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Author Topic: How are crypto exchanges able to send Bitcoin with such low fees ?  (Read 400 times)
zertix
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December 10, 2017, 07:11:18 PM
 #1

Hi Guys,

I am interested how are crypto exchanges able to send Bitcoin at such low and fixed fees ? I am posting this in "Technical" as I would prefer an answer from a technical person Smiley .

Basically are these exchanges running local mining operations and then sending all transactions to that local mining farm ? How is this one done technically ?

Or is it something else ?


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Xavofat
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Satoshi wanted "small, casual transactions".


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December 10, 2017, 07:31:43 PM
 #2

When an exchange sends payments, they send them in bulk.  They send one transaction with several outputs.

The size for a typical Bitcoin transaction with one input and one output is about 226 bytes.  Transaction fees are based on the number of bytes that your transaction takes up on the blockchain (what you're basically paying for is space on the blockchain).

IIRC, each output only adds 34 bytes to the transaction, so if an exchange sends to many people at once, the transaction fee decreases relative to the number of people that they're sending to.
zertix
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December 10, 2017, 07:47:38 PM
 #3

When an exchange sends payments, they send them in bulk.  They send one transaction with several outputs.

The size for a typical Bitcoin transaction with one input and one output is about 226 bytes.  Transaction fees are based on the number of bytes that your transaction takes up on the blockchain (what you're basically paying for is space on the blockchain).

IIRC, each output only adds 34 bytes to the transaction, so if an exchange sends to many people at once, the transaction fee decreases relative to the number of people that they're sending to.

Hmm interesting. Didn't think of that.
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December 10, 2017, 07:58:09 PM
 #4

I haven't used an exchange but they might also be subsidizing their transaction fees from fees paid by account-holders. If you have X bitcoins stored on an exchange, these are not literal bitcoin addresses, they are just entries in the exchange's ledger, backed by its (massive) Bitcoin holdings. As long as you transact with people on the exchange, there is no blockchain tx fee. To entice users to leave their money on the exchange, it might be in the interest of the exchange to subsidize the blockchain tx fee for entry/exit to the exchange, thus ensuring that users will feel comfortable leaving their bitcoins on the exchange. The exchange just treats the variable cost of actual tx fees as "business costs" - when fees are high, they have less total profits, when fees are low, they have higher total profits. Overall, it works out to some average cost and as long as this average cost is lower than the benefit of account fees from users leaving their bitcoins on the exchange, it's worth it. But this is just speculation based on how other financial businesses work, I don't know for sure how Bitcoin exchanges are doing things.
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December 10, 2017, 08:16:57 PM
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I haven't used an exchange but they might also be subsidizing their transaction fees from fees paid by account-holders. If you have X bitcoins stored on an exchange, these are not literal bitcoin addresses, they are just entries in the exchange's ledger, backed by its (massive) Bitcoin holdings. As long as you transact with people on the exchange, there is no blockchain tx fee. To entice users to leave their money on the exchange, it might be in the interest of the exchange to subsidize the blockchain tx fee for entry/exit to the exchange, thus ensuring that users will feel comfortable leaving their bitcoins on the exchange. The exchange just treats the variable cost of actual tx fees as "business costs" - when fees are high, they have less total profits, when fees are low, they have higher total profits. Overall, it works out to some average cost and as long as this average cost is lower than the benefit of account fees from users leaving their bitcoins on the exchange, it's worth it. But this is just speculation based on how other financial businesses work, I don't know for sure how Bitcoin exchanges are doing things.

Nah mate, I don't think so that happens. Haven't you ever sent bitcoin to multiple users at the same time before through blockchain.info or other wallet? Sending bitcoins of different values to different wallets at the same time cost you very less fee. In simple words, that works out in a similar way which PayPal used to have called "Mass Payment", in which a single transaction fee was able to handle hundreds of transaction at the same time, though I'm not aware if they still have that feature.

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December 12, 2017, 06:16:08 AM
 #6

When an exchange sends payments, they send them in bulk.  They send one transaction with several outputs.

The size for a typical Bitcoin transaction with one input and one output is about 226 bytes.  Transaction fees are based on the number of bytes that your transaction takes up on the blockchain (what you're basically paying for is space on the blockchain).

IIRC, each output only adds 34 bytes to the transaction, so if an exchange sends to many people at once, the transaction fee decreases relative to the number of people that they're sending to.
Good explanation @Xavofat. Just to add to your quote: this high transaction fee (for individuals)due to consideration of transaction bytes, Bitcoin is not suitable for micropayments as of now. Some other altcoins are trying to address this problem and designing solutions. Recently I heard about IOTA project which is aiming to make micropayments possible without any fee (zero fees).

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December 13, 2017, 02:47:31 AM
 #7

Exchanges don't write every single trade to the blockchains, they optimize it.
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December 13, 2017, 05:31:10 AM
 #8

Exchanges and even casinos to an extent always prioritize their outgoing transactions to carry optimum fees while the number of outgoing addresses receiving the withdrawals are multiple. Each address barely adds weight (in bytes) to the transaction and instead of sending each one in a separate transaction, multiple addresses are sent to at once which by large reduces the fee per transaction to a minimal.

-snip-
Recently I heard about IOTA project which is aiming to make micropayments possible without any fee (zero fees).

Came across this somewhere and this vision might actually change the way the world portrays altcoins as Bitcoin is known to have high fees.


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December 13, 2017, 06:41:51 AM
 #9

Exchanges don't write every single trade to the blockchains, they optimize it.
Exchanges don't ever post anything to BC besides withdrawal orders. Also they never send you withdraw immediately because they wait for multiple people to request withdraw, then write SINGLE transaction, spending their money from hot wallet to those who requested withdrawal (so they pay 1 fee to honor number of transactions).
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December 14, 2017, 04:05:50 AM
 #10

how are crypto exchanges able to send Bitcoin at such low and fixed fees ?
Where do you see exchanges with low network fees? Wink

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December 14, 2017, 06:01:34 AM
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how are crypto exchanges able to send Bitcoin at such low and fixed fees ?
Where do you see exchanges with low network fees? Wink



I think it was an initial (and fairly reasonable) assumption since alot of people evidently often withdraw BTC from an exchange he thought that each time someone exit exchange pays the fee.
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December 14, 2017, 06:25:42 AM
 #12

bulk transaction
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January 01, 2018, 06:02:19 AM
 #13

There is a method or an algorithm behind this. You might need to actually prepare for a bulk transfer on you with an average of 226 or more bytes of input and output.
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