Confused about transaction fee...

[arachn1d]

In my bitcoin client there is a transaction fee recommendation of 0.01. Does this mean anytime I send money to someone it'll charge them 0.01 back to me, or how does this work? I read the wiki but confused on who it affects. Who gets the 0.01 and at what point?

[Mahkul]

In my bitcoin client there is a transaction fee recommendation of 0.01. Does this mean anytime I send money to someone it'll charge them 0.01 back to me, or how does this work? I read the wiki but confused on who it affects. Who gets the 0.01 and at what point?

This means that every time you make a transaction you give 0.01 to the person who finds the next block. The purpose of this is to encourage people to run miners, because it costs money (electricity). Once it gets to the stage where miners will be rewarded very small amounts of coins for finding a block, the transaction fees will be their main reward. Currently though if you attach the fee you may be sure that your transfer will be added to the next block before the transactions that weren't paid for. If you don't pay the fee it doesn't mean your transaction will not be added to the block, but it may not be the next one created.

[arachn1d]

In my bitcoin client there is a transaction fee recommendation of 0.01. Does this mean anytime I send money to someone it'll charge them 0.01 back to me, or how does this work? I read the wiki but confused on who it affects. Who gets the 0.01 and at what point?

This means that every time you make a transaction you give 0.01 to the person who finds the next block. The purpose of this is to encourage people to run miners, because it costs money (electricity). Once it gets to the stage where miners will be rewarded very small amounts of coins for finding a block, the transaction fees will be their main reward. Currently though if you attach the fee you may be sure that your transfer will be added to the next block before the transactions that weren't paid for. If you don't pay the fee it doesn't mean your transaction will not be added to the block, but it may not be the next one created.

Thank you

[Raulo]

This means that every time you make a transaction you give 0.01 to the person who finds the next block.

Small correction. The fee is 0.01 BTC per 1KB of transaction size rounded up. A transaction with one input and two outputs (most typical) is 0.25 KB and the fee is 0.01. If your transaction has many inputs (like consolidating a wallet with many small change coins), the fee will be proportionally higher.

There is still no need to pay the fee unless you want to be (almost) sure to have the transaction included in the next block. The fee will probably become important when there are much more transactions going on and the competition for inclusion into the blocks is higher.

[arachn1d]

This means that every time you make a transaction you give 0.01 to the person who finds the next block.

Small correction. The fee is 0.01 BTC per 1KB of transaction size rounded up. A transaction with one input and two outputs (most typical) is 0.25 KB and the fee is 0.01. If your transaction has many inputs (like consolidating a wallet with many small change coins), the fee will be proportionally higher.

There is still no need to pay the fee unless you want to be (almost) sure to have the transaction included in the next block. The fee will probably become important when there are much more transactions going on and the competition for inclusion into the blocks is higher.

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

[Raulo]

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

It's an inevitable consequence of finite supply of bitcoins. When the mining reward gets lowered to 25 BTC at block 210000 (and then lower by half every 210000 blocks), there has to be some mechanism to compensate miners for their hashing effort. Otherwise they will stop hashing and without them, the transactions will not be processed.

[eMansipater]

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

Why is this a surprise?  Processing transactions costs money, and fees pay for that on an open market.  It will always be cheaper than something like PayPal by a wide margin.  Do you know of any other secure payment system that will process a $100,000 transaction for $0.01 ?  Pretty good deal imo.

[goatpig]

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

Miners provide computing power to the network at the cost of electricity and hardware. If there was no return there would be no one mining. You would have to mine yourself to maintain the system, in which case you have to pay for the hardware and electricity yourself. In the late future, you'll even be able to witness miners turning down blocks that don't have adequate transaction fees attached.

[FreeMoney]

This means that every time you make a transaction you give 0.01 to the person who finds the next block.

Small correction. The fee is 0.01 BTC per 1KB of transaction size rounded up. A transaction with one input and two outputs (most typical) is 0.25 KB and the fee is 0.01. If your transaction has many inputs (like consolidating a wallet with many small change coins), the fee will be proportionally higher.

There is still no need to pay the fee unless you want to be (almost) sure to have the transaction included in the next block. The fee will probably become important when there are much more transactions going on and the competition for inclusion into the blocks is higher.

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

It's really not silly. Finding blocks requires hardware and energy. Right now the payment for that is mostly new coins. Eventually there won't be any new coins. There will be a smooth transition to fees only over the next 120 years. It's clever because it solves two problems at once, appropriate distribution of new coins and free/cheap transactions for a long time. Maybe cheap forever compared to alternatives.

[elewton]

I do worry about extremely small transactions.
Assuming 1 BTC = 1 USD, and the majority of transactions require a transaction fee, will people be able to transfer uBTCs with fees in the nBTC range, or are fees more likely related to fixed costs?  Will small transactions just take days to process, or will "free and almost free" transactions be permanently sidelined?

[eof]

Continuing this, could someone go into a bit of detail, (or maybe just point me to the link I should have read already) in how a miner 'chooses' which transactions go into the next block? 

[caveden]

Miners choose the way they want (meaning, the way they coded their software to choose), as long as all transactions they add are valid.

[Alex Beckenham]

Kind of sounds stupid if Bitcoin gets really busy that you have to "pay fees" to make sure your transactions go by faster. This is a silly gimmick to the whole idea of Bitcoin doesn't make sense.

To me it's no different than car enthusiasts "paying fees" to Ferrari/Lamborghini to make themselves go faster. The more you pay, the faster you can go.

The same applies to bicycles vs cars vs air travel.

The same applies to sending your bitcoin transactions through the bitcoin network.

[goatpig]

I do worry about extremely small transactions.
Assuming 1 BTC = 1 USD, and the majority of transactions require a transaction fee, will people be able to transfer uBTCs with fees in the nBTC range, or are fees more likely related to fixed costs?  Will small transactions just take days to process, or will "free and almost free" transactions be permanently sidelined?

Nowhere in the foreseeable future. Right now no one turns down free transactions, and the recommended fee of 0.01 BTC per kb of transaction is just insignificant right now for any miner to care.

[cdonges]

Sounds reasonable.