To understand a bitcoin (BTC) transaction and associated fees, it helps to understand the motivation of bitcoin miners who verify and add transactions to the blockchain.

Miners get paid twice for ordering transactions on the blockchain. The first payment is for successfully entering the block of transactions. The second is in the form of fees they earn from user transactions.

Miners, the modern day clearinghouse

At a traditional bank, users may pay fees for withdrawing, depositing, or transferring. Fees also are dependent upon size of transaction, with large transactions costing more.

Transaction fees incentivize miners to keep working, which in turn keeps the Bitcoin network secure. Miners get paid 12.5 BTC for each block they mine, but this reward is cut in half every four years. However, an increase in transaction fees offsets the decrease in block mining payments. 

With Bitcoin, the fee is determined by a number of different factors including number of inputs, age of coins, and network transaction volume.

Extra fees and prioritization

If an output within a transaction, including change, is less than 0.01 BTC, then an additional fee of 0.0001 BTC is charged.

These high fees help to prevent the network from being overloaded with frivolous transactions. It also keeps it from being maliciously attacked with spam transactions which could slow it down.

A BTC wallet multiplies its value by the age of the bitcoin used. The corresponding ratio assigns it a priority value, which impacts the fee. In short, older coins are given priority over newer and carry a lower fee because of their relative importance to the chain.

More inputs means higher fees

If a transactor receives .5 BTC and another 1.5 BTC, there will be two new denominations in the transactor’s wallet for those separate amounts. They do not merge to become 2 BTC. Much like cash and change in a regular wallet, over time, a bitcoin wallet will accumulate different denominations.

When a transaction contains more inputs – denominations – the transaction will contain more bytes of data. Since more bytes take up more space on the block, more inputs increases the transaction fee.

Transaction volumes and free transactions

The transaction fee also depends on the volume of transactions on the BTC network, which is referred to as the fee density, or ‘fee-rate.’ Fee density rises and falls in response to the BTC network transaction volume.

The bottom line is that investors can save on transaction by transacting during off-peak times.

Transaction fees are voluntary for the person making the transaction, and the person sending bitcoin can include any fee or none at all. The miner can also choose whether to accept a transaction and include them in the new block. The transaction fee is therefore an incentive from the transactor to ensure that the miner includes the transaction in the earliest block.

For instance, transactors using old coins with few inputs can enter transactions into the blockchain for free. It’s possible to create any transaction offering less than the required fee, but without a fee miners can delay posting the transaction to the blockchain. 

Let the wallet do the math

In most cases, there isn’t much control over transaction fees. Calculations are difficult due to numerous, fluctuating factors. Thankfully, the wallet can be trusted to usually do the work effectively.  

A bitcoin wallet will optimize inputs to keep fees minimal, but knowing some of the rules will provide a better understanding of how blockchains motivate miners as well as how to estimate transaction fees.  

Transaction fees can also help explain why BTC’s recently suspended fork was so contentious.  

Bitcoin fees have been rising due to higher network usage and limited block size, which has made BTC uncompetitive for certain use cases such as small transactions. This is one of the reasons that forks like Bitcoin Cash have introduced larger blocks.

 

Image credit: maxpixel.net

 

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