Have you ever wondered why your transaction fee was the rate it was the last time you engaged in a Bitcoin transaction or what these fees are for? They are not your typical fees which are given to the CEO’s of the corporation as you may be used to, but they are actually an important mechanism in the Bitcoin ecosystem. These transaction fees are in place to incentivize miners to establish and create new blocks that hold the information of your transaction.
Within the Bitcoin network, block space is precious real estate that must be wisely spent and utilized, and this is the function of the miners. In other words, a tx fee provides incentive for the transaction to be included into a new block by a miner. In order to be as efficient as possible, you must first understand the basics of a Bitcoin transaction and what its related fees represent.
Bitcoin Transactions
The basic elements of a Bitcoin transaction include miners, block creation, block space, transaction fees and mining fees. Miners are the entities that verify and cement the data surrounding a transaction into a block they have created. These blocks have a finite amount of space available which varies from block to block based on the available space at the time, the size of the transaction and other technical factors within the network.
Bitcoin places the responsibility of setting transaction fees in the hands of the spender, and there are actually two types of transaction fees to pay attention to:
Total Transaction Fee
The total transaction fee is simply the total amount that will accompany your transaction to be paid to the miners to verify it. This number is normally given in satoshi’s.
Fee Per Byte
The fee per byte is the amount of money you are paying divided by the amount of bytes your specific transaction requires. Miners opt for transactions that have a higher fee per byte to fill each block with an efficient ratio of bytes to fees. This information is not widely known to most new Bitcoin users.
Block Space
Bitcoin currently has an ongoing issue with scalability, so block space is limited and competitive. Getting your transaction “mined”, or cemented into the blockchain, functions as a form of real estate where you are purchasing that block space. This process occurs extremely quick and must be maintained as such.
Block space is sparse as well. Every time a new block is created, there may be extra space available for others to utilize. As soon as the block is created, it can create extra space that must be filled before completion or the space will be lost forever. The price of block space is determined by overall supply and demand of this available space, so this creates a very volatile and constantly shifting price range. In order to most efficiently set the prices of your transactions, it is best to find a median price that still incentivizes block creation.
Keys for Determining an Efficient TX Fee
The critical factor is the amount of bytes contained in your transaction. As mentioned, this is because miners primarily are concerned with the fee per byte of each transaction. The total amount of Bitcoins you are sending is irrelevant, as the bytes associated could be the same for $10 or $10 million transaction.
You can search for the fees per byte from past transactions you have engaged to gauge how well they have done, and it is quite simple to apply the most efficient fee per byte to all of your future transactions
How To Find and Apply the Most Efficient Transaction Fee
While most crypto wallets can provide a lot of detailed information about the block size and other related information about your past and future planned transactions, a majority of these wallets do not provide the byte-size of your transaction. This is the main piece of information you will be searching for when attempting to get the best rate for you and the Bitcoin network as a whole.
The process is as simple as looking up two pieces of publicly available information at the time of your planned transaction: the current median transaction fee as well as the recommended fee for fast confirmation. When you multiply these numbers together, you will be left with the total fee of the transaction. A popular option to obtain this information is bitcoinfees.earn.com. Here, the information is displayed easily and with units. The median transaction fee in bytes, and the recommended fee in satoshis/byte. When these are multiplied together, the units cancel and you are left with satoshis.
Most wallet services do not account for these units, and ask for you to input your fee in Bitcoin units. These two unit types are easily converted between, sipky divide the satoshi value you calculated by 10^8 and you will be back to Bitcoins. It is important to not skip this step, as inputting the value in satoshis could increase your transaction fee exponentially.
Why Transaction Fees Are Important
The process of setting tx fees is important not only for you to complete your transaction as fast and as efficiently as possible, but it is also important to help the miners fill blocks as efficiently as possible. When these fees are set accordingly, miners can more easily and quickly designate and finalize these transactions.
While most wallet services attempt to make this value as close possible, checking on the stats prior to your transaction can greatly increase the efficiency, remove strain to the network, and ensure all parties involved are receiving the full benefit.
The Bitcoin network is growing in size and user base everyday, and it has been growing at a very fast rate over the last year. This network needs as much free space and efficiency as possible moving forward, as clogging and reduced speeds have been a common complaint. Even when these slowdowns and problems are occurring, by researching and calculating good rate for your transaction you can make sure your wait time and fees are not the same as everyone else’s, and that the miners can find available block space for you instantly.