How can you reduce your bitcoin transaction fees?

How can you reduce your bitcoin transaction fees?


The number of daily Bitcoin payments reaches a new all-time high — while the MemPool remains surprisingly quiet. The reason for this is the increasingly efficient use of space on the blockchain through batching.

Despite its ever-stronger status as digital gold, Bitcoin remains first and foremost a payment system. And a payment system can be judged by how many payments it processes. Accordingly, it fits well with the all-time high of the price that the number of payments has also reached a new all-time high.

However, you have to search for a while to find this all-time high in the charts. Suppose you look at the number of daily transactions, for example, on blockchain.com. In that case, you will encounter disillusionment: With 401,000 daily transactions, there was a small peak on January 7, but the value is still a decent distance away from previous records, such as on May 2, 2019, with more than 450,000 transactions.

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Why has bitcoin nevertheless reached a new record in daily payments?

Anatomy of a transaction

To understand this, you need to visualize what a Bitcoin transaction is like. Bank transfers have a sender and a receiver, which technically could be called input and output.

Bitcoin transactions, on the other hand, have any number of inputs and outputs. It’s called a “UTXO” system: when you form a transaction, you take a certain number of coins, melt them down, and use them to start the outgoing coins. There’s a coin press in every transaction.

So a single transaction can have multiple outputs and thus numerous recipients. Since it doesn’t make much sense, and is also very impractical, to accept payment in the form of numerous coins, we can roughly assume that each transaction’s output represents one payment. From this point of view, one recognizes the number of daily expenses not by the number of trades but by the number of outcomes.

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https://transactionfee.info/charts/payments-per-day/

This is exactly what Transactionfee.info does to plot a chart of daily payments. And this chart reached a new all-time high on January 9 with almost 800,000 prices.

More and more payments per transaction

So, it can be observed that Bitcoin is processing more payments while transaction volume remains constant. Individual transactions contain more charges and thus more outputs. This can also be demonstrated in statistics.

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Payments or outputs per transaction. Source also transactionfee.info.
At the beginning of 2020, a transaction contained an average of 1.5 outputs. Today, the figure is around 2.2, an increase of almost 50 percent.

The main driver of this development is so-called “batching” by platforms such as exchanges. Instead of processing each payout immediately, they collect them to accommodate a whole batch of payments in a single transaction. This, as we will see later, saves significantly more fees than one might suspect at first glance.

So Bitcoin is scaling inward rather than outward: instead of taking up more space, it uses space more efficiently. You could compare it to putting more seats on a bus instead of building a giant bus, or compressing files instead of adding a new hard drive.

The relaxed MemPool

All of this works surprisingly well. The MemPool of unconfirmed transactions remains calm despite the hype and the bubble.

At the end of 2017, when there was the last big bubble, it looked quite different. At that time, the rise in price was accompanied by at least as much rise in fees. At times, it cost more than $50 to send a simple transaction. A fee bubble is currently manifesting itself on Ethereum and catapulting the price of simple transactions to more than $10, while more elaborate smart contracts sometimes cost $100 or more.

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Fees per transaction. Source: blockchain.info

For Bitcoin, on the other hand, the situation is very relaxed, given the circumstances. The blockchain is indeed becoming fuller, as evidenced, for example, by the fact that the size of the blocks is also reaching an all-time high of 1.3 megabytes on average. But those who are not in too much of a hurry can get by well at this moment with a fee of around 90 cents; those who want their transaction in the next block have good prospects with a cost of approximately 5 euros. Even in the busiest moments of the past few weeks, it never got much more expensive. Those who postpone their payment until Saturday or Sunday can also get away with 20–30 cents.

Simultaneously, the volume sent per transaction has become significantly higher, as a chart from Bitinfocharts.com shows: While it was just over $100,000 in December 2017, it is now well over $200,000 (another all-time high on a 30-day average, by the way!). This means that the fees are still a bit more moderate about the amount sent.

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The MemPool of the last 30 days in Jochen Hoenicke’s visualization

All this assumes, of course, that one sends “simple” transactions that issue a single input. Those that give multiple inputs quickly multiply the number of fees.

This cries out for an explanation, doesn’t it?

Why inputs are so much more expensive than outputs?

As mentioned, an input is a “coin.” For example, if you send 0.001 bitcoin (about 30 euros) to my address, bc1q4z2pld66zl3t5xeu8kj2puxp4fvl5avpjy52nf, the amount will be in my wallet as a 30-euro coin. After that, if someone sends another 0.0005 bitcoin to the same address, it will be in my wallet as a second coin.

If I subsequently pay for something with Bitcoin, I can spend a single coin for amounts up to 30 euros. One input, low fees. However, if I pay more than 30 euros, I have to merge the two coins. Two inputs, higher fees.

Unlike outputs, each input requires a signature. The owner of the coin must prove that he owns it. Therefore, he must sign the transaction with the key associated with the coin. And these signatures make up a large part of the data in a transaction. On the other hand, the output is just the info about the next owner of that coin.

Some examples: A standard transaction with one input and two outputs is 220 bytes in size. If you increase the number of outputs to six, the size only increases to 344 bytes. If, on the other hand, the transaction contains two outputs and six inputs, it is 960 bytes in size. The logic is easy to see: More outputs increase the transaction size only slightly, while more inputs increase it enormously.

The effect of batching is correspondingly large: If an exchange sends five standard transactions with one input and two outputs each, it must sign five times and therefore requires a total of 1100 bytes. If, on the other hand, it sends only one transaction with one input and six outputs, it has to sign only once, which is why it uses only 344 bytes. That is not even a third.

The costs for transactions thus decrease when users use a platform that bundles transactions like Bitcoin.de. In principle, all media that manage coins for their users can offer such a procedure. Despite the reasonably widespread use of batching, there is probably still room for improvement in this regard — which is a pretty good prospect for the scaling of Bitcoin.

AO/X Staff
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