How To Reduce Your Bitcoin Transaction Fees

How To Reduce Your Bitcoin Transaction Fees

Miners tighten their belts

The big moment long awaited by all bitcoiners has finally arrived. We officially entered the fourth era of Bitcoin after the third halving occurred as expected in block number 630,000. This means that the reward guaranteed by the protocol associated with the discovery of a block by a miner is now 6.25 bitcoins, a 50% drop from the previous 12.5 bitcoin reward.

Minors will therefore have to tighten their belts knowing that overnight their income has been considerably reduced. Fortunately for minors, they are also rewarded by the transaction costs of users who wish to use the block space to put information there, more precisely transactional information which makes it possible to trade bitcoins from user to user. another. Fees are paid in satoshi / vbyte. That is to say, a Bitcoin user will pay satoshis (one hundred millionth of a Bitcoin) depending on the space their transaction takes in a block. The rate in satoshi per vbyte can vary greatly depending on the demand and the number of users who want to trade Bitcoin at a given time.

All users therefore enter a higher bid to be included in the next blocks by the minor who completes it. This competition can lead to a substantial increase in fees. We had the perfect example during the frenzy of 2017 when the average transaction cost exploded, reaching more than 50 US dollars.

The great transition

At the moment the proportion of income from transaction costs is quite small. However, this will inevitably have to grow over time in order to gradually replace the protocol award. This will ensure that a large number of professional miners continue to contribute to network security in the form of proof of work. In addition, with the growing number of Bitcoin users, block space will naturally become more scarce and precious, as more people will want to trade on average.

Knowing that transaction costs are destined to increase, what can you do as a user to minimize your transaction costs? The savings may seem minimal at the moment, but each satoshi is precious and worth keeping. Follow the list of recommendations below to find out!

Recommendation # 1 Understand the concept of mempool

Do you remember the overbidding we discussed above in which users take part in order to be included in the next block? Well, every transaction that a user creates ends up in a virtual auction house called "mempool". Each transaction therefore has an associated transaction fee and is presented to minors for possible selection. Obviously, the limited space of the block means that the minor who finds a valid block only includes those transactions which offer the highest transaction costs, the other transactions remaining pending.
To save transaction costs and not overpay, just consult a graph showing you what is the minimum sat / vbyte fee for a transaction to be included in the next block. Any charges that appear at the bottom of the line illustrating the maximum space of a block will most likely be accepted in the next block. Obviously, if you are not in a hurry, you can set a much lower fee and the transaction will eventually be selected when the mempool decongests.

Recommendation # 2 Use a wallet that supports SEGWIT and RBF

In recent years, several protocol implementations have optimized the use of Bitcoin by making transactions more compact and light in terms of the space they take up in a block. One of these famous implementations, which was at the heart of great debates on Bitcoin scalability in 2017, is called Segwit. The technical complexity of the implementation is beyond the scope of this article. Simply put, this technique allows you to extract part of the information from a standard transaction and transfer it to a new section called "Witness". Segwit therefore makes it possible to reduce the size that a transaction takes in a block and consequently reduces the transaction costs associated with it. The address format resulting from this implementation is called bech32 and Segwit transactions will start with the characters bc1.

RBF is an acronym meaning “Replace by Fee”. It’s a feature that was also developed a few years after Bitcoin was phased out. It is a practical tool which allows you to modify the cost of a transaction which you have already initiated and which is pending in the "mempool". If this is not included quickly enough for your taste, you can increase the transaction costs. You therefore have the choice of always paying a minimum fee without worrying that your transaction remains blocked for hours and only increasing the fee if necessary.

You now know what to look for, however not all wallets offer these features. To check if your favorite wallet supports these or if you are looking for a wallet, check out this Bitcoin software wallet analysis by CANEMER.

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