Blockchain Transaction Fees Explained – What is a Transaction Fee?

Newbies quickly learn how to use a Bitcoin wallet and send their first transactions. Only, a lot of details remain unclear. Why was the Bitcoin commission introduced? Why does it have a different size? What are the ways to avoid overpayment? The article will answer how to define transaction fees and not only. 

What are Bitcoin transaction fees?

If you are familiar with bank transfers or any other forms of money movements that involve the transfer of currency from sender to recipient, you definitely paid commissions to the bank or processing, and sometimes all together. Often this payment is included in the price, hidden from your eyes, but it is always there. Following BTC transaction fees definition a commission is the amount that Bitcoin owners pay each time they transfer money to another Bitcoin address.

The Bitcoin network commission for a money transfer, like any other payment system, consists of 2 parts:

  • One is funds to keep the system running.
  • The second one is a stimulating reward for miners so that the transfer gets processed and confirmed as soon as possible.

Why do blockchain transaction fees exist?

Why pay a commission if the miner will already receive a reward for finding a block?

Let’s take a look at Bitcoin as an example. One block can store a maximum of 1 MB of data, which is equal to 300-500 transactions. On average, 250,000 transactions are executed per day, and 625 blocks are required to instantly execute these transactions. At the same time, only 150-160 blocks are mined per day. In total, 75% of transactions will not be processed on the day of the request. We’ll have to wait for the moment when the total number of transactions drops and there is free space in the block.

The transaction fee was introduced to determine the priority of the transaction. If a person needs to send money within 30 minutes, he will pay for the urgency of the operation. If the transaction can wait a few days, you can do without any commission at all. The commission is always charged in cryptocurrency, so the cost of a transaction in fiat depends on the exchange rate.

How are blockchain fees calculated?

Today, few people calculate the price of transferring a cryptocurrency manually. There are convenient services for this, and we will consider some of them today:

  • Estimatefee.com. A fairly simple platform where you can calculate transaction fees based on how quickly you need to complete the transaction. The service highlights a range of commissions that can meet the needs of the client.
  • Bitcoinfees.info. This site helps to allocate commissions for several types of transactions at once: slow/medium/fast ones. All that remains to a person is to choose the method that is suitable.
  • Bitcoinfees.earn.com. This tool demonstrates the amount of payment for transfer in satoshi.

Transfer fees are highly variable. While you are forming a deal, its price can change dramatically up or down, because the information quickly becomes outdated. Therefore, online calculators are real helpers for beginners in this field.

And let professionals use byte computers, for example, people involved in mining (as it is the commission that goes to pay for their work). 

What factors contribute to transaction fee sizes?

Satoshi Nakamoto, the developer of a decentralized cryptocurrency network, aimed to create an inexpensive, accessible service. At first, it was like that, but only Bitcoin gained popularity:

  • the number of transactions, i.e., transfers, has increased;
  • increased load on the BTC network;
  • there was a scalability problem;
  • the transaction confirmation time has increased to 10-15 minutes;
  • the payments begin to be stuck for hours and even days.

In general, the algorithm is as follows:

Bitcoin purchase fees do not depend on the amount of the transfer but on the volume of the transaction.

For every 1 thousand bytes, it is necessary to pay the so-called optimal share of the commission of 10 thousand Satoshi. This amount is conditional. If the demand for transactions on the Web rises sharply, this share may be 50,000 Satoshi and more. If the transfer amount is less than 0.01 Bitcoin, the amount of the recommended contribution increases additionally.

Nevertheless, it is not necessary to pay the optimal commission, the amount of which varies depending on the current load on the network. It is enough to assign any other than zero and the transfer, albeit not quickly, will be confirmed.

Bitcoin retention by the network should be distinguished from the fees of blockchain services, i.e. online wallets, exchanges where intermediaries charge a premium, and transactions are more expensive.

How expensive are Bitcoin transaction fees?

There are certain parameters that indicate what the commission will be for the transaction.

To use a transfer to/from a Bitcoin wallet without a commission, you need to secure three conditions:

  • The size of the operation must be less than 1,000 bytes.
  • The transaction amount required is at least 0.01 Bitcoin.
  • Coins participating in the transfer have previously been confirmed many times.
  • It is allowed to set a high priority for such a transfer.

If such a set of data is available, it still does not guarantee a quick translation. Sometimes the operation is completely frozen and the cryptocurrency is simply returned to the user’s account.

In the case of small transactions, the commissions are paid as a precaution.

  • If the amount is less than 0.01 BTC, you will need to pay a reward for miners. This measure is implemented to prevent spam on the network using microtransactions.
  • Also, the smaller the number of inputs per transaction is, the lower the fees are. Each transaction consists of inputs, i.e. how your address has been replenished. If you have 5 BTC, 3 of which are received from one address, and 2 from another, then you have 2 hotel inputs, and their sum is your balance.
  • Older coins can enjoy lower fees. Old Bitcoins are coins that have old “inputs”, there is a great chance that such a transaction will not require a commission. Each transaction is assigned a priority based on the age of the BTC, the size and number of inputs.
  • Each Bitcoin transaction consists of a specified size (like a file on a computer). The larger the transaction size is, the more space it takes up, the more you pay for it.

Currently, the average transaction fee is less than $ 10.

Bitcoin commissions are volatile, but sometimes users are faced with too high volatility of this indicator. Due to the fact that the price often changes, people are in constant competition. They are trying, like in an auction, to outbid each other’s price. The speed of the transaction will depend on what commission to put when transferring bitcoins. The one with the highest bidder will finish the trade in the fastest way and get their Bitcoins into the account. 

Reducing Transaction Fees

Imagine you have a friend who mines and controls 10% of all the computing power used on the Bitcoin network. On average, it generates a block once every 100 minutes. In this case, you can create your own transaction, in which you set a zero commission, and then send this transaction to your friend for confirmation. Your transaction with a 50% probability will receive the first confirmation within 50 minutes, and the full confirmation on average 50 minutes after the first one. As a result, your transactions will receive full confirmation in about 100 minutes. If you did not have such a friend, the transaction would receive a full confirmation within about 60 minutes, but already with a full commission.

As you can see, when it comes to saving money, then you’re in luck if you have a miner friend. But if there is no such friend, then there may be alternative options for paying for a place in the block.

In order to optimize transactions in terms of speed and fees in Bitcoins, users have resorted to several tricks.

The main one is the average remuneration for miners if the transfer is required to be received without much delay.

For the calculation, it is enough to use special sites and carry out the calculation for the current period, given that the aggregators show inaccurate values ​​of the minimum recommended commission. Here it is better to round up the amount a little.

However, even observing the condition of motivating miners, you can save.

It is important to track network congestion. There are periods in the day when the transaction queue decreases. The data is published at https://jochen-hoenicke.de/queue/#0,24h. It is not very profitable to use online and desktop wallet applications. Service owners tend to overestimate or generously round up increasing the recommended commission. The pre-holiday period is characterized by increased demand for transactions when the average cryptocurrency transaction fees increase. During national holidays, for example, in China, where the turnover of crypto transactions is high at normal times, the operation can be performed relatively cheaply and the load on the Network is significantly reduced.

At the same time, it should be borne in mind that some mining pools reject payments with a small commission from processing.

How Bitcoin Wallets Deal with Fees

Bitcoin wallets are software or electronic means that provide users with access to accounts in the system. They allow you to view the balance and transfer coins to another account. It’s not so easy to get a Bitcoin wallet these days, where you can store this digital currency more and more. In such a situation, not just like a beginner, but well-worn pros do not know where to look first. Still, it is extremely important to find a suitable option.

Ideally, storing Bitcoin should be safe, secure, free. But most importantly, the wallet should allow you to easily pay with the stored asset, as well as withdraw funds at any time in any direction.

In total, there are the following ways to store BTC:

  • Exchanges are the easiest and most common way. In addition, the most convenient, since at any time you can sell or exchange the stored assets.
  • Online services (blockchain.info, Cryptonator and others) are not more and not less reliable than exchanges.
  • As part of payment systems (Payza, Webmoney).
  • Mobile wallets for Android and IOS.
  • Lightweight desktop clients to download on your computer. They weigh a little, since they do not download the entire blockchain, but only the necessary files for synchronization.
  • Bitcoin Core, the official Bitcoin wallet is an incredibly “heavy” client downloading on a computer.
  • Hardware wallets cost starting at € 80.

You should clarify that you will not be able to withdraw and get Bitcoins without a commission. It is unprofitable for a wallet to provide services to users and at the same time not gain anything on it. In addition, the commission will be taken from you not only when withdrawing money from the wallet, but also when using the exchange service you will have to pay crypto exchange fees.

You can save on commissions if you use the services of intermediaries who earn on Bitcoins, and are only happy to receive on their wallets. The intermediary, in turn, will make a transfer to your electronic wallet or bank card. Thus, you can withdraw funds from the blockchain or another system. Important! Finding an intermediary who is not a fraud is quite problematic and it will take time. 

If you need money urgently, then you’d better use special exchange services, such as Godex. Sending funds is carried out automatically, which means that you can receive money instantly to your wallet. At the same time, the Godex commission is minimal.

You can make transfers directly within the exchange from one BTC wallet to another. In this case, you do not have to use exchange services. This option can come in handy if you pay for any services using BTC. When sending funds, you will be charged a minimum commission and you will have almost nothing to lose.

If you cannot figure out the withdrawal of BTC on your own, then you should visit specialized forums. Such forums are very useful for those who regularly deal with cryptocurrency.

Where do Bitcoin transaction fees go

The main purpose of cryptocurrency is to be exchanged for goods and services. How much does this exchange cost? The commission goes to miners, i.e. to pay them for finding the next block and including transactions in it. A transaction is considered completed when a block with the commission enters the blockchain, and the information about it enters all nodes. After that, the cryptocurrency “disappears” from the sender’s wallet and appears on the recipient’s wallet.

Conclusion

Blockchain and cryptocurrencies are a new financial system. Naturally, it has a lot of disadvantages, and volatile, often disproportionately high fees are one of the biggest problems. But this does not deflate the revolutionary nature and convenience of the technology. In the future, Bitcoins can completely replace standard banking technologies, as they allow you to get rid of the control of modern banks. 

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