, a year ago
Miners are rewarded with the block reward with freshly minted BTC each time they successfully produce a new block. But that is just one part of the story of how they get rewarded and which incentive is in place to reinsure that they keep on doing their jobs. Fees have been a part of a larger discussion within the Bitcoin community in recent years.
While Bitcoin fees have been negligible at the beginning of the network, they became more important in 2017. One reason was the rising Bitcoin adoption, and the other one was that BTC saw a significant price increase in the same year. As a result, the prices for fees rose. At least if you denominate them in Euros or US-Dollars.
At the end of 2017, the rally experienced its peak, and so did the fees. The Bitcoin fees at that time were so high that it was simply impossible for smaller investors to send transactions without losing a significant portion of their BTC holdings.
In today’s article, we'd like to dig a little bit deeper into Bitcoin’s fees and explore how they work and why they are important.
Bitcoin is useable without paying any fees. It is possible to send transactions without paying fees. But with more and more people interested in transacting, miners will prefer transactions that will reward them with fees in addition to the block reward. You might already have experienced that a transaction became stuck in the mempool. The mempool is the place where all transactions are gathered and saved before they get confirmed.
Yours got stuck for hours in the mempool because somebody else paid more fees and therefore got first in line. So, one role of the fees is to reward miners and decide for users how important their transactions really are and to determine who is first in line. Need to pay a bill using Bitcoin urgently? Increase the fee up to a certain limit, and in return, you’ll get the transaction confirmed within the next block because you are sitting first in line in the mempool.
As we have shown, it is a simple game of supply and demand. But the above explanation only tells you how the demand side is handled. On the other hand, the supply depends on each blockchain and is determined by the block size. Each block can contain a maximum of data, and therefore only a limited number of transactions.
This was also part of the debate in 2017 and the reason why Bitcoin Cash came into existence. A smaller portion of the Bitcoin community believed that only larger blocks would increase transaction speed and lower the costs. But the proposal to increase the block size drastically didn’t win the majority. And because that group felt unhappy, they forked BTC and created BCH.
But Bitcoin has a solution to the limited block size. With SegWit, the size of each transaction became reduced, and in return, it was possible to send more transactions using the same block size. Using native SegWit addresses sending Bitcoin will save in most cases up to 70 % in transaction fees.
It is also worth mentioning that larger transactions also take more space. Therefore, they are also more expensive than smaller transactions.
With Bitcoin, all fees are voluntary. If you don’t like to pay a transaction fee, you have to be willing to wait for a long time, and you don’t have to mind if your transaction gets dropped out of the mempool after 14 days. Other cryptocurrencies are seeking different solutions. This is not only because they like to be cheaper, but they also have a different census model than Bitcoin.
One notable example of a cryptocurrency that uses feeless transactions is Nano. However, it remains to be seen if Nano can prevent transaction spam effectively in the coming years.
Bitcoin’s solution for feeless and - even more important – fast transactions is the lightning network. It is a second layer solution on top of the blockchain that also allows micropayments and aims to make Bitcoin available for everyday payments. Because even if you increased block size, people would need to wait for at least 10 minutes until a transaction has its first confirmation.
The Lightning Network is not flawless yet, and it is recommended to use it for payments of up to 50 US-Dollars or less. With Bitcoin’s solution still under development facing some hiccups, fees are likely going to be debatable in the future.
Jan 18, 2023
On the surface, Nostr is much like a stripped-down version of Twitter. But just like Bitcoin works in fundamentally different ways from traditional money, under the hood Nostr works very different from conventional social media. In Nostr, YOU own your account. Also, Nostr lends itself to integration with wallet software and Bitcoin's Lightning network. Let's dive in and experiment.
Jan 06, 2023
Since the birth of Bitcoin people have been worried about improving decryption technology one day becoming capable of breaking the encryption. A recent paper by Chinese researchers claiming a quantum computation breakthrough - which most consider a hoax - adds fuel to the fire. How likely a candidate is quantum computing to ever break Bitcoin's encryption?
Dec 02, 2022
Hash trees are vital to blockchain technology and Bitcoin because they allow validating data securely and efficiently. The name Merkle tree derives from its scientist inventor Ralph Merkle who patented his invention in 1979. Today, hash trees are very common in cryptography as well as in computer science.
Nov 03, 2022
Bitcoin is decentralized and secure. The downside of both features is that Bitcoin doesn’t scale very well and cannot execute complex smart contracts as Ethereum does. This limits its use and while the mother of cryptocurrencies still stands tall, it needs to change and adapt to the existing demand. The most promising technical approach to solve at least one of both issues is the so-called Lightning Network. It is a protocol that runs on top of Bitcoin and offers almost instant finality of transactions by facilitating them off-chain and confirming them at a later point in time. In this sense, the Lightning Network is the transactional layer that still profits from Bitcoin’s security and finality of its blockchain. TARO is a brand-new invention that was brought to life by Lightning Labs and just introduced in late September 2022 as an alpha version.