When Satoshi Nakamoto designed Bitcoin’s blockchain, he was probably aware that the blockchain could be exposed to all sorts of attacks. After all, the network could be clogged by so-called spam transactions, which would slow it down considerably. This contributed to the decision to implement BTC transaction fees. Today we will look at what they are and why they are an indispensable part of the functioning of the entire network!
Cryptocurrency transaction fees vs. mathematical fundamentals
For this particular topic, it is crucial to discuss the absolute basics of how transaction fees work. To do this, it will be necessary to refer to mathematics.
The transaction fee is the difference between the number of cryptocurrencies sent and received. It can be thought of as the approval speed of a transaction approved on the blockchain. When a user initiates an action, it goes to the mempool, which is a dedicated virtual waiting room for bitcoin buying and selling processes. The approved transaction leaves the mempool and goes to the blockchain. If too many transactions go unconfirmed, a backlog is created, which encourages miners to prioritize processing transactions that have higher fees.
The user’s acceptance of the next block is tantamount to acceptance of all transactions in it. He then receives transaction fees and the so-called “block grant” – together form the reward for unearthing the next block.
Any overfishing of the blockchain network causes the hashrate (an indicator of how much computing power the network uses to process a given transaction) to decrease. This causes both an increase in the expense of mining more blocks and a reduction in the rewards for digging. Continuing to confirm them is paid for with more energy expenditure, and the increased fees make miners more incentivized to continue working. Thus, the security of the grid is somehow dependent on the miners’ commitment.
Definition of BTC fee
The BTC fee is the amount paid for completing a given transaction on the Bitcoin network – its component entered by the sender into the total. Both the network and the amount of the fees themselves are extremely dynamic. As this “slows down” due to the aggravating number of transfers performed, these correspondingly become higher. This also works the other way – a more static blockchain offers lower fees.
Charging royalties for buying and selling bitcoin is the practice of the vast majority of cryptocurrency exchanges around the world. Nevertheless, it is worth noting that they are completely separate from the fees required to process a transaction on the bitcoin network successively.
How is the BTC fee determined?
The amount of the BTC fee is determined by two factors, namely the amount of data contained in the transaction and the state of network congestion. A single block can contain up to 4 MB. Thus, there is a limit to the contracts processed within it. If a transaction takes up more space, it is charged for each additional byte used.
If, for example, we acquire cryptocurrencies using an exchange wallet, it will display an option to select a fee rate. The rate will be converted to satoshi (the smallest unit of bitcoin), which will be used to finalize the transaction. Wanting to confirm it immediately, we will have to increase the rate. However, assuming that we are not in a special hurry, we will get a waiting time of 1 to 7 days in exchange for 2 SATS.
At the very beginning of the BTC network’s existence, that is, in 2010, this one charged a “fee” of 0.01 BTC per transaction, regardless of the amount. Over the following years, as the price of bitcoin itself successively increased, it became clear that the rate of the fee itself had to increase. Thus, they began to look for opportunities to make it more flexible.
In 2017, preceded by intense debates in the cryptocurrency community over transaction fees precisely, one of the most significant updates to the Bitcoin protocol was made, called SegWit (full name: Segregated Witness). Its purpose was to remove some of the data stored in all transactions performed. “Byte reduction” allowed lower fees to be charged, and this despite the growing position of cryptocurrency gold.
Bitcoin transaction fees for institutional transactions
Cryptocurrency exchanges mostly charge in 2 ways. The first is nothing more than a fixed rate for conducting a buy or sell. The second, on the other hand, is a percentage for a 30-day total volume of transactions. Regardless of the method adopted, each is based on a tiered fee structure, the foundation of which is total trading volume. The idea behind the concept is to encourage people to trade cryptocurrencies as often as possible. Ultimately, this allows the company to offer low fees for transactions characterized by high value and frequency. On the other hand, smaller ones and those executed less frequently will incur higher costs.
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