Bitcoin network fee: how is it calculated?
Network fee is a small amount of coins charged by a blockchain for each transaction. In Changelly, the network fee is taken when we send coins to your wallet after exchange. If the amount is too low to cover the fees, a transaction will fail. In this article, we will explain how the Bitcoin network fee is calculated and why you should be concerned about it.
How do I send Bitcoin?
Let’s consider an example of sending process. Depending on your wallet type, you can set the network fee manually or choose the processing speed, whether it’s slow, medium or fast. These preferences will determine the fee to be automatically excluded from your balance. This feature is called a ‘sender-pays-fee’.
You send, say, 0.01 BTC to Changelly’s address and manually set the fee of 0.0008 BTC. This is an average fee for fast transaction processing. In this case we will receive from you only 0.0092. If you want so send the accurate amount, you should include the fee into it.
However, if your wallet by default deducts the fee from your balance, you don’t need to include it into the amount to send.
Changelly suggests you to carefully check the blockchain state before buying the coin. If the number of pending transactions is over 50 000, you should set you fees higher.
What about Changelly?
If you buy Bitcoin on Changelly, we surely extract the fee from the final amount. This fee is fixed – 0.00085 BTC. For this reason, you will get the amount less than the final figure stated in the receipt. For example, if it’s stated that you received 0.01 BTC, in fact you will get only 0.00915 BTC. To send coins quickly, we automatically combine recipient addresses with a range of others into one transaction using a dynamic fee divided into the number of the addresses. This is why in some cases while checking the hash you can see a wide list of other wallet addresses in the block explorer.
Mining and rewards
So how the fee is calculated? Blockchain is a complicated registry system containing all the transactions that ever took place. This is an entire network that belongs to no one but needs to be revised 24/7. This is what mining does. Mining is a process of calculation and adding blocks with transactions to the blockchain. Once a transaction gets into it needs to be confirmed. You see money reflected in a wallet only if a transaction is confirmed in the blockchain. The whole process is maintained by thousands of computers connected to the Bitcoin network. They decide which transactions are to be included/rejected and in what order.
The computing power contributed into the mining process needs to be rewarded, otherwise it would be senseless. This is you who set the reward for miners. The higher the fee in comparison with other transactions, the more prioritized your transaction gets and the faster it goes through. This nuance is crucial whenever a blockchain is overloaded since a transaction may stick for weeks if the fee is low.
Transaction size and block space
For better understanding, consider blockchain as a cellular system. Each cell consists of information. The more information transaction in the block takes, the more fees it requires. In other words, you ask miners for processing your transaction by rewarding it. Depending on the blockchain state, if the fee is acceptable, miners ‘buy’ it and process the transaction. With Segwit implemented, the size of the information to be included into a block is increased up to 4 megabytes which makes the process more cost effective.