Bitcoins, the anonymous and decentralize crypto-currency, is wildly used across the internet for online purchases and monetary transfers. It is generally seen as safe and secure, and a relatively easy process for people to go through in order to send money. However, there are some caveats associated with the sending of bitcoins, one of them being transaction fees associated with the sending of bitcoins from one address to another.
Transaction fees are associated with any sort of movement of a bitcoin from one individual to another. It is “voluntary”, depending on many different factors, and usually amounts to less than 40 cents. It is a bit confusing as to how this system actually works and is managed, so it is important to start from the beginning of a bitcoin in order to understand it fully.
People use installed software on their computer in order to “mine” bitcoins. Essentially, people spend computational power, and are then compensated in bitcoins. The higher the amount of computational power expended, the higher the amount of bitcoins you receive from the network.
When mined, the users who initially receive these bitcoins can place the fee on them that is to be accounted for whenever that specific bitcoin or fraction of a bitcoin is sent throughout this system. This process was set up in order to encourage individuals to mine more bitcoins, spurring the generation of bitcoins within the blockchain. The fees act as incentives for the economy built on bitcoins to thrive and continue.
The next logical question to ask, then, is that how does the network know how much to charge for a transaction fee if my wallet is made up of many different miners bitcoins, all of which might have different fee amounts associated with them? The simple answer is that your wallet generally decides which bitcoin to be applied to the transaction for you.
Wallets are software that display the amount of bitcoins an individual has, and the past transactions that have resulted in the user having those bitcoins. However, wallets aren’t actually one giant “pile” of bitcoins, instead, they act as a list of bitcoins sent to the user the user now as access to. For example, if a user is sent two different amounts of bitcoins, such as 4 and 3, the user doesn’t have 7 bitcoins. Instead, the user has access to two different entries of bitcoins. This is different than a physical wallet, where all the money that is entered into it is essentially part of the same amount.
When attempting to send money, the wallet tries to find the most closely linked amount to what you are trying to send. In a way, the wallet is autonomously playing a game of “Which piece fits best” with itself in order to pick out which bitcoin amount to send.
There are additional methods followed by the wallet in order to specify which packet of bitcoins to send. For example, wallets demonstrably prioritize the sending of older bitcoins over newer ones. In addition, wallets try to send the highest denomination of bitcoins before the smallest. Following these qualifiers, there are technical details that follow that determine whether or not a fee is paid.
Specifically, the sum of the age multiplied by the size of the block, divided by the total size of the transaction is used to determine whether a fee is applied to the sending of bitcoins. If that answer is less than a specified amount, a transaction will require a fee, otherwise, there is no fee attached. This means that the older and higher valued the bulk of the packets sent in the transaction are, the lower the chances are that you will have to pay a fee to send the bitcoins.
After the individual bitcoins are decided on, there are still other factors that qualify whether or not the transaction is free. For example, if the total size of all inputs is less than a certain amount (10,000 bytes), the transaction is still free. However, in any other case, a new fee is required.
The fee for the second step is calculated by kilobyte, and is assesses as .0001 per kilobyte. An important piece of information is that when a fee is assessed based on the size of the transaction, here listed as the second step, it overwrites any fee designated by the first step. For example, a user won’t be taxed BOTH because he is using new coins and he has a high kilobyte count. Only the fee based on size will be factored in.
Overall, transaction fees for bitcoins are a complex subject. They are assigned by and given to the original miners in order to provide incentive for the economy to prosper. They are applied depending on the bitcoins used, are are usually less than 40 cents.