Money Rehab with Nicole Lapin - Bitcoin Thieves Part 4: How Cryptocurrency Costs Users

Episode Date: February 24, 2022

When miners add a new block to the cryptocurrency blockchain, they are rewarded with the transaction fees associated with that block. But where do those transaction fees come from? You. Today, Nicole explains. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. So far on this cryptocurrency journey, we've been talking about the perspective of the miners.

But Lappin, what about the users, you might be asking? I hear you. Well, if you're getting paid in Bitcoin or buying something using Bitcoin, your transaction will need to be verified by the network. By now, we know this. But this process doesn't happen completely automatically. It's actually more like posting a job on TaskRabbit or Upwork. You let the network know you have a transaction that needs to be confirmed, and you detail how much money you'll give to the miner who gets it added to the blockchain. Yep, it's to circle back to the fees. Remember, in yesterday's episode, I mentioned that when a miner gets a block added to the blockchain, they get to gobble up all the

fees associated with that transaction in the block. This is where those transaction fees come in. If you're paying someone in Bitcoin, you'll essentially go to the network and say, hey, fam, I'm looking for a miner to verify a transaction of Bitcoin that I'm sending. And then you will be assigned a fee that is typically generated based on how busy the network is at the time. Bitcoin miners on the network see all of the transactions in the memory pool that have yet to be validated and can choose which ones to prioritize. Obviously, they're going to scoop up the transactions that are offering the biggest fees. This can affect the amount of time it takes for a Bitcoin user's transactions to be verified. If your transaction fee is low, it's probably not going to be priority for miners who are looking to score some bigger transaction fees. Once a block holding your transaction is

added to the blockchain, your transaction is considered to be verified once. Each block that's added to the blockchain after yours counts as another verification. Some people who accept Bitcoin as payment will consider payment complete as soon as a transaction is verified once. But more commonly, vendors will require three to six verifications before they consider a payment to be legit. For example, if your transaction is grouped onto block number 100, some vendors would not consider themselves paid until the greater blockchain had reached block 105. The rationale behind waiting for up to six verifications is that there is a circumstance in which a cryptocurrency transaction gets reversed. It's unusual, but here's how it could happen.

Let's keep with our example and say that we just made a transaction that is now in the mempool. The most recent block added to the blockchain is number 99, and miners are hard at work competing to add the next block to the 100th spot. Two separate miners, let's call them Fred and Ginger, unlock block 100 at the same exact time and both get to add number 100 onto the blockchain. Let's say your transaction is in the block Ginger added to the chain. When there are two blocks created for the same slot on the blockchain, it creates what's called a fork in the blockchain, where the chain splits in two directions. Consequently, miners can add block number 101 to Ginger's 100 block or to Fred's 100 block. Pretty quickly, the network catches on to these types of forks.

The rule in the network is that there can't be repeat blocks. So either Ginger or Fred's branch of the blockchain needs to be deconstructed. The rule is that the shorter chain loses. So if Fred's branch has reached number 104 blocks, but Ginger's branch has only reached number 102 blocks, Fred's branch is the one that gets to remain on the blockchain. Therefore, Ginger's block 100, 101, and 102 all get unverified, and those transactions, including yours, go back to the mempool and your transaction goes back to step one. On average, it takes about 10 minutes for a transaction to be confirmed by the Bitcoin network, but it can take longer for smaller altcoins. However, because miners will prioritize

validating the transactions that have the biggest fees, of course, people who want their Bitcoin transactions verified have to choose. Do they want to offer a higher fee to get the transaction validated? Or are they okay waiting a while for the transaction to go through? As more transactions get added to the memory pool, the demand for miners to confirm transactions goes up. As a result, transaction fees go up as well. The transaction fees can be as high as $59, which can feel ridiculous if you used Bitcoin to buy something worth $20 and makes you wonder if cryptocurrency really is addressing the problems it set out to solve. That's the question I'll be tackling in tomorrow's episode on the grand finale of

our Cryptocurrency Week. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.

You spend my money, money, money.