To understand Bitcoin transaction fees, it helps to first understand the method of processing transactions. How does it all work!?
Well, it starts with the blockchain and the blocks which store the transaction information (thus making them legitimate). Each block in the Bitcoin network has an artificial size limit of 1 MB and this averages 2020 transactions to fill one block. Also, a new block is mined every 10 minutes – which is 600 seconds. So to calculate an average transaction time the math is straightforward:
Number of Transactions Per Block / Block Time in Seconds
2020 Transactions / 600 Seconds = 3.37 Transactions Per Second
So that means in every ten minutes 2020 transactions can be processed by the network at an average time of 3.37 seconds per transaction. In its formative years, before Bitcoin became so popular, this system allowed for definitely cheaper and faster trading. At most, wait time for a transaction could be the time it takes for the next block to become available – but more often than not your transaction was able to be added to the block in unit time.
However, all that changed as Bitcoins popularity soared. With BTC reaching a good level of adoption its block size limit is frequently reached. Transactions that are not processed are rolled over into the next block but priority is given to transactions that include a higher transaction fee. Herein begins the issue of bidding wars and the result can be astronomical fees; at its peak in 2017 fees were as high as $34 per transaction.
Who Decides Bitcoin Transaction Fees?
Miners are incentivized by the Bitcoin network by two factors: block rewards earned when discovering/”mining” a new block (12 BTC per block), and the transaction fees earned by processing a transaction to a block.
It makes sense for miners to process transactions with a higher fee, as the process of finding more blocks is very costly, timely and consumes a lot of extra energy. In this way, miners can off-set the cost of mining. But prices are pushed by demand – so those who cannot afford to wait will pay a higher transaction fee to have their transaction confirmed first. This increases the overall free-market average fee and many users are finding it expensive to get a place in the blocks. So simply put, the fees are decided by those who are willing to pay the highest and also the miners who choose to accept higher fee payments.
What Is The Current Status Of Bitcoin Fees?
At the time of writing, there are more than 143,623 unconfirmed transactions in the mempool – where transactions wait for a miner to process them. This highlights the demand and scalability issue with Bitcoin (remembering an average of 2020 transactions fill a block). The average number of blocks mined per day in January 2018 has been increased to 164 blocks from 144 based on the 10-minute block time target but still it seems it isn’t enough to truly handle demand; users are paying over $30 for a $100 transaction compared to the transaction fees of $0.30 in 2017.
How Can Bitcoin Transaction Fees be Cut Down?
There are ways to help the issue:
- Transaction Batching: A payment is made to multiple recipients through one on-chain transaction. Examples of this are given by outputs.today and an increased use of batching over the year 2017 is clearly visible.
- SegWit: SegWit is a soft fork that allowed an increase to the block size limit. The SegWit addressed wallets help to reduce fees by nearly 50% – 70%. Wallets include; Ledger Nano S, Trezor, and Green Address.
- Custom Transaction Fees: Certain wallets enable users to set custom transaction fees rather than opting for a recommended fee structure. Ledger Nano S and Coinomi are two such examples.
- Tools: UTXO consolidation and dynamic fee estimation combine two separate transactions into a single transaction.
- Wait: the network fees fall as the congested network starts to turn people off using Bitcoin. Other coins are proving to have fewer scalability issues and therefore faster processing times and cheaper fees. As more and more people chose other methods/coins to trade in, demand can subside causing transaction fees to fall.
Besides this, off-chain scaling solutions known as Lighting Networks will hit the crypto world in the near future. This network allows fast blockchain payments without having to worry about the block confirmation times. With the proficiency to handle millions of transactions per second, the lighting networks allow remarkably lower fees and curtail the demand on an over-worked network.
Hopefully, you now have an understanding of Bitcoin transaction fees and how they work!