable while still allowing users to "jump the queue" by paying a higher tip, offering flexibility at the cost of potential fee volatility. Cardano, on the other hand, opts for a straightforward and predictable fee model, sacrificing some flexibility, for the time being, in favor of ease of use and stable transaction costs. Cardano has plans to become more flexible. The concept of tiered transactions as well as Babel fees are Cardano solutions to becoming more flexible. Babel fees would allow users to pay the transaction fee in any token that has implemented Babel fee instead of having to pay with Ada, Cardano’s native currency. Here is a video from the IOG team explaining how this is possible.

Conclusion: Different Solutions to a Common Challenge

Ethereum and Cardano illustrate that there is no one-size-fits-all solution to managing blockchain transaction fees. Each platform's approach reflects its underlying philosophy and technical design, offering users a choice based on their priorities: flexibility and responsiveness in Ethereum's case, or predictability and simplicity in Cardano's.

As the blockchain landscape continues to change, the evolution of fee mechanisms will remain a critical area of innovation and differentiation. Users, developers, and stakeholders across the ecosystem will benefit from understanding these differences, enabling them to make informed decisions about where to build, invest, and transact in the vast and varied world of blockchain technology.

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