To ensure a timely inclusion of your transaction in the blockchain, you must pay a Bitcoin transaction fee or network fee to miners. The higher the fee, the greater the likelihood of immediate processing, as block space is limited.
After validating a new block, a miner is rewarded with the transaction fees and block subsidy. This combined amount is called the block reward. Bitcoin network fees are crucial because they partly ensure that transactions are processed efficiently and miners are incentivized. This article will explain Bitcoin transaction fees, how they work, and the concept of satoshi per vByte.
What are Bitcoin transaction fees?
Bitcoin transaction fees are influenced by two main factors: the size of the transaction data and the user's demand for block space. Generally, the faster users want their transactions confirmed, the more fees they will pay.
Network demand: During periods of high activity, fees increase due to higher competition among transactions to get included in the next block.
Transaction size: Measured in vBytes, larger transactions require more data and thus higher fees.
How are Bitcoin transaction fees calculated?
There is a limit to how many transactions can be processed in one block since a block can hold a maximum of 4 MB of data. More significant transactions will take up more block data, resulting in higher fees per byte.
When sending a transaction using a Tangem Wallet, you can select your fee rate. This rate is calculated in sats/vByte, representing the data your transaction will consume on the blockchain. The wallet will display this option, and the total fee paid by your transaction will be the rate multiplied by the size of your transaction.
Fee estimation algorithms may not always be right. When you need immediate confirmation, it's better to be cautious and pay a higher fee.
How SegWit impacts Bitcoin transaction fees
Segregated Witness (SegWit) is an update to the Bitcoin system that was created to solve several problems, such as making it easier to handle a large number of transactions, reducing the chance of errors in transactions, and improving the network's operation.
SegWit introduced the concept of weight units and the witness field into Bitcoin. Both of these concepts augment the "size" factor we described above. Here’s how SegWit achieves this:
- Weight Reduction
SegWit separates (or segregates) the witness data (signatures) from the transaction data, changing how transaction size is calculated.
SegWit transactions have a "weight" measured in "weight units" (WU), where 1 vbyte is equivalent to 4 weight units. Since witness data is given a lower weight, SegWit transactions effectively become smaller in terms of weight units, reducing the cost per transaction.
- More efficient use of block space
By optimizing the way data is stored in a block, SegWit allows more transactions to fit within a single block. Blocks can hold up to 4 million weight units, compared to the previous limit of 1 MB.
This increased capacity can lead to lower fees, especially during periods of high network activity, as more transactions can be processed per block.
- Lower transaction fees
SegWit transactions are more data-efficient allowing users to set lower transaction fees. For instance, a traditional (non-SegWit) transaction might be 250 vbytes, whereas the same transaction using SegWit might be around 150 vbytes due to the reduced weight of witness data. Paying fees based on vbytes rather than raw bytes means users save on fees with SegWit.
SegWit was introduced in Bitcoin Improvement Proposal (BIP) 141 and implemented in August 2017. It makes important changes to how information is stored and handled in Bitcoin transactions.
Calculating fees with Satoshi per vByte
A "satoshi per vbyte" is a unit of measurement used in Bitcoin transactions to represent the transaction fee rate. It refers to the number of satoshis (the smallest unit of Bitcoin, where 1 Bitcoin = 100,000,000 satoshis) paid per virtual byte (vbyte) of data in the transaction.
- Satoshi is the smallest unit of Bitcoin, equal to 0.00000001 BTC.
- vByte stands for "virtual byte" and is a measure of transaction size, accounting for the SegWit (Segregated Witness) protocol, which reduces transaction size.
Bitcoin transactions have different sizes in terms of data, and these sizes impact how quickly transactions are processed. The term "vbyte" is used to standardize the size measurement, taking into account both the actual size of the transaction and additional factors like SegWit (Segregated Witness) optimizations.
For example, if a transaction fee rate is set at 50 satoshis per vbyte, and the transaction size is 200 vbytes, the total transaction fee would be:
50 satoshis/vbyte × 200 vbytes = 10,000 satoshis
This standardized measurement can help you estimate and set appropriate transaction fees to ensure that miners confirm your transactions promptly.
Tip: Use tools like mempool.space to check the recommended satoshi per vByte rate. For instance, if the recommended rate is 60 satoshi per vByte, you would multiply this by the size of your transaction.
Who sets Bitcoin fees?
Bitcoin fees are set by the network itself, based on supply and demand. Miners choose which transactions to verify and prioritize based on the fees attached.
Why are Bitcoin transaction fees so high?
Bitcoin transaction fees are often high due to network congestion and block size limitations. When the volume of transactions increases, the demand for space in each block exceeds the capacity, leading to higher fees as users compete to have their transactions confirmed quickly.
Even with SegWit (Segregated Witness) enhancements, the effective block size limit still constrains the number of transactions per block. Larger transactions consume more space, demanding higher fees. During periods of high activity, such as market volatility, fee competition intensifies and drives up costs.
The periodic Bitcoin halvings reduce miners' rewards from block subsidies, prompting them to rely more on transaction fees for compensation.
Bitcoin transaction fees chart
A Bitcoin transaction fees chart displays historical data on transaction fees over a period of time. Such charts typically show the average or median fee per transaction, often measured in satoshis per byte (Sats/vbyte).
These resources will help you see and understand trends in Bitcoin transaction fees to make better decisions about when to make transactions and how to manage fees.
When are Bitcoin transaction fees lowest?
Bitcoin transaction fees tend to be lowest during periods of low network activity. These quieter periods typically occur during weekends, early mornings (UTC), and times when there's less speculation or trading activity in the cryptocurrency markets. However, there's no universal rule for when fees are consistently lowest.
How to reduce Bitcoin network fees
To manage transaction fees effectively, consider the following measures:
- Use SegWit: SegWit transactions are more space-efficient, often resulting in lower fees.
- Consolidate inputs: Regularly consolidate smaller inputs into larger ones to reduce transaction size.
- Time your transactions: Send transactions during periods of lower network congestion to save on fees.
- Adopt scaling solutions: Layer 2 solutions, like the Lightning Network, which handles smaller transactions off the main blockchain, can alleviate congestion and reduce fees in the long run.
Will the Bitcoin transaction fee go down?
After the recent halving, the average fees for Bitcoin transactions have decreased significantly. According to data from Mempool.space, medium-priority transactions are now priced at $8.48, while high-priority transactions cost $9.32. This reduction in fees is generating interest within the cryptocurrency community.
How do I set my Bitcoin transaction fee?
Tangem Wallet automatically sets fees based on current network conditions. You can also manually set fees on the send screen, but be aware that very low fees may result in delayed or unconfirmed transactions.
Bitcoin transaction fees on the Lightning Network
On-chain fees are influenced by the size of the transaction data and the user's demand for block space. In contrast, Lightning Network fees are influenced by the value of the transaction sent along the network.
To successfully make payments on the Lightning Network, there must be a direct or indirect route with enough funds available between the payer and payee. If there are only routes with a capacity of 0.5 BTC and Alice wants to send a payment to Bob, she would need to make two 0.5 BTC payments as it would be impossible to pay Bob directly.
Fees on the Lightning Network fall into two categories, but it's important to note that these fees can vary between nodes.
- The Base fee is a flat rate charged per transaction and expressed in thousandths of a satoshi.
- The Liquidity Provider Fee, also referred to as the Fee Rate, is a percentage fee applied to the value of a payment, expressed in millionths of a satoshi transferred.
Node operators on the Lightning Network can set their fees at the level they believe compensates them for locking up liquidity.
Conclusion
Bitcoin fees are the costs of transferring bitcoins (BTC) from one wallet to another. These fees are paid to the miners who verify and record transactions on the Bitcoin blockchain.
Paying Bitcoin fees incentivizes miners to prioritize and verify your transactions, ensuring that your BTC transfer is processed quickly and securely. Bitcoin transaction fees are also non-refundable. Once a transaction is confirmed, the fees are locked in and cannot be reversed.
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