Bitcoin Fee and Optimisation Strategies
Published: 2023-04-24 15:15:21

One thing that makes bitcoin fascinating is that it is not controlled by a central entity or government. This makes it a sought-after choice for those seeking a secure and private way to transfer funds. However, with the growing acceptance of Bitcoin, transaction fees have risen, resulting in user dissatisfaction. Consequently, users are seeking ways to decrease fees and improve their transaction performance. This article discusses Bitcoin fee estimation and optimisation strategies, and why they are important.

To optimise fee estimation, users can utilize the mempool state. The mempool consists of unconfirmed transactions broadcasted to the network and is maintained by all nodes in the network. It includes information about each transaction such as its fee rate, transaction size, and priority. However, it is important to note that there is no single unified mempool state shared by all nodes. Each node can impact the contents of their own mempool by adjusting their policy rules. By using the mempool state, users can estimate the fee rate required to ensure a prompt transaction confirmation.

To determine the appropriate fee rate, users should review the current status of the mempool, checking how many transactions are pending confirmation and the corresponding fee rates they offer. Based on this analysis, users can approximate the fee needed to ensure timely confirmation of their transaction.

For fee estimation, Bitcoin Core offers the `estimatesmartfee` tool. It uses current mempool statistics as well as a review of fee rates for transactions that were confirmed in previous blocks and the duration they spent in the mempool before being validated. This tool provides an estimate of the required fee rate, measured in satoshis per byte, for confirmation within a specified number of blocks. The fee rate is updated periodically, typically every few blocks.

Another tool that utilises mempool state for fee estimation is the `mempool.space` web link. This tool provides users with access to real-time information about the state of the mempool, such as the number of unconfirmed transactions, total mempool size, and current fee rates paid by transactions. This information is useful for estimating the required fee rate to ensure timely confirmation of transactions.

Optimising fee estimation is important for users who want to send transactions quickly without overpaying. By using mempool state, users can estimate the fee rate they need to include to get their transaction confirmed quickly. Tools like estimatefee and mempool.space make it easy for users to access this information and optimize their fee estimation.

There are multiple fee optimisation strategies available for Bitcoin, and the mempool state is just one of them. One such strategy is to consolidate multiple transactions into a single transaction. This approach reduces the transaction size, resulting in lower fees for the users.

Using Segregated Witness(SegWit)addresses is another effective fee optimisation strategy as it separates transaction signatures from transaction data which results in smaller transaction sizes. 
The Lightning Network allows for instant transactions with low fees as transactions are processed off-chain, reducing the need for miners and resulting in lower fees.


Users can utilise fee estimation tools that apply different algorithms to determine the best fee for their transaction based on the current network status. Additionally, RBF(replace-by-fee) is a protocol that enables users to replace an unconfirmed transaction with a new transaction that has a higher fee. This feature can be helpful if a user's initial transaction is stuck in the mempool for an extended period without confirmation.

**Conclusion**

It is crucial for Bitcoin users to employ fee estimation and optimization strategies. These strategies enable users to confirm their transactions quickly and at a reasonable cost.