How and why do we pay bitcoin miner fees?

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For every bitcoin transaction you make comes with it a cost. In bitcoin jargon this is called a fee. You pay this fee to the network. Why do you actually pay these transaction costs, and how do you determine the right amount?

Bitcoin miner fees- what and why?

  • Why do I pay a transaction?
    • Rewarding miners
    • Countering spam attacks
  • How do I determine the right transaction fee?

Why do I pay a transaction fee?

You pay the fee for transactions with bitcoin. That fee is given in the form of bitcoin. You pay these transaction costs to the bitcoin network. This is therefore separate from the commission you would pay when purchasing bitcoin on our platform for instance.

You do not pay the bitcoin fee for nothing. It maintains the decentralised bitcoin network. You can read exactly how this works:

Reward for miners

A bitcoin fee is primarily intended as an incentive for miners. Miners have a job to ‘fish’ for transactions held in memory pools on the network. Each transaction that is ‘fished’ has a fee attached that is given to the miner for their hard work. Since mining is a costly task, they need to be compensated somehow.

The power consumption of these mining rigs is monumental. Miners are therefore faced with high electricity costs. To accommodate the miners for this, you give them a share of your transaction in form of a fee

What rewards do minors receive?

Miners receive two types of rewards. First, they receive a block reward. This is a fixed number of bitcoin, which is halved once every four years. At this moment, a block reward is 12.5 bitcoin. In 2020, this number will be halved to 6.25 bitcoin. You can read more on how mining works .

Secondly, miners receive a fee. This is the transaction fee that you give to the network. Because the block reward is halved every four years, the role of the transaction fee becomes increasingly important. In the distant future, this will be the only form of income for miners.

Combating spam attacks

Another important reason for paying transaction fees is the prevention of spam attacks on the network. Without a transaction fee, malicious parties could send a large volume of transactions at little expense. If you were able to send a transaction without a fee, you could in theory send 100 million bitcoin transactions at the cost of just 1 bitcoin. The network can not handle this large number of transactions at once, which means it would take much longer for a transaction to be confirmed and processed.

Because a fee is required for a transaction, someone can not continue to attack the blockchain indefinitely. The transaction fee then forms a protection against these types of attacks.

How do I determine the correct transaction fee?

Which factors are involved?

Determining the right transaction cost depends on a combination of several factors:

  • The current congestion on the bitcoin network
  • The size of the bitcoin transaction (in data)
  • Your personal priority of the transaction

The current congestion on the bitcoin network

A general rule of thumb is: The busier the bitcoin network, the higher the average transaction fee is. How do you find out if it is currently busy on the network? Online wallets indicate this by means of a push message, but you can also check this yourself.

There are websites where you can see what the current average transaction fee is. This website provides a clear overview of the current situation on the bitcoin network. At the bottom you can see which transaction fee is needed for relatively quick processing on the blockchain.

The size of the bitcoin transaction

Another factor that plays a role is the size of your transaction. The size of your transaction is divided into the number of bytes or kilobytes, rather than the amount of bitcoin you are sending.

How does this work? The size of a transaction depends on the number of inputs of a transaction. Suppose you receive 0.1 bitcoin in your wallet each month. After a year you want to send one bitcoin. This bitcoin is made up of multiple transactions of 0.1 bitcoin. As a result, the transaction is relatively large. In this case it is advisable to attach a larger fee to the transaction.

Why do you have to pay a higher fee in that case? Suppose a miner sees two transactions with the same fees, he will then rather opt for the transaction containing the least data. The more transactions that fit into a block, the more fees a miner can collect. Do you want your big transaction to stand out more? You’ll need to attach a larger transaction fee in this case.

How fast do you want your transaction to be confirmed

Is your transaction in no hurry? In that case you do not necessarily have to declare a high fee. Sooner or later the transaction will be taken by a miner and added to a transaction block.

If transaction time is an important factor for you, you’ll need to consider that the fee you attach. For example: Perhaps you are looking to sell bitcoin to BTC direct- we offer a 60 minute window for receiving bitcoin. Another time sensitive scenario is when sending funds to an ICO sale. During the open of a sale it is usually a first come first serve basis. Sending funds with a higher fee will increase the chances of your transaction being put to the front of the queue.

How do I determine the correct transaction fee myself?

You now know which factors are involved in deciding the right transaction fee. But how can you ensure that you give the right fee to your transaction? You have two options- automatic and advanced.

The easy option: let your wallet decide

Some wallets offer you the option to automatically attach the correct fee. For example, the wallet BTC.com offers you three different choices. The three choices depend on how fast you want to send bitcoin. These options automatically take into account the congestion on the network and the size of the transaction.

The advanced option: calculate your own fees

With some wallets you can set the transaction fee yourself. For particular wallets, this is the only option. How do you calculate the correct transaction fee? It’s all on the website bitcoinfees.earn.com. Here you see the number of satoshis per byte.

Pay attention to the unit it is measured in. A satoshi is a hundred millionth part of a bitcoin. Let’s use an example where the average transaction cost on the network is currently 20 satoshis per byte. How can you calculate the correct fee from this?

  1. The wallet gives you the option to enter the number of satoshis per byte. It is wise to choose a fee just slightly higher than the average, but 20 is just fine.
  2. The wallet gives you the option to enter the number of bitcoins per kilobyte. Now you have to convert. One thousand bytes fit into a kilobyte, and a satoshi is a hundred millionth part of a bitcoin. With this knowledge, 20 satoshis per byte is the same as 0.000002 bitcoin per kilobyte.
  3. The wallet indicates the size of the transaction, you must specify the total fee. In this case, you also have to convert the fee. Suppose your transaction has a size of 225 bytes. Transaction size (kb) x average transaction cost per byte (satoshis per byte) = suggested fee. In this case 225kb x 20 satoshi/byte = 4500 satoshi.

Determining the fee all by yourself requires some calculation work. In addition, fees change quickly, depending on the crowds on the network.

Do you have questions about the fee? Do not hesitate to contact us. We are happy to help you.

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