Help me understand which approach is best for a privacy based CEX network fee.

[nonlogs]

1. Charge a fixed fee, but include a buffer to cover unexpected network traffic (for BTC, it would be around $5–$20).

2. Charge the user only the actual network fee, which would be very low ($1-$0.10). However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject. Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).

what do you guys suggest ?

[OmegaStarScream]

1. Right but CEXes never process withdrawals to one address at the time, they batch them. So do they really need 20$ from each single user to cover the transaction fees? I don't believe so.

2. I have never seen mining fees skyrocket that much in a short period of time. But let's say they do, you can introduce a lock-period, you show the user the fees, give them X time (2-3 minutes for example) to accept or reject the withdrawal before you refresh the fees again.

Which way to go is up to you. I guess you could even introduce both options. The first option is for you to profit a bit from (in addition to trading fees) and also process the user's transaction as fast as possible, while the second option would be for those who want to pay as little fees as possible and also don't care when they receive their withdrawal (low priority).

[nonlogs]

1. Right but CEXes never process withdrawals to one address at the time, they batch them. So do they really need 20$ from each single user to cover the transaction fees? I don't believe so.

2. I have never seen mining fees skyrocket that much in a short period of time. But let's say they do, you can introduce a lock-period, you show the user the fees, give them X time (2-3 minutes for example) to accept or reject the withdrawal before you refresh the fees again.

Which way to go is up to you. I guess you could even introduce both options. The first option is for you to profit a bit from (in addition to trading fees) and also process the user's transaction as fast as possible, while the second option would be for those who want to pay as little fees as possible and also don't care when they receive their withdrawal (low priority).

That is indeed true for a big CEX, but mine hasn’t been launched yet, and I don’t know if there will be withdrawals every 10 minutes or so I can’t leave users hanging.

For example, Bitcoin network fees are decided based on virtual bytes. Let’s say the fee rate is 1.05 sats per vB. If your transaction is 208 vB in total, that means:

208 x 1.05 = 218.4 sats

218.4 / 100,000,000 = 0.000002184 BTC

So, the total fee at 1.05 sat/vB would be 0.000002184 BTC ($0.23).

[JeromeTash]

Privacy based CEX? I am curious in knowing how it will operate.

Regarding the withdrawal fees, I personally prefer the flexible fee approach vs. the fixed rate approach. A lot of exchanges have exploited users in the name of fixed withdrawal fees. I suggest maybe when one is withdrawing, that there are two withdrawal fee tiers.
1. Optimal/Fast tier calculated from the state of Mempool - This is for users who want their transactions processes in the next block
2. Saver fees -  Fairly cheap but could get confirmed in the next 2–5 blocks, also varying according to the state of the mempool.

I know some platforms that use this approach, like Bustadice (you might want to check them out to confirm if they haven't changed it). Possibly you can get an idea out of it.

[Z-tight]

That is indeed true for a big CEX, but mine hasn’t been launched yet, and I don’t know if there will be withdrawals every 10 minutes or so I can’t leave users hanging.

If that is the case, then wouldn't it be better to charge a flat rate exchange fee for withdrawal, in addition to a real-time estimate of the network fees that the customer has to pay. In that way your customers can select for themselves how quickly they want their withdrawals confirmed based on the real-time updates and you make your profit from the exchange fees.

[NotATether]

Why don't you charge a small percentage of the deposit like 1% to cover for network fee fluctuations?

[stompix]

However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject.

It's not a two-step process, you show them what they get for 0.4 BTC for example, with the current fee included.
Why not copy what everyone else does, just add the fee in your percentage take as I don't think you're going to do this with zero fees.

Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).
what do you guys suggest ?

You do the median.
You charge a bit over the next block fee, and with the money you have saved when you have managed to get confirmations for 0.30 cents for a $3 charge, you offset the transactions where you have to pay $6 to bump your $3 tx.

[Synchronice]

1. Charge a fixed fee, but include a buffer to cover unexpected network traffic (for BTC, it would be around $5–$20).

2. Charge the user only the actual network fee, which would be very low ($1-$0.10). However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject. Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).

what do you guys suggest ?

I think that the second approach is much better, at least that's what I want and found fair. I know that transaction fees fluctuate but when the fee is low, like 40 cents and you charge me 20 dollars, I find this very unfair. It's good for me when the fees are like $40 and you charge me $20 but this is not fair condition for you too, so I prefer to pay what I have to pay for that exact moment instead of fixed withdrawal fees and then feeling a victim of injustice.

In ideal world, for me, the best approach from exchange will be to offer me fee recommendations like mempool.space and to also let me manually type the fee per sat/vByte.

[hosemary]

In ideal world, for me, the best approach from exchange will be to offer me fee recommendations like mempool.space and to also let me manually type the fee per sat/vByte.

This is not a good idea. Exchanges usually want the withdrawals to be confirmed fast, so that they don't have unconfirmed changes.
If the network is congested and people use low fees for their withdrawals, chances are the exchange end up with many unconfirmed coins.

[rat03gopoh]

What are the factors you consider for transaction fee spikes other than unexpected network traffic? Since you mentioned privacy based CEXs with btc fees around $5-$20 in the first point which doesn't sound like a normal single input-output tx fee considering the recent mempool situation, I'm curious what kind of privacy is that, especially how a user gets tx inputs for a single withdrawal (is it possible to get consolidated inputs from other users' exchange wallets at times, or all inputs from one centralized wallet).
As far as I know, the higher the level of privacy you offer, the higher the fees are and I think taking a percentage fee is fairer in this case.

[khaled0111]

This is not a good idea. Exchanges usually want the withdrawals to be confirmed fast, so that they don't have unconfirmed changes.
If the network is congested and people use low fees for their withdrawals, chances are the exchange end up with many unconfirmed coins.

That’s correct, but if it’s the user who has set the fee rate, then if the transaction gets stuck because he chose a low fee rate then this would be his fault not the exchange's. This can be solved by adding an option to accelerate the transaction by bumping its fee.

It’s a good idea but I doubt any exchange would be willing to implement it because of the too many complaints and support tickets they will have to deal with.

[hosemary]

That’s correct, but if it’s the user who has set the fee rate, then if the transaction gets stuck because he chose a low fee rate then this would be his fault not the exchange's. This can be solved by adding an option to accelerate the transaction by bumping its fee.

The low fee rate set by the user may affect other users withdrawals as well.

Assume that the user A requests a withdrawal with a low fee and the transaction stays unconfirmed for a long time.
Now, the user B wants to make a withdrawal and he uses a sufficient fee. The user B's withdrawal may not be confirmed in the expected time, because the exchange used the change received in user A's withdrawal for processing user B's withdrawal.

[nonlogs]

Privacy based CEX? I am curious in knowing how it will operate.

Regarding the withdrawal fees, I personally prefer the flexible fee approach vs. the fixed rate approach. A lot of exchanges have exploited users in the name of fixed withdrawal fees. I suggest maybe when one is withdrawing, that there are two withdrawal fee tiers.
1. Optimal/Fast tier calculated from the state of Mempool - This is for users who want their transactions processes in the next block
2. Saver fees -  Fairly cheap but could get confirmed in the next 2–5 blocks, also varying according to the state of the mempool.

I know some platforms that use this approach, like Bustadice (you might want to check them out to confirm if they haven't changed it). Possibly you can get an idea out of it.

Thanks for the suggestion. It’s not a coin but an exchange, so you know the usual stuff: non-KYC, no logs, and other features that I’m developing.

[ABCbits]

2. Charge the user only the actual network fee, which would be very low ($1-$0.10). However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject. Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).

As customer, i would suggest this option. Aside from what @OmegaStarScream suggested, i would also recommend you to use fee rate which ensure the TX can be confirmed within next or 2nd next blocks.

Privacy based CEX? I am curious in knowing how it will operate.

I'd speculate it have similarity with exchange listed on https://kycnot.me/.

[nonlogs]

Why don't you charge a small percentage of the deposit like 1% to cover for network fee fluctuations?

Na mate, that’s too much to charge a user who’s withdrawing $10K — it would be $100.

However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject.

It's not a two-step process, you show them what they get for 0.4 BTC for example, with the current fee included.
Why not copy what everyone else does, just add the fee in your percentage take as I don't think you're going to do this with zero fees.

Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).
what do you guys suggest ?

You do the median.
You charge a bit over the next block fee, and with the money you have saved when you have managed to get confirmations for 0.30 cents for a $3 charge, you offset the transactions where you have to pay $6 to bump your $3 tx.

It’s a two step process on the backend, and it might get quite heavy when 100 people are withdrawing simultaneously. It takes time to fetch UTXOs and construct the transaction, and we get the hex data that we push to the blockchain.

Now, if we wait for a certain period without broadcasting, other users trying to withdraw could end up using the same UTXOs, and the blockchain would reject those transactions. i guess you have heard about double spend problem, That creates more complications in showing the exact fee that will be charged.

2. Charge the user only the actual network fee, which would be very low ($1-$0.10). However, the problem is that we need to introduce a two step process to get an accurate fee: first create the transaction, then show it to the user for confirmation to accept or reject. Sometimes, due to high network traffic, the price can increase unexpectedly ($10-$50).

As customer, i would suggest this option. Aside from what @OmegaStarScream suggested, i would also recommend you to use fee rate which ensure the TX can be confirmed within next or 2nd next blocks.

Privacy based CEX? I am curious in knowing how it will operate.

I'd speculate it have similarity with exchange listed on https://kycnot.me/.

As I mentioned in the previous post, it’s a complicated process to create a transaction and keep it without relaying it to the network. Double spending and vByte fee changes happen depending on the number of transactions in the mempool. I think it would be best to hard code a certain vByte and consolidated utxo's to avoid increasing inputs.