What is Bitcoin’s fee-to-reward ratio?

The Bitcoin fee-to-reward ratio represents the proportion of complete block rewards from transaction charges paid by customers within the Bitcoin community.

Transaction charges permit customers to supply compensation to miners to encourage the inclusion of their Bitcoin (BTC) transactions in a block. To extend their earnings, miners steadily prioritize transactions with larger charges. Nevertheless, the charge quantity might range relying on variables, together with community congestion and the scale of a person’s transaction in bytes.

By resolving difficult mathematical riddles to validate transactions and safe the community, miners play a crucial position in the Bitcoin network. Miners obtain newly created BTC (block reward, sometimes called block subsidy) and any charges from the transactions they embrace within the blocks as a reward for his or her work.

To retain their earnings, miners more and more depend on transaction charges because the block subsidy diminishes over time resulting from halvings. As Bitcoin will get nearer to reaching its maximum supply of 21 million coins, this dynamic is anticipated to persist.

Right here’s the right way to calculate the Bitcoin fee-to-reward ratio:

To grasp what this ratio signifies, take into account three eventualities the place the Bitcoin fee-to-reward ratio is larger than 1, equal to 1 and fewer than 1.

Bitcoin fee-to-reward ratio better than 1

Contemplate a state of affairs through which customers transact typically, the block reward is 6.25 BTC, and there’s a big demand for block area. On this state of affairs, customers are ready to pay larger charges to validate their transactions extra promptly. Let’s assume miners obtained 7 BTC in transaction charges for the included transactions within the block.

On this case, the fee-to-reward ratio is larger than 1 (1.12), demonstrating that the whole miner charges earned are better than the block reward. When customers need their transactions to be confirmed shortly, a state of affairs like this arises since transaction charge bidding is aggressive.

Bitcoin fee-to-reward ratio equal to 1

Let’s now discover a case through which the block reward and the whole quantity of transaction charges miners earn for together with transactions within the block are the identical. Assume the whole charges collected are 6.25 BTC, utilizing the identical block reward of 6.25 BTC.

On this case, charges and the block reward contribute equally to the miner’s income.

Bitcoin fee-to-reward ratio lower than 1

Now think about that there’s much less demand for transactions on the community and that customers are unwilling to pay excessive charges to validate their transactions. Assume that miners have obtained 4 BTC in transaction charges, however the block reward remains to be 6.25 BTC.

On this case, the fee-to-reward ratio is 0.64, suggesting that the block reward is larger than the sum of transaction charges collected by miners. This would possibly happen when there are fewer transactions within the mempool, decrease community congestion or when customers aren’t vying as onerous so as to add their transactions to the following block.