The transfer of over one billion dollars by using two Bitcoin’s transactions; How much really did it cost?
$ 120 or $ 20 million?
In this short article, we will show that despite it appears Bitcoin’s transaction fees are negligible, more than ninety-five percent of the cost of power consumed by miners, as well as miners’ remuneration, is not provided by the sender or transaction fee but winner miner’s reward, or the so-called Bitcoin mining. For this reason, to pay or not to pay the transaction fee has almost no effect on the subject. Of course, the consequence of paying the winner miner’s reward is specified exclusively by inflation, and unfortunately, this is not so tangible for most people.
From the very beginning, if either sender or receiver paid directly the total cost of the miner as a transaction fee and there was neither winner miner’s reward nor Bitcoin mining. At least, the inefficiency of the proof mechanism, as well as the staggering consumption of electricity in the decentralized network of Bitcoin, would become obvious for everyone, and more quickly a solution would be found.
The authors of this article are Somayyeh Gholami and Mehran Kazeminia. It’s published in English and Farsi In June 2019.
Transferring over 1 billion dollars;
Block #578327 and Block #578328
In the morning of 29th May 2019, two Bitcoin transactions, which totaled $ 1.2 billion, were recorded on blocks 578327 and 578328 of the bitcoin network. At the same time, the tweeter account of Whale_alert, which announces large crypto transactions from and to exchanges, tweeted that Binance (Cryptocurrency exchange) transferred a total of 145980 Bitcoin into an unknown wallet. The first transaction was approximately 77410 Bitcoin with a transaction fee of $ 19, and the second transaction was about 68570 Bitcoin with a transaction fee of $ 105. It means a total of $ 1.2 billion transferred with a transaction fee of $ 124 on the same day.
Bitcoin freak and supporters high praise these large transactions with low cost while conveying this as an example of high-profile and correct Bitcoin application. But the hidden costs of the Bitcoin network are many, and it should not forget the fundamental weaknesses of bitcoin transactions. In the next section, let’s make this clearer.
$ 120 or $ 20 million; that is the question.
Suppose a new currency was introduced and sold to the people by a financial institution who announced that users can buy and sell it safely and limitlessly. This financial institution will not receive any payments such as a commission nor fee from users who can trade this money anonymously, easily and free of charge. Meanwhile, using special technology, the reliability of the accuracy of each transaction is 100%. There is neither mistake nor misconduct nor corruption in this financial institution.
Their only condition is to print new currency at least an annual equivalent of $ 3 billion, in addition to the available amount and to sell to the public to cover its costs.
The condition of the financial institution ensures that it receives $ 3 billion annually, and will no longer need to receive any other payment, like the transaction fees. That’s exactly why it can always provide its services for free. Meanwhile, let’s not forget that the injection of new money definitely have inflation effects and indirectly all holder of this currency will be paying this cost. In other words, $ 3 billion annually will be reduced from the value of this currency in hand of holders to cover the costs of this financial institution.
Bitcoin’s decentralized network works just like the financial institution of the above example, makes the new Bitcoins in the form of Bitcoin mining, and immediately gives new Bitcoins to the winner miners. Of course, the transaction fees cover only five percent of the cost of the miners and whether or not it has little impact. So, it should not be surprised at the low transaction fee of Bitcoin transactions or considered it as an advantage of Bitcoin.
Never forget that Bitcoin transactions are one of the most expensive and with the highest energy consumption in the world because the electricity consumption of each Bitcoin transaction is thousands of times more than a regular visa card transaction. Unfortunately, the annual power consumption of miners exceeds 50 terawatts per hour.
We have already discussed these issues in a different article and you can learn more here:
As we explained in the above article; Round-the-clock, the miners are trying to get a reward as a winner miner in competition with other miners and by using enormous electricity consumption. Every ten minutes, a miner is selected and the new competition begins immediately.
The mathematical calculations of the miners don’t solve any real problem; they haven’t any creativity and do not help mathematics. In these calculations, only massive random numbers are added (combined) one by one to a particular type of math function (hash of block contents) and the result of this combination is calculated for each random number. The winner miner finds out the correct random number faster than the others. A random number is the correct one that in combination with this mathematical function produces a certain result.
Finding this correct random number is very similar to play a slot machine. A person inserts cash or ticket into a machine and keeps on playing to win. Either inserting more cash or ticket and playing more help winning chance increases and the same way, in mining operation, adding new mining machine and consuming more electrical power let the chance of winning increases.
One new block is added to the Blockchain about every ten minutes, and immediately the reward plus all transaction fees of the same block is paid to the winner miner. It means that around 52560 blocks are registered annually, considering that the miner’s reward is currently 12.5 Bitcoins this year, about 657,000 new Bitcoins have been generated. If we assume that this year the average price of Bitcoin is $ 5,500 so just this year $ 3.6 billion have been paid to miners. Of course, as mentioned earlier, miners also receive an additional payment as the transaction fees which usually is less than five percent of the miner’s reward.
Now, we want to answer the main question: it means that we want to find out the actual cost of the transactions of $ 1.2 billion on May 29th. On the face of it, only $ 124 was received from the Bitcoin sender as a fee but as we explained earlier this is just the appearance, and the cost of the miners is far more than it.
Generally, the fair deal for financial transactions is that the sender or receiver pays the costs which are in proportion to the amount of money of each transaction, to the financial institution. Considering that this year, the total cost of all transactions in Bitcoin decentralized network was $ 3.6 billion, it’s reasonable to pay the total cost of a transaction according to its sum of Bitcoin.
If we skimmed through Bitcoin daily transactions, we quickly find that in one day, we rarely see Bitcoin transactions worth about $ 1 billion or more. For this reason, we can presume currently the sum of Bitcoin transactions worth about $ 600 million per day, on average. So, in one year $ 3.6 billion is spent just to transfer $ 216 billion. In other words, the actual transaction fee of Bitcoin should be about 0.0167 of the transaction amount.
So, finally, we can conclude our example that the real transaction fee of $ 1.2 billion on May 29th should be at least $ 20 million. But this amount is currently not paid by Bitcoin sender and receiver, but due to inflationary effects, it is indirectly paid by all Bitcoin holders.
The staggering electricity bills of miners is not only about money but the study, which was carried out in October 2018 on global climate change, showed that in less than three decades, Bitcoin mining could increase global temperatures more than 2 degrees Celsius.
Let’s not forget that Bitcoin is the world’s first Blockchain network and until today remains the most popular cryptocurrency in the world and should be preserved. Bitcoin’s creator ten years ago proposed the POW(Proof-of-work)mechanism which was a great idea to launch the first decentralized network (as a pilot project). But this method for long life needs to be corrected and its current state cannot always continue.
We have addressed these issues in the different perspectives and articles and in order to solve them, we have proposed a new generation of Blockchain network. In our approach, smart contracts replace the miners and block producers so we’ve named it from the very beginning Smart Blockchain. You can learn more about the fundamentals of this technology by studying the following articles:
Smart Blockchain; The rescue of Bitcoin and saving electricity more than 50TWh per year
The electricity consumption of one single Bitcoin’s transaction is 200,000 times more than electricity consumption of a…
The elimination of miners and block producers by using smart contracts
(The first and the most important step to smart and eco-friendly blockchain)
Smart Blockchain is a new technology for the next generation of Blockchain networks while solving the problems and limitations of Bitcoin. Of course, in this technology, Bitcoin will still not be dependent on any financial and banking institution.