Pay in Change: The Best Way to Conduct Small Bitcoin Transactions

Pennies are a problem for both traditional and virtual currencies. Imagine that you have one 50-pound note in your pocket. Or maybe several banknotes. Or two-pound coins, fifty-penny coins. When will it be easier for you to buy something? The situation with Bitcoin is the same: small transactions are troublesome for all parties. Particularly since bitcoin transactions involve a considerable fee.

Each bitcoin consists of small parts: it includes 100 million satoshis. In the crypto community, they are called ‘dust’ or ‘sand’. As a rule, it is difficult to spend such parts of bitcoin, because the transaction fee may be higher than the purchase price. Small purchases with bitcoin payment are one of the well-known problems of the currency, which will not be eliminated in the near future. We have to think about how to make them less unprofitable.

Some time ago, bitcoin ‘pennies’ didn’t cause inconvenience to anyone. Everything changed after the increased commissions and transaction fees. The developers even started to think about how to get rid of fractional parts of bitcoin, so they don’t overload the system. They don’t provide practical benefits, as sending $0.01 is possible if the commission is significantly higher than the transaction amount. Which solutions are possible?

How to use a handful of satoshis

As in the real world, it is easier to spend a handful of coins than one, and in the situation with bitcoins, things are similar. Some programmers suggest combining micro transactions with this type of virtual currencies into pools. Then it will be possible to carry out a series of small transactions, significantly saving on commissions.

There is a lot of work to be done on efficiency. Moreover, you should devise a system of transaction integration. It should not look like an attempt to pay for the purchase by a plethora of coins, where British pence is mixed with euro cents and US cents.

Some wallets already have such features, for example, Electrum. There is a feature called Simple Payment Verification that works with small transactions. Such operations are usually performed from mobile phones. The user can select several addresses where the parts of bitcoin are stored, and withdraw funds from them in one transaction. Bitcoin wallet of Blockchain offers a similar solution. Not all wallets are equipped with such features yet, especially if they have enhanced protection for currency storage. For example, Coinbase doesn’t have it.

What the risks are

Transaction pools with small parts of bitcoin have one problem: they disclose more information about financial activity than we’d like. How does it work? Let’s say you have several small parts of bitcoin at a number of different addresses. As is known, it is better not to reuse the same public addresses in the cryptocurrency world (for security reasons). Otherwise, your entire economic activity in the crypto world will be too exposed.

Not all users take it into account, but those who find safety more important than convenience, know it. Consolidation of satoshis from different addresses in one place jeopardises user privacy. Since the blockchain is a public place, it will be easy to find out where and how many transactions were made on behalf of the same person.

This is particularly true if you have already registered on the exchanges using the principle ‘Know Your Customer’. There all users confirm their identity by sending copies of their documents. If at least one account is linked to such an exchange, identifying the owner of the remaining addresses will not be a problem. Transaction pool is the action that can reverse all efforts to protect your privacy made during the long years at one stroke.

But here’s the thing: if different user accounts are tied to a single account, it is not anonymous. Then, using the transaction pool for cheap withdrawal of small amounts will be the solution that won’t break anything.

However, experts believe that safety is more important than greed and the economy. It is better to leave parts of coins in different places than to lose privacy. After all, then there will be a risk of losing much more than you can gain.

How will the problem be solved in the future?

Analysts of the cryptocurrency market assure that the number of Bitcoin users who have tiny amounts of currency in the account reduces. The business dealing with this kind of virtual money is getting bigger. Due to the high commissions, many traders are forced to think about more effective transaction technologies.

So far, consolidation of operations is the only available method to make small payments cheaply for private users. If the number of bitcoin holders keeps growing, the commission will increase. This means that the overpayment for small operations will eventually be even higher. Then the transaction pools will become even more popular. This makes us think that by that time, the developers of cryptocurrencies come up with the ways to protect the anonymity of users who will consolidate transactions.