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Bitcoin network fees

Timothy Stranex
4 minute read

We’re revising our pricing as of 1 March 2017.

Changes include a dynamic Bitcoin send fee, a BTC 0.0002 Bitcoin receive fee, a volume-based fee schedule with significant decreases for the Luno Exchange, and some smaller changes for certain countries.

Since Bitcoin send and receive transactions were previously free, in this blog post we’ll explain the reasons for introducing the fee, show how it is connected to the dynamics of today’s Bitcoin ecosystem, and introduce our free alternative: send and receive Bitcoin by email address or mobile number.

Bitcoin network fees

Bitcoin is often advertised as being very cheap and a good solution for micropayments. While this was true in the past, Bitcoin is no longer suitable for these kinds of low-value transactions today. To understand why, we need to delve briefly into the technology that powers Bitcoin.

All Bitcoin transactions are recorded in a distributed ledger called the “blockchain”. This ledger is immutable (meaning that once a transaction has been recorded, it can never be removed) and highly replicated (meaning that each transaction is copied thousands of times by everyone who runs the Bitcoin software).

These two properties, immutability and replication, make the Bitcoin blockchain a very robust system. However, the downside is that every transaction must be processed and stored thousands of times. This duplication has a high cost in terms of computing resources namely bandwidth, disk space, memory and CPU time.

As Bitcoin becomes more popular, the number of transactions has been increasing rapidly. The resources needed to process transactions a couple of years ago was minimal, but now it is becoming significant. In addition, the capacity of the Bitcoin blockchain has become constrained by the “block size limit”: often there are simply more transactions being created than the system is able to process.

As a result, the various people and businesses participating in the Bitcoin network (such as miners and node operators) have begun applying pressure to prioritise and reduce transaction load by means of transaction fees.

Here is a graph showing the daily Bitcoin network transaction fees over the last few years:

Daily Bitcoin Network Transaction Fees

Since Luno was formed, we have been covering these transaction fees on behalf of our customers. However, as fees rise and the number of people using our services increase, these transaction fees have become prohibitively large. Sending a transaction a couple of years ago cost roughly BTC 0.0001 or USD 0.02, while the same transaction today costs roughly BTC 0.0004 or USD 0.42, an increase of 20x in fiat currency terms. Covering the fees also encourages inefficient behaviour like sending thousands of tiny transactions through the network when a single larger transaction would be more efficient.

As a result, we are being forced to introduce send and receive fees for transactions processed through the Bitcoin network.

We have set our fees so that we don’t actually make any profit from send or receive transactions, but just break even. By making the true costs of transactions visible, customers can make informed decisions on their transaction behaviour.

We intend to adjust our fees from time to time to track the costs we observe in the Bitcoin network. For example, if the Bitcoin blockchain introduces new technologies to make transactions more efficient or increases its capacity limits, fees should decrease.

A free alternative

The above discussion only applies to transactions sent through the Bitcoin blockchain. Luno also supports an alternative payment method: off-chain Bitcoin payments. Payments sent from one Luno customers to another can be processed by us internally without having to be transmitted through the Bitcoin network. Consequently, we don’t need to charge transaction fees.

This feature is already available to all Luno customers. Simply enter the email address or mobile phone number of the recipient when sending your payment and we’ll process it instantly and with zero fees.

FAQ

What are the new fees?

  • Each send transaction will have a dynamic fee, depending on the network congestion
  • Each receive transaction will cost 0.0002 BTC
  • Payments sent and received via email address or mobile number remain free and instant

Where can I find the all the updated pricing information?

All our pricing information on a per-country level can be found here: https://www.luno.com/en/countries

Why do you charge receive fees?

The transaction fee required by the Bitcoin network depends on the size of the transaction. Transactions consist of a set of inputs and outputs. If there are many inputs, the transaction size is larger. Whenever a transaction is received, it will become an input of a future transaction.

Therefore, each time a transaction is received, it will incur a cost when it is consumed in the future. Since some customers receive more transactions than they send, while others send more than they receive, it wouldn’t be fair to pass the full cost onto the senders but not the receivers.

What if I need to send or receive many small amounts?

We recommend that you send or request payments by email address or mobile number since we can process these payments instantly and with zero fees.

Will fees increase or drop in the future?

We intend to roughly track the fees we observe on the Bitcoin network. Bitcoin technology is slowly evolving and may become more efficient in the future (e.g. Segregated Witness or Bitcoin Unlimited). In addition, when “second layer” technologies (such as Lightning or Teechan) become available and robust, we will make these available on our platform.

In the meantime, payments sent or received between Luno customers by email address or mobile phone numbers are instant and have zero fees.

What is your stance on the so-called “block size debate”?

We intend to implement whatever technologies gain widespread adoption in the Bitcoin ecosystem, whether that is Segregated Witness, Bitcoin Unlimited, Lighting, Teechan, etc.

Avatar Timothy Stranex
Author

Timothy Stranex

Timothy is co-founder and CTO at Luno. Before founding Luno, Timothy was a software engineer at Google in Switzerland. He holds an MSc in Theoretical Physics from the University of Zürich and a BSc in Physics, Mathematics and Computer Science from the University of Cape Town.

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