Bitcoin, Transaction Fee Health (TFH)

What is transaction fee health?

TFH (Transaction Fee Health) is an aggregate metric that helps assessing health of the Bitcoin network for transporting value. The transaction fee is a critical part of the network. Transaction fee is the what is the price for transportation. But how can we know, at an aggregate, how the network transportation health is doing? is it in good state at a point in time or not?

How do you calculate transaction fee health?

First, as a first step, we get TFP (transaction fee ratio). What is that?

For all Transactions (let’s say in last 24 hours), we calculate:

TFP = Fee amount / Transaction amount

Example: TFP = 2 BTC / 100 BTC = 0.02 i.e the 2% is the transaction fee

It’s calculating the percentage of the transaction amount, that was used as fee for facilitation of the transaction. This should be ideally be as low as possible, but also not too low so as to have the right incentives in the system.

We now have a list of TFP for all the transaction TFPlist =[TFP1, TFP2, ….TFPn]

Next, we calculate Transaction Fee Health, TFH.

A batch of transactions over a period of time can be considered for TFH. Let’s say, we consider all transaction in the last 24 hours. We get TFP for all transactions in this batch and then move towards calculating our aggregate final metric, TFH.

For TFH, we find the % of transactions that have TFP < 0.03. What we are trying to do is assessing how many of the transactions are good i.e. if any transaction has fee above 3% of the total transaction amount, that is not a good transaction, in most scenarios. It is too high.

TFH = % TFPlist that are < 0.03

We have our TFH (Transaction Fee Health). This metric helps assess the health of Bitcoin network for transporting value.