The processing of transactions remains one of the crypto world’s biggest sources of confusion. Many people are also unsure about what role miners play in this process. One thing is for certain: miners, airdrops, and migrations can all cause increases in transaction fees.
Here’s a guide to help you understand what happens from when you initiate the transaction to when it becomes part of the blockchain, and how that can affect the fee you pay.
From the wallet to the blockchain
You start the transaction from your wallet app by signing it with your private key. After it’s signed, the wallet app sends the transaction to the node. The node then adds the transaction to its own transaction pool. This is also known as a “mempool.” There is no single transaction pool for the entire network, since every network node keeps its own mempool.
The transaction is now waiting in the pool, and remains unconfirmed until a miner picks it up. Miners select transactions from pools and form them into a block. They also tend to choose transactions with higher transaction fees, since those give them a bigger reward.
Your initial transaction is now in the block waiting to be added to the blockchain. To add a block to the blockchain, the miner first needs to sign it. This process requires a lot of computer power. To sign a block, the miner needs to solve a hash function (mathematical problem), which is unique for every block. A hash function is hard to solve, but the solution is easy to verify. That’s why hash functions form the backbone of proof-of-work blockchains.
Once the miner solves the hash function for its block, they sign the block. The signature is then broadcasted across the network. Other miners must then verify the hash function solution for this block and confirm that the block can now be added to the blockchain. Of course, before that happens, wallet balances corresponding to transactions must also be verified.
When the majority of the miners confirm that the block is valid, it can be added to the blockchain.
Rewards and fees
After the successful addition of the block to the blockchain, the miner gets a block reward. They also get a fee sent with the confirmed transactions inside the block.
The fee you pay is calculated automatically by your wallet. These fees can be static or dynamic. For example, fees for Bitcoin and Bitcoin Cash transactions are dynamic; your wallet calculates the fee after you enter the amount you want to send. Fees do not depend on the amount you send, but by network transaction volume (fee density) and transaction size (length in bytes).
The size of the transaction fee also prioritizes the validation of the transaction. That’s because the miner will always choose the transaction with a higher fee.
Airdrops and the increase of transaction fees
Several other factors can have a large impact on transaction fees. Airdrops are among these factors.
Take the Safex Cash migration/airdrop as an example. The migration from the Bitcoin blockchain to Safex’s own blockchain could actually lead to an increase in Bitcoin transaction fees. Since Safe Exchange Coin was based on Bitcoin’s blockchain, for every one of approximately 10,000 Safe Exchange Coin addresses that need to be migrated to the new blockchain, at least three transactions are needed. In total, the migration will require at least 30,000 transactions. That could be enough to cause an increase in Bitcoin transaction fees across the network.
Coined Times asked Randall Stephens, Crypto blogger, and editor at Cryptpresso.com to share his opinion on this topic, and tell us more about airdrops, and its effect on transaction fees:
During airdrops there can be a raise in their transaction fees to guarantee block inclusion. That’s because miners prioritize transactions with higher fees. During large airdrops, that fee increase can be an additional factor in the overall increase of Bitcoin transaction fees.
As you can see, the transaction process requires multiple levels of verification. There is no room for error. Miners remain a major factor; naturally, they employ their hardware to maximize profits from block rewards and transaction fees.
To be fully prepared for increases in transaction fees, keep an eye on big movements in the crypto world. After all, major airdrops and migrations could mean an increase in fees across the network.