Need for speed, but how much does it cost? Unpacking the fee‐speed relationship in Bitcoin transactions

Abstract

The growing popularity of blockchain‐based cryptocurrencies is driven by the flexibility in transaction fee offerings, among other factors. To achieve service‐level differentiation among their users, many cryptocurrencies allow users to “name your own price,” giving rise to a large variation in fee offerings and hence, variation in confirmation times. Yet, the time it takes a cryptocurrency transaction to be confirmed in the blockchain is not only affected by the fee offered, but also by the contemporaneous congestion level and the inherent randomness in the verification process. Although it is generally expected that higher fees lead to quicker confirmation, the uniqueness of the cryptocurrency setting adds important nuances to the fee‐speed relationship. Using Bitcoin—the original and most heavily used cryptocurrency by far—as our empirical context, we stylize the transaction confirmation processes, propose a theoretical framework that maps the causal path from fee to speed, and estimate this framework using Bitcoin transaction data under periods of high volatility. Our results show strong evidence for two characteristics of fee's impact: congestion dependence and tail shrinkage. Our finding that the speed acceleration effect of fee is particularly strong on the tail of the confirmation time distribution motivates a target service level approach to fee recommendation. To put this finding into practice, we develop an efficient computational procedure that helps Bitcoin users accurately estimate fees based on their confirmation delay preferences. We discuss the implications of our analyses on future cryptocurrency development and the long‐term adoption of this revolutionary technology.

The Use of Blockchain Technology and OCR in E-Government for Document Management: Inbound Invoice Management as an Example

“…SECHash does not focus on the speed of embedding the transaction into the network. Therefore, Shang et al [51] recommended waiting for network conditions to improve, as fees are lower when the network is less congested.…”

An Enhanced CoD System Leveraging Blockchain, Smart Contracts, and NFTs: A New Approach for Trustless Transactions

“…Introduced in 2009, Bitcoin was a pioneering system that facilitated trust-less peer-to-peer payments [20]. However, Bitcoin's reliance on the Proof-of-Work (PoW) consensus algorithm led to significant operational costs, both monetary and environmental [21]. The system's constraints, particularly its limited throughput and associated high fees for transaction validations, led to the search for alternative blockchain solutions.…”

Predicting confirmation times of Bitcoin transactions

“…While the paper is tailored to Bitcoin confirmation times, its applications reach much further. It was noticed before in [Shang et al, 2023] that the fundamental problem of paying a transaction fee for faster transaction confirmation is related to operations management pricing. More specifically, the model portrays a modern application of pay-for-speed -the more you pay the shorter the expected service time.…”

“…It goes without saying that personnel chooses orders with the highest tip-to-fulfilment ratio first. We refer to [Shang et al, 2023] for other examples of pay-what-you-want applications in practice. In such examples there is similar interest to pay the lowest fee or cost possible to receive a good or service within a certain time frame for which the model can be used.…”