Thread by @JohnCantrell97

You’ve probably heard Bitcoin lets you send money for free. You’ve also probably heard Bitcoin transactions are too expensive.

What’s going on here and why is there so much confusion around the cost to send Bitcoin? It’s kind of complicated, so let me break it down for you 👇

Technically it’s possible to make a Bitcoin transaction for free but in practice it’s really difficult. There’s nothing stopping miners from including transactions that do not pay a fee but most nodes on the network won’t relay transactions with a fee under a certain amount.

This means you either need to be a miner or somehow send your transaction directly to a miner. The latter case is still unlikely to work unless the miner is your friend because miner’s are incentivized to include transactions that pay them the most in fees.

Ok, so we’ve gathered that you almost definitely will have to pay a fee to send Bitcoin but how much is the right amount? You might think the fee should be correlated to how much money you're sending but in Bitcoin it’s actually based on the size of your transaction in bytes.

Why is that? Well, there’s sort of two related reasons...

First, each transaction consumes bandwidth, cpu, and storage proportional to the size of the transaction. Your tx needs to be sent to, processed, and stored forever by every node on the network. Resources cost money, so the more your tx uses the more you should have to pay

Second, there’s a limited amount of space in each block. This means each participant should pay a fee proportional to the amount of space they use up. If Alice’s transaction consumes 10% of the block and Bob’s only consumes 1%, it wouldn’t be fair if they paid the same in fees

Ok, so what determines the size of a tx? Well a tx is largely made up of a list of inputs ( what coins are being spent), signatures proving ownership of those inputs, and a list of outputs (where and how much to send). All of these factors contribute to the size of a tx.

Some wallets allow you to manually select how many and what inputs are used in your tx. Typically you’ll have two outputs. One for the recipient and one for the change. It’s possible to have just 1 input and 1 output if you are spending an entire output (minus miner fee).

Prior to segwit activation in 2017 all bytes of the tx were counted equally towards the total size. Segwit included a 25% discount on the witness bytes of a tx. What are witness bytes? A simplified answer is it’s the proof you provide that you own the coins being spent.

Ok so what does this practically mean for you? All it means is you can save some money on fees if you send money from native segwit addresses (hint: they start with bc1). Now we know fees are proportional to tx size and we know how tx size is calculated but how do we pick a fee?

We know there is limited space in a block and that miners are incentivized to include transactions that pay the most per unit of space (bytes). The more satoshis we pay per byte of our transaction the more likely a miner will be to include it in a block.

The default min fee most nodes will relay is 1 sat per byte. This is a great fee to use if you are not in a hurry. If you need the tx to confirm within a certain amount of time then you need to see how many people are making transactions and how much they are paying on average.

How can you get this info? Most wallets will estimate the going rate for you but my personal favorite way is to use the app built by @mempool

You can get great estimates for what fee rate you should use depending on how fast you want your tx to confirm.

I hoped this helped you gain a better understanding of how fees work and a little bit about why they work the way they do. If you want to learn more about how Bitcoin works then make sure to follow me. I write daily threads where I try to explain one concept in simple terms.