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Cryptocurrency : 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 rise above averages with exchange overpayments.

Have you noticed that the fees to process transactions in Bitcoin go up disproportionately 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 charge very high withdrawal figures for clients to be able to withdraw their bitcoins (BTC) from the platform.

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

The miners of the Bitcoin network are in charge of including the transactions in each block they find. The fees that are paid to process the shipment of bitcoins go to them. And the higher the commission, the greater the incentive for miners to include the transaction. By having limited information space, each bitcoin block can only contain a certain amount 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 in which the cryptocurrency is divided. Namely, each sat equals 0.00000001 BTC. To define the fee for each transaction, the total weight of the information it contains is crossed 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 decongestion of the network, with this rate it is even possible for a transaction to be confirmed as quickly as one with a higher rate, if there are few blocks pending.

Paying 10 times more than necessary by sending bitcoin

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

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

In another example, we come across this Bitfinex transaction. On 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 house ended up paying three times more than the average and almost 10 times the minimum rate that managed to enter the block.

In Poloniex, for its part, we found a transaction with a rate 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 block average. 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 rate above 340 sats / vbyte in that same block, for example. That is, at a time of high activity on the network, the increase may be more significant.

Some more than others. But most of the big bitcoin exchanges have this practice of overpaying. We can also see it in the addresses of exchanges 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 in that transaction was in line with the block average, although I could have entered for 50% less.

Bittrex transaction, in line with the block average but well above the minimum fee. Source: mempool.space.

How does the exchange overpay in Bitcoin fees affect me?

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

Wallets usually set the average rate of highest priority to enter the first block that is about to be mined. And if it does not allow you to define the commission to pay, you could be spending a lot more than you should.

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

Every transaction like the ones we have seen previously made by exchanges, some individuals and other services that use Bitcoin, causes that average to rise. And as the minutes pass without the block being mined, more transactions with high fees are included.

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

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

Current rate for a 140 vbyte transaction at a rate of 3 sats / vbyte. Source: CriptoNoticias

In times of high congestion, as happened in April of this year, that difference is increasing and we could be talking about tens of dollars. Blockchair data shows that at that time there were 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 equivalent in dollars is calculated.

As we indicated in our previous report, this situation is aggravated in the case of customer withdrawals of their funds. Exchanges often charge withdrawal fees well above those required to issue a transaction to the Bitcoin network. Also, they end up paying the miners less than what they charge the customer, so overpaying does not affect them. The client loses due to their withdrawal and the bitcoin users due to the increase in commissions on the network.

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

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