And so, the Bitcoin transaction may be more complicated than many people think. However, this is by no means witchcraft, because anyone who has understood the basics of the Bitcoin network and transaction processing can easily follow the individual steps.
Last time we looked at transactions on and off the Bitcoin blockchain, and today we’ll talk about batch transactions.
According to Coinmarketrate.com, the advantage of batch transactions increases with increasing scale. For the exchange to perform one withdrawal operation for each client is not the same as for the exchange to perform one operation that pays everyone. The savings on fees in the latter option are more than significant.
For example, Coinbase said that this system helped its customers save 75.2% of transaction fees, as well as reduce the number of transactions per day by 95%.
This feature is available in many exchanges, as well as wallets that help their users significantly reduce costs. Let’s take a closer look at this interesting option, as well as the advantages and some pitfalls.
How Bitcoin Transactions Work
Understanding how Bitcoin transactions work helps us understand how batch transactions work.
Unlike other cryptocurrencies, where an accounting or balance sheet system is used, Bitcoin uses the so-called unspent transaction outflow model (UTXO).
Step-by-step explanation of a Bitcoin peer-to-peer transaction
Users do not have a balance as such, but instead they control the unspent results of operations that can be used as input data for other operations.
When we create a Bitcoin transaction, the amount of BTC we need to transfer should be equivalent to the UTXO amount selected as input. One withdrawal will be for the person receiving the funds, the other will be for the miner’s commissions and the last one will be for the exchange address that is returned to us.
Of course, this is a simple example, but a transaction can have multiple inputs and multiple outputs. This is exactly what batch transactions use in the interests of the user.
The Bitcoin block size is fixed and this determines the number of transactions that can be combined in it. Therefore, if the network is oversaturated, miners will choose to add to the block those transactions that pay the highest fee.
In fact, more important than the commission they pay per transaction is the commission for the size of the transaction, as they try to get the highest commission for one block mined. In other words, they strive for revenue efficiency.
A transaction of 100 bytes and worth $1 is not the same as a transaction of 150 bytes and worth $2. In the first case, 1 cent is paid per byte, and in the second – 0.013 dollars. In this case, the miner considers this option to be the best one.
For the user, this means that he can use two ways to save space and commission:
- Consolidate UTXO: We can use as few inputs as possible, which will save space and generate a lot of outputs (known as Bitcoin dust). Then, when commissions become cheaper, we take all these outflows and combine them into a larger one.
- Batch transactions: If we need to conduct frequent transactions, we can include a large number of outflows to different people in one transaction.
The latter is a very common practice among mining groups and exchanges that need to save as much commission as possible and need to pay many people.
Often in such transactions there are dozens and hundreds of exits from the business.
Example of batch transactions
For example, let’s say we need to pay 5 friends a total of 1 BTC. With this alternative, we can create one transaction with 5 outputs that pay each friend the required amounts.
Another option would be to create 5 different transactions, but that would be more expensive.
The reason for this is that each transaction we create has a fixed and variable size. The first one will be common to all transactions, and the second one will depend on the number of inputs and outputs it has.
Although creating a transaction with more outputs will increase its size, it will not be larger than all the transactions created for our example.
Advantages of this type of transactions
Although there are both advantages and disadvantages, the former are more numerous and important than the latter. Let’s see what it is.
- Combining several operations into one
The transactions we have talked about so far are ideal for combining multiple transactions into one with all the benefits that follow from this.
In the past, Bitcoin users created one transaction for each submission, which was an inefficient use of the network’s monetary and physical resources.
- Reducing the maximum number of transactions, without spending the wallet
When we generate transactions, we accumulate unspent transactional outflows with small amounts known as dust. However, we have two options for solving this problem. It would be possible to collect all these operations into one transaction, a transaction with multiple inputs and outputs.
The second option is to use batch transactions more, so that instead of hundreds of transactions with their balances, we have only one exit.
- Minimizing commissions
Fees are another big advantage of such transactions. As we have already seen, they help to significantly reduce the commission when you have to make multiple payments.
Some services have started using them for a reason, and the savings can be very significant, especially for a company that is used to constantly paying.
- Reducing the number of transactions generated on the network
This is an advantage not only for someone in particular, but also for the network as a whole. Using more mechanisms of this type helps to generate fewer transactions on the network.
On the one hand, it saves time and efforts of companies or individuals who need to make a large number of payments, but also reduces network congestion and makes its work more efficient.
- Reducing the operating time of exchangers
The exchange can generate a payment now and then use the remainder of that transaction to create a new one. The problem is, it has to wait for the blocks to be confirmed in order for the new transaction to become valid.
By reducing the number of transactions that need to be sent, the exchange reduces the waiting time and can spend more time on other operations, which ultimately brings more revenue.
Disadvantages of this type of transactions
Although everything we’ve talked about so far is very interesting, there are also some downsides to Bitcoin transactions.
- Reducing the level of privacy
The first disadvantage is reduced privacy and increased centralization. Someone conducting a chain analysis will easily determine that we used this transaction to pay other people.
This can be avoided to some extent by using the CoinJoin system for this type of transaction.
Many exchanges make payments to users when they request a withdrawal of funds. But if this is done in a batch transaction, you will have to wait until several users gather on the exchange to take advantage of these advantages.
This may not be a problem for everyone, but for those who want to get their money as quickly as possible, it can become a problem. Especially if you add confirmation time to this equation.