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Bitcoin Transaction Frequency Increases 50% Since April 2018, Fees Stay Put

Bitcoin transaction frequency has increased roughly 50% since April 2018, yet during the same period of time, transaction fees have not risen. This is likely a demonstration of how SegWit and transaction batching have helped make Bitcoin more scalable.

Estimating daily transaction frequency is somewhat difficult since there is a weekly oscillation of Bitcoin transaction frequency that causes daily frequency to rapidly change. Eyeballing the chart, there were on average 165,000 transactions per day at the beginning of April. This has steadily increased since then to 245,000 in late October 2018, a 48.5% increase. This is just a rough estimate but the point is Bitcoin transaction frequency has just about grown by half its April numbers.

Simultaneously, transaction fees remain close to zero and are not being impacted by increasing transaction frequency. Currently, the fee for confirming within several blocks is less than USD 0.25 per transaction, and this has been the case since early July. In general, since April, transaction fees have actually been decreasing, which may be a sign that SegWit and transaction batching adoption is increasing.

SegWit, short for segregated witness, has a block size limit of 1 million units, rather than bytes like the old system. Signature data, called the witness, is separated from the Merkle Tree and only counts as 1/4 of a unit. This has caused the average maximum block size to increase from 1 mb to 1.2-1.3 mb, with some record block sizes in excess of 2 mb. Allowing more transactions into each block reduces transaction fees, and SegWit adoption is rapidly increasing.

Transaction batching is usually what causes blocks to reach sizes greater than 1.2-1.3 mb. Batching works by merging several Bitcoin transactions into a single one, which saves space. Thousands of transactions can be merged into one transaction via batching.

Looking at Bitcoin block size gives a good indication of how close the network is to reaching maximum capacity, at which point transaction fees will increase. The average daily block size is extremely volatile, and it is hard to estimate an average block size for a week or month but in general, there is an uptrend since April from roughly 0.6 mb to 0.95 mb currently.

Average block size would have to consistently be above 1 mb every day for a surge in transaction fees to occur, unlike the current conditions where average block size is far below 1 mb on most days. The last time block sizes were consistently above 1 mb was in February 2018 on the tail end of the transaction fee crisis which saw fees in excess of USD 30 in December 2017.

At the rate transaction frequency is increasing on the Bitcoin network, eventually, blocks will be filled consistently. However, users will have a bigger incentive to use second layer solutions like Lightning Network at that point, which should prevent a fee crisis.


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2.26 MB Bitcoin Block Sets Record for Block Size

On 5 September 2018, the all-time record for Bitcoin block size was set when a 2.26 MB Bitcoin block was mined at block height 540,107. This record block size was made possible by Segregated Witness (SegWit) and transaction batching.

Before the deployment of SegWit in August 2017, Bitcoin block size had a hard cap of 1 MB. SegWit was implemented in response to scalability concerns due to increasing usage of Bitcoin, since there were concerns that 1 MB blocks would not be able to fit all recent transactions, which could lead to rapidly rising transaction fees.

With SegWit, the Bitcoin block size limit was re-dominated to be in terms of units instead of bytes. Signature data, called the witness, is separated from the Merkle Tree of a transaction and added to the end, and each byte of signature data only counts as a fourth of a unit. Therefore, if a block consisted purely of signature data, the block size would be 4 mb, so this is now the upper limit on Bitcoin block size. However, the Merkle Tree transaction data accounts for most of the block size, and Bitcoin blocks are rarely larger than 2 MB. The first Bitcoin block over 2 MB occurred on 20 January 2018 at block height 505,225, and weighed in at 2.17 MB.

One thing peculiar about this record-setting 2.26 MB Bitcoin block was it only had 230 transactions, as compared to an average block which has a size of 0.804 MB and 1,609 transactions. Likewise, the 2.17 MB block on 20 January only had 225 transactions.

These large blocks with low transaction counts are likely the result of transaction batching. Essentially, batching is when several transactions are merged into a single Bitcoin transaction. This saves space relative to sending each transaction separately, but the batched transaction can become quite large. The record for a batched transaction is 13,107 outputs, and it is estimated that as of May 2018, only 12% of Bitcoin transactions are batched, but they account for 30-70% of Bitcoin volume.

Indeed, when looking through the transaction ledger for this record 2.26 MB block there are numerous batched transactions. Although the official transaction count for the block is 230, it is actually far more, and could be near a record if you count each input or output in a batched transaction as a transaction. Especially combined with the knowledge that batched transactions take up less space per input or output, yet this block was of a record size. Therefore, this record block is a good example of how batching and SegWit can combine to bring Bitcoin scalability to new levels.


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“Batching” Bitcoin Transactions Makes Blockchain More Efficient

Batching multiple Bitcoin payments into one transaction is becoming a popular trend. The practice makes the blockchain more efficient by reducing the amount of data needed to send each payment, which in turn reduces transaction fees for each payment. As more people batch their payments, the block space is available for other transactions, allowing more Bitcoin transactions per block while reducing fees for everyone.

A simple and loose definition of a batched Bitcoin transaction is a transaction with 3 or more outputs. In a typical Bitcoin transaction, there are 2 outputs, the payment going to the receiver and the change output which goes back into your wallet. Bitcoin change output works the same way as getting the change at a grocery store when you hand 20 USD to the cashier for 12 USD worth of goods and she hands back 8 USD of change. Just like these transactions are discrete in the physical world, they are discretely represented on the blockchain when using Bitcoin as well.

A typical transaction with one payment output uses 230 bytes, but a batched transaction with 2 payment outputs uses 260 bytes. If these were separate transactions they would use 460 bytes; the savings in memory space when batching are obvious from this example. It is possible to include as many payments as you want in a single transaction. Typical batched transactions have between 3 and 40 payment outputs, but the record is 13,107 payment outputs.

The Bitcoin fee is a direct function of how much data is in the transaction, and therefore batching saves money on the fee. Batching has become much more popular recently after the transaction fee crisis of late 2017 when Bitcoin hit record prices near 20,000 USD. There were more Bitcoin transactions than ever before, causing transaction fees to rise to nearly 60 USD.

This made Bitcoin unusable as an everyday currency, and there was much outcry across the Bitcoin world to find a solution, such as batching. Several major Bitcoin exchanges including Bitstamp, Bitfinex, and Binance began to batch their transactions after being pressured by the public.

The fee crisis resolved itself temporarily when Bitcoin’s price collapsed and transaction volume dropped along with it, but the percentage of batched transactions has been steadily rising since it saves money regardless. Currently, only 12% of all transactions are batched, but 30-70% of all Bitcoins volume is in batched transactions.

It will be important for users to batch their Bitcoin transactions in the future to optimize the blockchain and help keep fees lower, since inevitably fees will be on the rise again. Segregated Witness (SegWit) is another feature that is being implemented by Bitcoin users to reduce fees and works well with batching.

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