This post is part of a series on how everyday investors can understand the word "fees" in the context of blockchain networks.
A fee is a payment required for a service rendered or access to a privilege. In general, it's a fixed amount paid by an individual, business, or government entity. Fees are everywhere in our lives, from legal fees and membership fees to filing fees. We spend much of our lives paying fees of some kind.
Fees are distinct from other types of payments in a few ways. Firstly, they are typically negotiated before the service is rendered or the privilege is granted. Secondly, they are typically tied to a specific transaction rather than an ongoing relationship.
Fees tend to show up in our lives in two ways: explicit and implicit fees. Explicit fees are the ones we are likely more familiar with. This includes the toll on the highway or the activation fee for a gym. Implicit fees are the fees we don't see, like working overtime when you are paid a salary or watching ads before a video.
Similarly, explicit and implicit fees show up in blockchain networks. This ranges from gas fees and priority fees to spread while trading assets.
Explicit Fees
Explicit fees are the more common fees one will interact with when dealing with blockchain networks. These fees are usually set beforehand and are for a very well-defined service or privilege. On blockchains, the most common explicit fees are base fees (also called network or gas fees), priority fees, and on-ramp/off-ramp fees.
Base Fee
Blockchains are ledgers distributed across the world. There are people, often called miners or validators, that are responsible for maintaining the network. This usually means having a computer that is getting new transactions and processing them to be added to the network. This is a service they are providing; they are giving up compute and energy to allow others to use the network. For this service, a fee is paid to them, often referred to as a gas fee. For each transaction, there is a predetermined "price" in base gas units that it will cost. Let's say you want to send tokens to a friend. That send operation has a given number of gas units. At any given time, there is a base fee that is calculated, usually based on network demand. If more people want to use the network, the base fee increases. The base fee and the gas units are then multiplied to figure out how much you will pay in the network's native token.
Priority Fee
The priority fee is an additional fee that is sometimes paid along with the base fee. Priority fees allow you to get your transaction prioritized for inclusion in the blockchain. This is an additional way to incentivize the validator/miner to include your transaction in a block. Very similar to the base fee, the priority fee is the amount of gas units used multiplied by the amount of fee you want to pay. A good way to think of priority fees is like paying a tip to the validator for better service. You pay a tip beforehand, and the validator is incentivized to give you better service.
On-Ramp/Off-Ramp Fee
Blockchains and the traditional financial system are separate. This means that to get regular money into crypto assets, you need to do what's referred to as on-ramping. On-ramping is simply the process of converting fiat into crypto assets. Conversely, off-ramping is the process of converting crypto assets to fiat currency.
This is done through a service provider of some kind. They will swap your fiat for crypto and vice versa. For example. you likely have some money in a bank account. If you want to move this money from that account to USDC onchain, it would require an onramp provider that already has USDC onchain to facilitate this for you.
This is the primary path to getting involved with the onchain world.
Implicit Fees
Implicit fees are fees that are automatically taken in the process of doing something. They are costs you absorb without ever seeing them. Watching an ad before a video is a great example. You are paying with your attention to access the content. Your attention is monetized, and that is what funds access to the media.
In the context of blockchains, implicit fees mostly come into play around trading. When you trade on a blockchain, there is a whole pipeline of infrastructure between you and your completed trade. At each step in this pipeline, different service providers are extracting value. You won't see these costs broken out on a receipt, but they are real and they do affect the final price you pay.
Spread
When you want to buy or sell a token, the trade doesn't just happen on its own. There needs to be someone on the other side willing to take the trade. This is where market makers come in. Market makers are entities that provide liquidity by continuously offering to buy and sell assets. They make it possible for you to trade at any time, even when there isn't another individual looking to make the exact opposite trade.
However, market makers don't do this for free. They set their buy price slightly below the fair market price and their sell price slightly above it. The gap between these two prices is called the spread. If a token is fairly valued at $100, a market maker might offer to buy it from you at $99.50 and sell it to you at $100.50. That $0.50 difference on either side is the fee you are paying for the convenience of instant liquidity. The tighter the spread, the less you are paying. Spreads tend to be tighter on high-volume assets where there is more competition among market makers, and wider on less liquid assets.
MEV
MEV stands for Maximal Extractable Value. It refers to the profit that can be captured by reordering, inserting, or excluding transactions within a block before it is finalized. In practice, this often means that sophisticated traders and bots are watching the pool of pending transactions and acting on them before they are confirmed.
A common form of MEV is called frontrunning. Let's say you submit a trade to buy a token. A bot sees your pending transaction, quickly buys the same token before your trade goes through, and then sells it to you at a slightly higher price. You end up paying more than you would have otherwise, and the difference goes to the bot. This all happens in the span of a single block and is completely invisible to you as a user. You simply see that your trade went through at a slightly worse price than expected.
MEV is one of the more difficult implicit fees to understand because it is entirely hidden. There is no notification, and no obvious sign that it happened. It is a byproduct of how public blockchains work, where pending transactions are visible to anyone before they are finalized.
Routing
When you make a trade through an app or exchange, the platform has to decide how to actually execute that trade. This is called routing. The platform might route your trade through one liquidity pool, or split it across several to get you a better price. The path your trade takes from submission to execution is the route.
The thing is, the route your trade takes might not always be the most optimal one. The platform may route through pools where it has partnerships or earns referral fees, even if a slightly better price exists elsewhere. You might also lose value simply because the routing algorithm isn't perfectly optimized, or because the price shifts between the time you submit the trade and the time it actually executes. The difference between the price you expected and the price you actually got is called slippage, and suboptimal routing can make it worse.
This is an implicit fee because you never see a charge for it. You just end up with a slightly less favorable execution price than what might have been possible.
Conclusion
Fees are a fundamental part of how blockchain networks operate. Explicit fees like base fees, priority fees, and on-ramp/off-ramp fees are relatively straightforward. You can see them, compare them, and factor them into your decisions. Implicit fees like spread, MEV, and routing are harder to spot, but they are just as real. Understanding both types of fees gives you a clearer picture of the true cost of transacting on a blockchain, and helps you make more informed decisions as an investor.