Excessive fees for Bitcoin transactions? This is what exchanges do

Key facts:
  • Binance, Bitfinex and Poloniex come to pay between 3 and 10 times more than necessary.

  • Commission rates increase the averages with exchange overpayments.

Have you noticed that the fees for processing transactions in Bitcoin rise immeasurably and in a short time? In part, it can be caused by a sudden drop in miners ‘ processing power, transaction congestion at a time of high activity, or the exaggerated payment by users of the Bitcoin network: among them, the exchanges stand out.

In a recent report by CriptoNoticias, we revealed how cryptocurrency exchange sites charged very high withdrawal figures so that customers can get their bitcoins (BTC) off the platform.

And although they do so in the name of paying miners, who include transactions in blockchain blocks, those amounts are not necessary to achieve confirmation of BTC sending.

The miners of the Bitcoin network are responsible for including the transactions in each block they find. The fees that are paid to process sending bitcoins go to them. And the higher the commission, the greater the incentive for miners to include the transaction. Having limited information space, each bitcoin block can only contain a certain number of transactions, which they compete for that space based on the fees paid.

Commissions in Bitcoin are measured in satoshis( or sats), the minimum unit into which the cryptocurrency is divided. Namely, each sat equals 0.00000001 BTC. To define the fee for each transaction, you cross the total weight of the information it contains and a rate measured in sats for each vbyte of data.

Even with 1 sat / vbyte, a transaction can be confirmed. In scenarios of total network decongestion, with that rate it is even possible for a transaction to be confirmed as quickly as a higher rate, if there are few pending blocks.

Paying 10 times more than necessary by sending bitcoin

Exchanges like Binance pay commissions well above what the network requires when executing their clients ‘ withdrawals. In the example that we put below, this exchange paid a fee of 100 sats/vbyte, when the average of the block was 20 sats/vbyte and even entered transactions that paid only 3 satoshis for each vbyte.

Binance transaction with rate of 100 sats / vbyte. Source: mempool.space.

In another example, we find this Bitfinex transaction. In it, the exchange paid a fee of 143 sats / vbyte. The block included transactions of even 16 sats/vbyte, and the overall average was 54 sats / vbyte.

We see how, even in a case of higher average commissions, the exchange ended up paying three times more than the average and almost 10 times the minimum rate he managed to get into the block.

In Poloniex, for its part, we found a transaction with a fee of almost 350 sats/vbyte in that same block. In this case, the overpayment was 6 times the average and more than 20 times the minimum rate.

Poloniex transaction, paying 6 times more than the average block. Source: mempool.space.

In theory, a single transaction per block would not seriously affect the average commission. But exchanges move high volumes of money daily, with thousands of transactions. The same address of Poloniex included up to four transactions with a fee above 340 sats / vbyte in that same block, for example. That is, that a moment of high activity on the network, the increase may be more significant.

Some more than others. But most large bitcoin exchanges have this practice of overpaying. We can also see it in exchanges addresses such as Huobi or Bittrex, for example.

However, in the case of Bittrex the payment is not so excessive. The fee paid by the exchange on that transaction was in line with the block average, even if I could have gotten in for 50% less.

Bittrex transaction, according to the average of the block but well above the minimum fee. Source: mempool.space.

How does the exchange overpay in Bitcoin fees affect me?

If you’ve run into excessive fees to send a few dollars in BTC from your wallet, you may be falling victim to fees inflated by exchanges and other users of the Bitcoin network.

Wallets usually set the average to enter the first block to be mined as the highest priority rate. And if he does not allow you to define the commission to be paid, you could be spending a lot more than you should..

For example, at the time of writing there are the equivalent of five blocks of transactions on hold. For your transaction to be included in the first, a fee of 10 sats/vbyte would suffice, at this time. But the average for the next block is about 40 sats / vbyte, as mempool shows.space.

Every transaction like the ones we’ve seen before that exchanges, some individuals and other services that use Bitcoin, make that average go up. And as the minutes pass without the block being mined, more transactions with high fees are included.

Take block 688.887 as an example. The average for that block was 42 sats / vbyte, but 3 sats / vbyte transactions entered that were confirmed. If you sent at the average rate, set by your wallet at the time of sending, you ended up paying 14 times what was needed.

In an average transaction, there could be about 140 vbyte of information for native SegWit addresses, according to mempool.space. At a rate of 42 sats/vbyte, it would be a total of 5,880 satoshis. Today, with the price of bitcoin above $ 31,000, it would be a total commission of $ 1.86. With the rate of 3 sats / vbyte (420 satoshis in total), the rate would be just $ 0.13, the Crypto news price calculator reflects.

Current fee for 140 vbytes transaction at 3 sats/vbyte rate. Source: Crypto News

In times of high congestion, as happened in April of this year, that gap is growing and we could be talking about tens of dollars. Data from Blockchair shows that at that time there came to be commissions of more than $ 60.

When measured in satoshis, fees are also susceptible to bitcoin price fluctuation. Therefore, as the cryptocurrency gains more value in the market, each satoshi spent on commissions represents more money, if its dollar equivalent is calculated.

As we indicated in our previous report, this situation is aggravated in the case of withdrawals of clients from their funds. Exchanges typically charge withdrawal fees well above those needed to issue a transaction to the Bitcoin network. In addition, they end up paying miners less than they charge the customer, so overpaying doesn’t affect them. The client loses by his withdrawal and bitcoin users by the rise of commissions on the network.

In short, the large volume of transactions rising the averages of exchanges affects you as a Bitcoin user and puts a barrier to cryptocurrency for use as a medium of exchange. Would you be willing to pay $ 3, $ 5, or $ 10 commission when it can be done for pennies?

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