Transactions on Steem vs Bitcoin. Part 1. How Steem Platform Has Solved the Issue of Transaction Fees

The Bitcoin network, just like many other blockchain networks, has transaction fees. Fees on the network are not mandatory. Users can choose to include or not include a fee with their transaction. However, for a transaction to go through, it needs to become a part of the Bitcoin blockchain. For a transaction to become a part of the Blockchain, a miner needs to include the transaction into a block of the Bitcoin blockchain. Just like users of the Bitcoin network do not have to include a transaction fee, miners on the Bitcoin network can freely choose which transactions they include into the blocks of the blockchain that they create.

 

Bitcoins as rewards for mining blocks on the Bitcoin blockchain

Bitcoin miners get rewards for creating blocks of the Bitcoin blockchain. This is how the Bitcoin network adds Bitcoins to circulation.

As of January of 2018, the Bitcoin network had over 500,000 blocks. You can see how many blocks the network has as you are reading this article by visiting Bitcoin block explorer at https://blockchain.info/

The reward for blocks 1 through 210,000 was 50 Bitcoins per block. It then divided in half and was 25 Bitcoins for the next 210,000 blocks. In July of 2016, the reward became 12.5 Bitcoins. The reward will keep decreasing until the Bitcoin network creates 21 million Bitcoins.

You can see how many coins the network has in circulation as you are reading this article, what percentage of Bitcoins have already entered the circulation and the estimated date of next reward decrease by visiting http://www.bitcoinblockhalf.com/

The Bitcoin network went live in 2009, right after the world financial crisis of 2007/2008. During the crisis, many governments all around the world decided to print more money to bail out banks, insurance companies and other big players in the financial industry. Fundamentally, this meant shifting the responsibility for the mistakes of several large corporations onto the shoulders of taxpayers. With Bitcoin, Satoshi Nakamoto wanted to create a currency in which such a scenario is not possible.

 

Coin supply and fees on the Bitcoin network

The Bitcoin network is decentralized, meaning that anyone could become a miner and start creating blocks on the Bitcoin blockchain. The number of Bitcoins is also limited. The network can only create 21 million Bitcoins. This way, everybody knows how many coins the network has in circulation and nobody can decide to print more money simply because they want to.

The idea of Satoshi Nakamoto was that once the network issues all the coins, the miners will keep doing the work because transaction fees will serve as an incentive. Nakamoto envisioned Bitcoin as a peer-to-peer transaction system. “peer-to-peer” is one of the words from the title of Nakamoto’s white paper in which he has introduced Bitcoin to the world.

However, as the popularity of Bitcoin kept growing, its transaction capacity did not. The Bitcoin network generates a block of the blockchain every 10 minutes or so. Depending on the number of transactions on the network and the number of miners, the network creates some blocks faster and some blocks slower, but the goal is 10 minutes per block. You can see the time it is taking the Bitcoin network to create the blocks of its blockchain and the number of transactions in these blocks by visiting https://blockchain.info/

The field called “Age” shows how long ago a block was created. For example, if you see that block A was created 1 hour and 37 minutes ago and block B was created 1 hour and 40 minutes ago, it means that it took the network 3 minutes to create block A. Next to the “Age” column you will see “Transactions” column. This column shows the total number of transactions included in the particular block of the Bitcoin blockchain. The data size for a transaction on the Bitcoin blockchain is about 250 bytes. Bitcoin blockchain blocks are 1 megabyte in size. The fact that the network is designed to create 1 block every 10 minutes means that the Bitcoin network can process between 3 and 7 transactions per second.

Because of this, as the popularity of the network started growing in 2016 and especially in 2017, the number of transactions that uses wanted to send was significantly surpassing the capacity of 3 to 7 transactions per second. This means that miners could choose the transactions they wanted to include in the blocks. Obviously, miners started to choose transactions that included transaction fees. This led to transaction fees on the Bitcoin network increasing very significantly. For example, average transaction fee on the network on July 3, 2016 was USD$0.173. A year later, on July 3, 2017, the fee was more than 10 times higher, USD$2.817. You can see a chart with historic average transactions on the Bitcoin network here: https://bitinfocharts.com/comparison/bitcoin-transactionfees.html

Transaction fees on the Bitcoin network don’t depend on the financial value of a transaction. Transaction fees are about including a transaction into the blockchain. The limitations are about data size, not about the value of individual transactions. This means that it doesn’t matter if you want to send 0.001 bitcoin or 1,000 bitcoins. The transaction fee is going to be the same. Essentially, this issue made the Bitcoin network not usable for micro transactions, which constitute the majority of transactions on the Steem network.