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How do Bitcoin Mining Fees Work?

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Bitcoin miners provide the critical service of network security. The more power that is added to a network, the more difficult it is to attack. A large hash rate provides the security of the Bitcoin network. The hash rate is the speed at which your mining hardware can process data to solve complicated mathematical equations necessary to earn Bitcoins.

To keep the network safe, miners need incentives to cover the cost of their equipment and electricity. The mining process secures the network using proof of work which is a method that ensures the newly acquired block was difficult to be produced. The block reward is paid with Bitcoin and transaction fees.

In other words, miners receive bitcoins in exchange for their computational power.

Transaction Fees

According to the rules of the network, only 21 million Bitcoins can be mined. These coins are expected to be exhausted sometime in the year 2140. As the number of Bitcoins continues to halve until then, the number of coins awarded will diminish. When miners approach these small rewards, they will instead be paid by the users who utilize the network through transaction fees. At this point, it is estimated that there will be millions of users so paying a small percentage from each transaction will allow the miners to continue keeping the network secure.

Each time a user sends a transaction on the network, mining fees are paid to the system. For example, if the user sends 0.21959858 BTC, it will include a 0.0001 BTC fee for using the network. These Bitcoin mining fees incentivize the miner to continue solving block algorithms. The fee is transferred once a clock has been confirmed by a mining rig. Unconfirmed transaction sits the “mempool” waiting to be confirmed.

Mempool Transactions

User transactions with low fees regularly get stuck in the mempool. This is such a common occurrence that there are daily posts about stuck transactions. New users to the Bitcoin network are unaware that a sufficient fee is included to guarantee fast confirmation. Transactions sent with the correct fee amounts are confirmed in only around 10 minutes. Meanwhile, transactions with incorrect amounts sit in the mempool for many hours.

Bitcoin Mining Fees

The solo miner or mining pool that has solved the block collects the associated transaction fee. For example, if a mining pool solves a block that included 175 transactions totalling 0.056012509 BTC in fees, the block reward is the fee plus 6.25 BTC. This means that the fees for this block were only a fraction of a percentage of the total reward. As the block reward decreases the transaction fees must increase to compensate miners for their hard work.

When the network was first launched, Bitcoin mining fees were not required for every transaction. Many miners would mine transactions without fees if they had enough “priority.” Today the low priority transactions are often considered spam because all miners expect each transaction to include a fee. As a user, remember that miners use the miner fees associated with the transactions to determine which blocks to confirm first. Therefore, a sufficient miner fee means there is a higher probability of your transaction being confirmed in a faster period. If you do not use a fee or offer a lower miner fee, then your transaction could take days or weeks to confirm. In some instances, the Bitcoin network could reject the transaction and return the money to your digital wallet.

Free Transaction Rules

Historically, a transaction could safely be sent without Bitcoin mining fees granted that the following conditions were achieved:

  • All transactions must be 0.01 BTC or larger.
  • The priority was large enough.
  • The transaction was smaller than 1,000 bytes.

These requirements are all related to consuming a miner’s resources (electricity, equipment, and time) without being paid for doing the work. The transaction could not be assigned a big priority but small enough where it was not complicated to solve the block.

Sending Bitcoin Mining Fees

Most Bitcoin wallets include a miner fee for all outgoing transactions. To ensure the wallet includes the correct fee, it is important to update the settings so that the dynamically-calculated fee is selected. This will ensure the transaction arrives quickly, even during peak networking hours.

Bitcoin Mining Fees for Dependent Transactions

In many instances, Bitcoin transactions depend on other transactions within the same block which complicates the Bitcoin miner fees. Every block transaction operates in sequential order with one transaction following another. Each block in the entire blockchain also holds a sequential order. That means there is one single sequential order to all transactions in the best blockchain.

One of Bitcoin’s transaction rules is wherever the Bitcoins are received, they must appear earlier in the sequence than the transaction where they are spent. For example, if Dan pays Adam in transaction A then Adam uses those Bitcoins to pay Chris in transaction B, transaction A must appear in the sequence before transaction B. Even if transactions A and B appear in the same block, A must appear earlier than B.

From a miner’s perspective, this complicates the target of maximizing fee revenue. If transactions A and B are unconfirmed then the miner is unable to include B earlier in the block than A, regardless if B has higher Bitcoin miner fees. The system does not allow this to occur. This can lower miner profitability since a more complicated algorithm is required. Luckily, it is only slightly more complicated.

Essentially, miners must compare groups of similar transactions to one another and individual transactions without confirmed dependencies. That means all available transactions in the next block must have calculated fees and for all unconfirmed transaction relatives. In the example above, this means transaction B becomes a combination of transaction B plus A. These groups are then sorted into a new sequential order. This creates a new issue of counting transactions twice. When this occurs, redundant copies are removed from the network.

While transaction grouping is occurring behind the scenes, users are waiting for their unconfirmed transactions to be confirmed. This could be as quick as ten minutes or take weeks depending on the Bitcoin miners fee. It is also possible to create a child transaction, with a low fee, and attach it to a parent transaction with a higher fee which encourages the miner to confirm both simultaneously. Some digital wallets support the child pays for parent (CPFP) feature. This type of transactional grouping has earned the name because the child transaction pays for the parent transaction.

Factors Determining Bitcoin Mining Fees

For those sending funds and needing a quick confirmation, the fee can greatly vary and is based on a variety of factors. In some instances, the fee does not depend on the amount sent, it is mostly dependent on the two following conditions:

Network Conditions

A block in the blockchain can only hold up to 1 MB of data so there are a limited number of transactions that can be included in a block. During peak network times with countless users sending funds, there are often more transactions sitting in the mempool for confirmation than space in a block. All the transactions in the mempool are prioritized based on the highest fees. When the mempool fills, users will compete to get their transactions into the next block with higher Bitcoin mining fees. Eventually, senders will reach the highest equilibrium fee they are willing to pay and the miners work through the mempool in sequential order.

Transaction Size

With transactions only being up to 1 MB of information, the size of the block is critical for the miner. While smaller transactions are easier to validate, larger transactions are more complicated and consume more resources. As a result, most miners focus on smaller transactions that are faster.

Bitcoin is commonly advertised as a fast and easy method of making payments and the mining fees are confusing. However, Bitcoin mining fees are required as an incentive for miners to secure and grow the power of the network. Without miners working hard in the background, the network would be vulnerable to attacks which would scare away users rendering the system useless.

Bitcoin mining fees also showcase users’ willingness to pay the Bitcoin network. If a user is willing to hand over $5 to send a single Bitcoin transaction, this confirms the system is providing a valuable service where users feel safe and comfortable with transferring money.

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