The real cost of Bitcoin transactions is only the mining fee? You are too naive

It seems that the Bitcoin community has not correctly calculated the true cost of Bitcoin transactions.

Many people believe that the cost of a Bitcoin transaction is equal to the mining fee. We will show why this is a wrong calculation, but of course the mining fee is also part of the cost, so we will start with it.

The average mining fee for each Bitcoin transaction is currently between $0.30 and $1. Below are the transaction counts and average transaction fees for the last few blocks.

Block #451871 Transaction Fees $1,287 / 1347 transactions = $0.95 per transaction Block #451872 Transaction Fees $1,649 / 2161 transactions = $0.76 per transaction Block #451873 Transaction Fees $1,497 / 1450 transactions = $1.03 per transaction Block #451874 Transaction Fees $1,209 / 1582 transactions = $0.76 per transaction Block #451875 Transaction Fees $1,591 / 2180 transactions = $0.73 per transaction

Total: $7,233 in transaction fees / 8,720 transactions = $0.83 per transaction

Are such transaction fees "too expensive"? Different people may have different answers, depending on what you use Bitcoin for.

Some people use Bitcoin to transfer "normal" amounts of money (they use Bitcoin as a "peer-to-peer cash system"). I'm not talking about "microtransactions" here, but transactions worth $1-50, which make up the vast majority of human economic activity, and this is also true for Bitcoin activity. A $0.83 transaction fee for a $2500 transaction is not a big deal, but if you're sending a $7 transaction to a friend, it's definitely a big problem.

Regarding explicit miner fees, maybe $0.83 is too high, maybe for some people it is not high. It depends on what the user is trying to accomplish.

But in reality, $0.83 is not the true cost… and this is the point that most observers fail to see.

A better way to calculate the true cost of a Bitcoin transaction is:

Cost = F (transaction fee) + T (time to determine fee) + Ru (uncertainty risk).

How to understand it?

Those who use Bitcoin today pay more than they pay to the miners because they also pay for time and uncertainty (risk). Users often want to change their transaction fees when blocks are full (either before the transaction is sent or after the transaction is sent). Some wallets support this feature, but most do not (and before you vilify wallet creators, realize that "smart fee policies" are far from reasonable and are constantly changing.) So in addition to the $0.83 miner fee, currently users must also take the time to determine the transaction fee.

A Bitcoin veteran can quickly figure out the right transaction fee, but Bitcoin is not just for those who are very familiar with the platform. If that is the target market for Bitcoin, then the project is doomed. Fee calculation is cumbersome for the average user (I have been using Bitcoin for nearly 6 years, but I am not the most elegant when it comes to fee calculation).

Many regular Bitcoin users are confused about how fees are calculated, and they don’t even bother to try, or go to /r/bitcoin to ask for advice.

Take a look at this comment on Reddit, where a user questioned transaction delays and fees:

We should realize that for a regular Bitcoin user (i.e. someone who is not tech-savvy and wants the system to be convenient and easy to use), this can be tricky and confusing.

At least this comment is helpful, and many users will get a response similar to this:

Holy shit. How miserable are users like /u/MinersFolly, and how amazing it is that Bitcoin still attracts them.

So, back to our equation, the true cost of the trade is $0.83 (maybe?) + the time to determine $0.83 + the risk of uncertainty.

What do I mean by uncertainty? Well, even if a user calculates a reasonable fee, he has no guarantee that the transaction will be confirmed in the next block. Using the recommended fee does not guarantee the confirmation time of the transaction.

Here is a frustrating true story that happened in the real world:

A few months ago, a bunch of friends and I wanted to play Civilization VI on a LAN. One of the guys didn't have it, so I bought it for him on Steam (which accepts Bitcoin!). I used BitPay, and then I waited for confirmations, and waited ...

Some people in the community found out about this and commented, “Uh, what’s the big deal?” Or someone would respond, “Wait two more years for Lightning!” Great, tell me to do that next time when I buy Civilization VII.

Back to the present… Due to the uncertainty faced by the user, the following happens:

1. The user is annoyed by the delay, or actually suffers some kind of economic loss, or:

2. Because of time constraints, users cannot use their Bitcoin at all in this transaction, and they cannot take that risk.

A user who became interested in trading Bitcoin (because some claim that Bitcoin is the future of money!) found that his transaction was stuck in the mempool for 33 hours... If this user can give Bitcoin another chance, we can call ourselves lucky.

Transaction fees + time + uncertainty risk (F+T+Ru). Since time and uncertainty risk are unmeasurable, it seems that most engineers in the industry have chosen to completely ignore them. These costs are even more obvious to economists, and any business that interacts with actual users will feel them the most (which is why almost every Bitcoin business with more than 10,000 users is eager to see the implementation of Segregated Witness and hard fork block size expansion... but that's another topic).

As the Bitcoin block approaches fullness:

1. Mining fees are getting more expensive;

2. The time to determine costs will go up;

3. The reliability of transactions will approach zero (the first confirmation has the risk of being delayed, even if a "reasonable fee" is given)

Many people only consider the first point.

Recently, the average fee for Bitcoin transactions has returned to $0.30 per transaction, and some people have made unpleasant voices: "Transactions are cheap, you can't expect the system to be free!" These people don't understand the problem, and this idea is harmful to the prospects of the Bitcoin project. Mining fees are only part of the user cost, and if people's time and mental health can be measured by value, mining fees are a smaller part of the cost.

Is Bitcoin a "payment system" or a "settlement system"? Let's put an end to this silly false dichotomy. This classification is a relic of the fiat banking network, and it does not apply to blockchain assets. The fact is this: every payment in a blockchain network is a settlement process, and the cheaper these transactions are, the more widespread adoption the platform will find, which means greater utility, a wider and more dispersed user base, and a higher market cap, more liquidity, and therefore more computing power, making Bitcoin more secure.

If Bitcoin transactions are too expensive (think F+T+Ru), people will move to other platforms for some or all of their economic activity. As I tweeted yesterday, I find myself now holding a modest amount of ETH, just to pay friends (not micropayments). ETH transaction costs are lower and confirmation times are more reliable. And the person I do this with is more loyal to Bitcoin than anyone on the planet, so for ordinary people, how can a platform that can't help them be worth their dedication?

Some people will respond by saying, "Well, bye then," and that person is arrogant, naive, and a common disease in the business world: not listening to or respecting customers. Of course, they are free to have that feeling, just as they are free to end up on a deserted platform.

Now, obviously blockchains can’t (and shouldn’t) process all of the world’s transactions on-chain, but that doesn’t mean we shouldn’t do what we can to get as much of the transaction share as possible. This is a platform that’s all about network effects, after all. Just because the Bitcoin blockchain can’t process Visa-level transactions on-chain doesn’t mean we should get comfortable and complacent with today’s threshold of around 5 tx/sec, especially during Bitcoin’s formative years when the world is still watching and waiting to see if Bitcoin can become the money protocol of the future (those who assume Bitcoin’s superiority is inevitable are equally arrogant).

in conclusion

The community needs to take the full block problem seriously, many people don't take it seriously, saying stupid things like "rising fees are just a free market result", of course, when users leave Bitcoin (because their first transaction was annoyingly unreliable and they never make a second transaction), their choice of alternatives is also a free market result. Our goal should be to do everything possible to make Bitcoin more economical and efficient, because if we don't, it will leave a huge opportunity for Bitcoin's successor. Bitcoin is a free market currency, it will encounter competition, and it must be competitive.

As the real cost of Bitcoin transactions is rising and marginal utility is declining, the platform's fundamental value as a tool for human economic interaction is also declining. Reducing the number of Bitcoin applications will also reduce the number and quality of people willing to hold Bitcoin.