How to Use Bitcoin Block Space More Efficiently
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Introduction
Matthew Kratter from Bitcoin University discusses the importance and methods of using Bitcoin block space efficiently. This guide is a follow-up to a previous discussion on how monetary systems scale and is aimed at those already somewhat familiar with Bitcoin. If you need a refresher, watch the linked video in the description (video linked at the bottom of this article).
Understanding Monetary Systems and Scaling
- Monetary systems scale in layers, where most transactions occur on higher layers or different payment rails.
- Transactions are batched and netted out, with the net result settled on the base layer.
- The base layer provides strong final settlement guarantees but has higher transaction fees.
Historical Example: The Gold Standard
- Countries would exchange goods and net out the balance at the end of a period, settling the difference in physical gold.
- This efficient approach avoided the cost and time of shipping equivalent values of gold back and forth.
Using Bitcoin Efficiently: Layered Transactions
- Similar to the gold standard, Bitcoin transactions can be batched and settled on the base layer.
- On-chain (Layer 1) transactions can be expensive, pushing activity to higher layers, like the Lightning Network.
The Lightning Network
- Opening a Lightning channel involves a single base layer transaction to lock up Bitcoin in a two-of-two multisig wallet.
- Once the channel is set up, unlimited transactions can occur with minimal fees.
- At the end, a corresponding two-of-two multisig transaction settles the net balance on the base layer.
Custodial Solutions: Internal Ledgers
- Services like Cash App maintain internal ledgers to record transactions without impacting the blockchain.
- Users can transact multiple times with no fees, and the service settles on-chain only when necessary.
- Custodial solutions carry the risk of government interference or the service not having sufficient funds for withdrawals.
Reducing On-Chain Footprint
High transaction fees drive users to:
- Use layer two solutions like Lightning or custodial services.
- Wait for lower congestion periods to transact.
- Batch transactions and use newer, more space-efficient address types to save on fees.
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Batching Transactions
- Exchanges can batch multiple withdrawals into a single transaction with multiple outputs to save on fees.
- Using a transaction size calculator, it's shown that one transaction with ten outputs uses significantly less block space than ten separate transactions.
Using Efficient Address Types
- Newer address types, like Taproot, use less block space than older types like Pay to Public Key Hash (P2PKH).
- A transaction calculator can show the savings in virtual bytes (v bytes) when using different address types.
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Conclusion and Call to Action
Efficient use of Bitcoin block space benefits the entire ecosystem by reducing fees and congestion. This efficiency encourages the use of higher layers and various payment rails, both custodial and non-custodial.
