Platforms like EOS, NEO, IOTA and Kin now don’t charge transaction fees. This would seem to be a boon for users, but does it make things better overall?
One notorious aspect of bitcoin is high transactions. Although they are much lower now than they were at their peak, one bitcoin transaction still costs about $3. This has led many bitcoin competitors to promise low fees. And some cryptocurrencies have gone further – they are trying to do away with commissions altogether.
This is not an easy task: transaction fees are an important part of most cryptocurrency devices, as they reward various network participants – for example, miners or nodes for facilitating transactions. However, transaction fees are not a strict necessity, and there are alternative ways to reward blockchain network participants and validate transactions.
Some blockchains have begun to introduce commission-free transactions. This often leads to radical changes in the way transactions are executed and to the valuation of tokens. Listed below are various approaches to eliminate transaction fees and provide users with a free blockchain experience.
By rewarding developers
EOS is one blockchain that does not charge transaction fees. Instead, each new account is required to purchase RAM (RAM) from blockchain makers. Such RAM is needed to perform transactions and smart contracts on the network, and some applications may require account creators to pay for more RAM.
This model means that the cost of transactions is borne by application developers, not by application users, but it also implicitly ensures that block makers are rewarded for performing transactions and providing their RAM.
This is very profitable because EOS applications are widespread. As EOS creator Dan Larimer noted, “a decentralized search engine would try to poach users from Google if it charged a small fee for each useful search result. While some blockchain applications deal exclusively with transactions, others simply have no reason to charge a commission.
By using multiple tokens
The NEO blockchain has also partially done away with commissions by splitting its tokens into two varieties: NEO and GAS. The NEO token is indivisible and is not intended for payments – it is more like an “equity stake” in the NEO platform than a cryptocurrency. There is no fee for the transfer of NEO tokens.
Meanwhile, the GAS token is needed to execute smart contracts on the NEO blockchain. Each execution of a smart contract costs 10 GAS tokens, although they are initially executed for free. When developers pay a commission to GAS, it is redistributed to NEO owners.
In other words, NEO places the cost of most transactions on developers, freeing up core users and rewarding stakeholders. This is similar to the EOS approach, in which developers are rewarded, although NEO tokenizes network resources more directly.
By placing the work on the users
Most blockchains do not require user participation to validate transactions and instead distribute that work among network participants. Bitcoin relies on miners, EOS relies on block producers, and NEO relies on various nodes.
IOTA takes a different approach: instead of paying a miner or node to confirm a transaction, your device must simply confirm two previous IOTA transactions before your own transaction is verified.
This guarantees a free confirmation of your transaction. However, the IOTA network does not charge users for the transaction: it simply takes the time and work of your device without charging a fee on your transaction.
By subsidizing the platform
While blockchains are often developed by the community, some are created by companies that can afford to cover transaction costs. The Kik chat app eliminates transaction fees in just this way.
Although Kik initially considered launching the token on the etherium blockchain, it decided that the etherium fee was too high. Instead, it did a fork from Stellar and started its own Kin blockchain.
Kik is currently responsible for voting for blocks and confirming transactions on the Kin blockchain. As a result, it can easily cover the cost of Kin transactions without charging fees. In the future, however, Kik may gradually transfer control of the blockchain to partners who will be trusted nodes.
Such Kin nodes will be remunerated from the company’s reserve, depending on the economic activity that accounts for their share. In other words, Kin nodes will not be rewarded based on the cost of operating the blockchain, but will be paid by the company.
All of the blockchains described above have zero transaction fees – in other words, they each manage to bear the burden of user costs. However, the cost of performing transactions cannot actually be excluded from the network, although it can be replaced. Otherwise, developers, companies, and partners must bear the cost on themselves.
This means that blockchain developers must still work toward lower costs. If the costs to network participants are too high, complications arise and incentives diminish. For example, EOS suffers from high RAM costs, forcing the network to constantly strive to reduce account creation costs.
In other words, inefficiently substituted costs can have a negative impact on potential partners, which also amounts to discouraging users with high commissions.
Many popular blockchains have achieved near-zero commissions, which seems like a more realistic model than no commissions at all. Larimer may be right that users expect something free. However, will free blockchains become more popular compared to those that maintain very low commissions at the expense of improved scalability? Low fees in tandem with high scalability can be a very effective selling point, especially if the blockchain is already popular for other reasons.