UNDERSTANDING HOW BITCOIN TRANSACTION FEES WORK
One of the great benefits of bitcoin is the ability to send it to any other person in the world with a bitcoin address. Miners do the work of validating transactions and adding them to the blockchain, powerful computers that makeup and connect to the network. Even though there is no intercessor, there are fees. So, how do they work? How are they used? Those are explained below.
HOW BITCOIN TRANSACTION FEES WORKS
When you, as a user, create a Bitcoin transaction, you have to include a transaction fee to be paid to miners to encourage them to add their transaction to the blockchain. So that; when a miner finds a block, they get a block reward plus the transaction fees together with transactions in the block.
There is something called BITCOIN MEMPOOL; this is when an unprocessed transaction sits in a pool of unconfirmed transactions. To avoid a transaction sitting around unconfirmed, you as a user creating transactions and you want your transactions processed faster, might want to pay higher fees than those who aren’t in a rush. This means that the higher the fees the, the quicker the transaction gets processed.
Transaction fees are not Bitcoin strategy, and they are not compulsory; but in the light of the high capacity of the transaction, it is essential.
SO, WHO SETS THE FEES?
The price is set at the point where the supply and demand curves meet.
On the demand side, there are spenders; all of them with varieties of wants when it comes to their transactions. While some want quick confirmations, some don’t.
On the supply sides, the Bitcoin protocol limits the maximum block size to 1mb and the time needed to mint it to 10minutes on average. This automatically means a bigger volume of transactions, together with more urgent transactions, will eventually lead to higher fees. Therefore, the price is set by the market for block space.
DECIDING HOW MUCH YOU SHOULD PAY
Before you can decide how much you should pay, you have to know how important is the speed of confirmation for your transaction; that’s the most crucial thing.
If you want your transactions to be authorized as fast as possible, you are going to have to pay higher fees. If you can tolerate waiting a few hours or even a few days, then you can get away with paying the lowest fees or even zero fees for your transaction.
Generally, bitcoin transaction fees are directly proportional to the size in bytes of your transaction. A bitcoin transaction fee is collected to process the transaction on the network. You need to pay the costs to make sure your transactions are done in the time expected.
Also note, that the higher your fees to miners, the faster your transactions will be processed. Just like in the case of shipping products from one place to the other; it’s the higher your pay, the faster your goods will get to you.