Continuing our series of articles on the core principles of working cryptocurrency. Today we will get down to direct definition of how the distribution network works. This network ensures the functioning of any cryptocurrency. Here, we will use bitcoin as an example.
When you want to send anyone a payment in bitcoin to sell bitcoin for fiat money or send anyone payment in bitcoin, first you should get into your bitcoin wallet. This may be a local wallet, stationed on your computer and working with a certain installed client app, as well an online wallet that does not require any means of usage beyond your browser. The latter are presented as special services on the internet, offering storage and transfer of your cryptocurrency. This can also be a hardware wallet in form of a specialized device separate from the computer, maintaining the local wallet. The most reliable hardware wallets are offered by KeepKey, Ledger and Trezor.
For the sake of our example we’ll take an online-based wallet which is the easiest to work with for a new user. You start by logging into the service that allows using bitcoin wallet. This can be cryptocurrency exchange or a more narrowly functioning service. Mind that not all of these services are trustworthy, to which we will return later. You choose the addressee in the sending form – you choose the id of another bitcoin wallet that the received was supposed to tell you and set the sum for transfer. After that comes the most difficult part – you have to set the commission (i.e. “miners’ fee”) that you agree to pay for transferring your transaction.
Due to a limited size of the block (1 megabyte) not all the issued transactions can be registered in one of the closest blocks. Considering the fact that the passthrough capacity of the network amounts to only a few thousand transactions every 10 minutes in the best case scenario, it’s safe to assume that bitcoin senders compete among each other. Those who pay a sufficient fee to include their transfer into the block – win. Their bitcoin payments get to the receiving party as soon as the aforementioned block is calculated. This event is called “getting the confirmation” for the given transaction. The first confirmation is the most important which is why it needs high commission attached to your bitcoin transfer. Getting the 2nd confirmation, the 3rd one and so on after getting the first one is practically guaranteed and inevitable after a brief moment of waiting.
What amount of commission would not suffice for the specific transaction? This depends on the level of current load in the bitcoin network. Simply speaking, the more transactions awaiting for confirmation, the higher the fee requirements. Also the size of the specified transaction. It is determined by the number of, say “inputs” and “outputs” and fluctuates from 300 bytes to a few kilobytes. It’s important to note that there is no direct connection between the transferred sum and the size of transaction. Even transferring bitcoin worth thousands of dollars can cost less than one dollar in case of a low transaction size. The opposite would be correct as well: in case of a huge transaction size in bytes, the required payment to miners can surpass the transferred amount in case it’s low, sometimes in several times. This is mainly crucial for those using bitcoin faucets. The large amount of tiny transactions in their wallets leads to an insurmountable size of any of their transactions. Even for a small amount.
What would happen if the commission that was “attached” to user’s transaction turns out to be temporarily insufficient for payment of the specified size. The user will have to wait until the network load drops and all this time, that often amounts to multiple hours, the transferred sum is already missing from the sender’s account and not yet available to the receiver. Worst case, the network will not accept the bitcoin transfer and then the sum will go N/A for a few days. Afterwards it will be returned to the owner. There is an option to push through jammed transfer but this demands additional expense and special knowledge.
In the online wallets you can usually set the commission paid for sending your transfer. However, without special insights it’s hard to evaluate the fitting amount of commission for each transaction. The commission described in the interfaces of online wallets as recommended, in practice turns out obsolete and disconnected from the spiking workload of bitcoin network. The growing array of problems with passability of bitcoin transactions is conditioned by the fact that regular bitcoin users can no longer rely on commissions, recommended by most services. The only thing left is just setting very high commissions (approximately a few dollars), or sending bitcoin from services that dynamically follow the amount of commission and set exactly the one that is needed for the given time and transaction. It should be said that the EXMO exchange both meets the latter requirement and charges its users for the fixed commission of 0.001 BTC for withdrawal of any amount of bitcoin, regardless of the actually required commission. Even if it greatly exceed the 0.001 BTC. This way, the aforementioned issue of difficult commission choice at EXMO is devoid of any hardships. All you need for withdrawal is setting the needed wallet id and the sum. As for withdrawing other types of cryptocurrencies, the situation is all the same. The exchange is charging the sum with a fixed commission
and you no longer need to worry about regulating it on your own. By May 2017 the usually required commission amounts to 200-250 satoshi/bytes.
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Additional materials that may help you:
Cryptocurrency: Where to start? Pt.1 – Introduction
Cryptocurrency: Where to start? Pt.2 Technical side of the coin
What are the pros and cons of investing into cryptocurrency
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