What are the Bitcoin fees?

Fees are a payment for the transfer of funds over the bitcoin network and compensate miners for their contribution to the system and protection from double spendings.

The number of transactions that can be included within a block is limited, since it can only weight a maximum of about 2MB. The fee that has to be paid is proportionate to the available space within a block and the size of the transaction, expressed in bytes and is not affected by the amount of funds to be transferred. Depending on the information included, the different operations of a transaction will have a different weight in bytes. For instance, transactions sending more information, such as sending bitcoin to more people at the same time will have a higher weight and will therefore have to pay a higher fee.

The fee market can be  very competitive; since fees are paid to miners, they will prioritize the transactions that pay a higher fee per byte. The higher the fee set and the more likely a miner will include the transaction in a block, confirming it.

The minimum fee necessary to confirm a transaction can vary, depending on the number of people transacting on the Bitcoin network at a specific time. The higher the number of users, the more competition to be included in a block, resulting in higher fees .The optimal fee is usually calculate by your wallet, depending on the level of priority desired. In case of transactions having a higher priority, a higher fee will be set, guaranteeing a faster confirmation.

As an example, we hypothesize that a miner can only include up to 2000 transactions in a block: if there are only 1000 users that wish to transact on the bitcoin network there is minimal competition and all transactions, even those with minimal fees, will be confirmed.

On the other hand, if there are 4000 people that wish to transfer bitcoin, there will be high competition to figure among the 2000 that will get their transactions included within a block. In this scenario, the miner will simply choose the 2000 transactions paying higher fees, creating a sort of auction where all users try to set a high enough commission to be included within a block. This process happen in the background and is not carried out manually by the users. Within each Bitcoin wallet there are specific components, tasked with providing the ideal commission depending on the state of the network at a given time.

The easiest way to use Bitcoin is through an app for smartphone or desktop, called wallet. A bitcoin wallet is an tool to contain your bitcoin, just as a normal wallet is for your cash. Thanks to these apps you can easily exchange bitcoin with whoever you wish.

The confirmations of the Bitcoin network are a necessary process to guarantee the finality of transactions. Once a transaction is sent, it needs to be included in a block to be considered as legitimate and have the guarantee that there will not be any double spending attacks.

The number of confirmations of a transaction represents the number of blocks that have been generated after the block where that transaction has first been included. The more confirmations received by a transaction and the safer it can be considered.

Merchants that wish to accept bitcoin payments can set the number of confirmations necessary to consider a received payment as valid and final, with a trade-off between velocity or security.

Bitcoin mining is a process needed to avoid double spending attempts (i.e. when somebody tries to spend the same bitcoin more than once), confirm transactions and regulate the emission of new bitcoins.

Since the Bitcoin network is decentralized, no central authority can be in charge of confirming transactions, the process has to be carried out in a decentralized manner.

A system of economic incentives guarantees the security of network, as users are rewarded for good behaviour. The blockchain is maintained by miners, providing computational power (with specific hardware) to verify and successively confirm transactions in exchange for bitcoin – an economic incentive to compensate them for the task performed. Through the mining process, transactions are added to the Bitcoin blockchain. This process is fundamental to confirm to the rest of the network that a transaction has taken place and to avoid malicious attacks to double spend bitcoin.

The blockchain is a distributed ledger, shared among all members of the bitcoin network. It is literally a “chain of blocks” and makes it possible to arrange all bitcoin transaction in chronological order. All transactions happening on the blockchain are grouped in blocks, a set of transactions. On average, a new block is added to the blockchain every 10 minutes, through the process of mining.

The main benefit a blockchain is removing any type of intermediary or trusted third party. Since all actors possess a copy of the ledger anyone can do auditing, without having to trust a third party to do so. In this way, it is always possible to be sure that all transactions are legitimate. Furthermore, the ledger cannot be manipulated, as a set of rules and incentives guarantees the cooperation between actors.