When a user wants to make a transfer on the Bitcoin main chain it is necessary to pay a transaction fee. In this article we are going to explain why do we need transaction fees, why recently there was a spike in fees and how to manage your fees with Hodl Hodl.
Why do we need transaction fees?
Bitcoin fees serve a few purposes. First of all they are a reward for miners who dedicate computational power to add transactions to the blockchain. In a distant future when all bitcoin is mined, miners will heavily rely on transaction fees to cover their operational costs. It’s important to note that fees are not set by a central authority but are determined by market forces within the Bitcoin network. Users can choose to set their transaction fees based on their preferences for speed and cost. Higher fees typically result in faster transaction confirmations because miners are more likely to include them in a block.
Secondly, transaction fees motivate more miners to join the network making it more decentralized and more resilient to attacks. Simply explained, the profit model for bitcoin miners is a difference between mining rewards and the cost of electricity. Hence if transactions are getting more expensive, it helps a miner to earn more bitcoin.
Thirdly, fees prevent spam or malicious use of the network, making a sustained attack on Bitcoin expensive and not very efficient, as an attacker will have to buy bitcoin in the first place, and by doing so will increase the price of the asset. Moreover, it will push more users towards side chains and second layer solutions like Liquid and Lightning, while creating urgency for developers to optimize for more efficient use of limited block space.
Lastly, fee structure is de facto working as a network congestion management mechanism that encourages users to use the network more efficiently with batching their transactions and choosing the right timing for their transfers.
Why the fees are so expensive now?
At the time of writing high priority transfer will cost a user 21,52 $, so it is normal to wonder what exactly has caused this spike in fees. The answer is inscriptions (check the picture below).
Some people figured out a variety of ways to use Bitcoin as a decentralized database storage to create, store, buy and sell so called NFT’s. It so happened that there are people incentivized to pay high fees to mint tokens, because of a new hype that has created a demand for “digital art”. And in case you are not using Twitter, you might not know that there is a heated debate now whether Bitcoin should be used solely as a monetary network, or it can be used for any purpose it may be fit, such as storing arbitrary data. Regardless of what camp you are in, due to the high fee environment we are already seeing more transactions on a Liquid side chain, and new comers are learning about utxo consolidation and second layer solutions.
How to manage transaction fees with Hodl Hodl?
When using Hodl Hodl it is possible to set any custom fee rate for a transaction. Please make sure that you understand the implications associated with choosing the fee yourself. Transactions with a low fee can be stuck in a mempool for a long time, and in the opposite case you might pay an extremely large portion of the purchased bitcoin in fees.
To select your fee rate click on your nickname, select dashboard and go to the settings. Scroll all the way down and select your preferred fee. We also have an option of high, medium or low fees based on the state of the network, it is a safer option for inexperienced users.
An additional key consideration is that while the mempool calculates fees by assessing the current state of the network and presents it in sat/vB, Hodl Hodl estimates the overall cost as sat/vB multiplied by the transaction size. Furthermore, miners have different templates for the next block, each transaction has its own weight, and individual blocks are mined with unpredictable timing. Hence achieving precise fee rate estimations proves to be a challenging task.
Last words
It is worth noting that discussions about high fees and possible solutions are cyclical in nature. Previous spikes encouraged more businesses to adopt Lightning network, they pointed out necessity in understanding coin management and motivated users to look into different scaling solutions. Like an old saying goes: high fees create efficient uses of block space, efficient uses of block space create low fees, low fees create inefficient uses of block space, inefficient uses of block space create high fees.
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