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May 09, 2020

6 min

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1189

6 min

Bitcoin Network Fees: Explained

Bitcoin Network Fees

Contents:

With the rising wave of hype, Bitcoin network fees start fluctuating and raising concerns. This article is about to explain how Bitcoin network fees work and how to cut on the network fees.

What is a network fee?

Network fees or transaction fees represent an additional amount you pay to miners that include your transaction to a public blockchain.

The network fee is required to be paid for every Bitcoin transaction without exceptions in order to get mined and included in the blockchain. The minimum network fee is one Satoshi 0.00000001 BTC.

How is a Bitcoin network fee is calculated?

Network fees depend on the total size of your transaction as every block in Bitcoin blockchain is limited to 1 MB. The more KBs it weights, the more you will have to pay for the transaction to be added into a new block. The amount of fees doesn’t depend on a service you use, they are calculated according to transaction size in bytes and network load. To understand this ratio, you need to know the process of completing the transaction.

  1. You request the network’s nodes to verify the amount you desire to send with your private keys’ signature (that is only available to you). The nodes scan the whole bitcoin network to prove whether you have that amount and if it wasn’t spent on any other transaction.
  2. Verified transactions get into mempool where they wait to be confirmed by the bitcoin network.
  3. Miners confirm the transaction that makes the process complete.

The bigger size of your transaction and the longer queue in the mempool – the higher fees. As every new block requires the solving of proof-of-work problems, the miners give privilege to those transactions that are offered with higher fees for their work.

You pay for making a record on the blockchain. The more demand for Bitcoin – the more transactions are waiting to be processed and higher are transaction fees.

Factors that affect Network Fees:

The inputs and outputs of your transaction

Inputs represent the number of transactions that your Bitcoin address received and the whole amount of BTC you own. When you send BTC to any other address, some inputs of your previous transactions are sent to the recipient. Your inputs are collected together and then became an output.

Example

  1. Address 1 has 2.29840064 BTC in total.
  2. Address 1 sends 0.008938 BTC to Address 2.
  3. After the transaction, Address 1’s output is 2.29840064 BTC. Address 2 receives 0.008938 BTC – input.
  4. Address 1 receives the change 2.28897064 BTC. Now, Address 1 has an input of 2.28897064 BTC.

The bigger the number of those inputs, the larger the transaction size and hence the network fee.

Network overload

If there are too many transactions to be confirmed, the average fees become higher as the number of transactions that can be possibly added to 1 block is limited by 1 Mb.

Unconfirmed Transaction Count*

Multisig feature

If you use a multisig wallet that requires multiple signatures prior to signing a transaction, the transaction size will be increased.

How can I cut on the network fees

Consolidate your inputs.

Don’t operate with small amounts. The fewer inputs you have in your transaction history, the lower fees you’ll pay in the future. This calculator will help you to estimate the fee you will pay for the transaction and how quickly it will be approved.

Pay or Wait

If Bitcoin Network is overloaded you will have to pay higher fees to get included in the next block as demand is increased. In extra cases, you may use BTC.COM service to make a paid request for miners to pick up your transaction out of the queue.

The other way is just to wait till Mempool will be unloaded, so the demand and fees will jump down.

Use Atomic Wallet

Atomic Wallet uses a dynamic fee that is optimized for most user’s purposes. The wallet automatically calculates the network fee and provides a reasonable amount for fast transaction processing.

btc fees gif

Bitcoin is made up of blocks that imply encrypted transactions and currently restricted up to 1,000,000 bytes and designed so that on average only 1 block per ~10 minutes can be created. Bitcoin miners can pick the transaction they want to include to the blockchain and get a reward for each block mined.

Therefore, the higher the network fee is set, the bigger the reward, and the higher the priority of the transaction. Miners are interested in the transaction sized because they can create only the blocks up to 1,000,000 bytes. The fee per byte, that’s what interests the miners.

*Mempool’s screenshot is provided by the Johoe’s Statistics.

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Top Stories 2 comments
Anikys3reasure
May 02, 2020 01:58 am

I never use to understand network fee, I just pay. But I guess this has helped. I will also share to people like me 😂.
Thanks for sharing.

Mazel CrypTOV
May 18, 2020 08:50 am

Very detailed! Short but it has got everything you need to know about Bitcoin network fees. Thanks for sharing this article.

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