Is ‘Outputs Per Day’ A Better Economic Indicator Than Bitcoin Transactions?
Outputs per day paints a more accurate economic portrait of the state of the bitcoin blockchain as larger players in the bitcoin industry use techniques to cut down on transaction costs, giving traders and investors an important tool upon which to base their decisions. Here’s why.
One of the main critiques of bitcoin is its high transaction fees. Fees were on the climb in mid-2017, and the collective inefficient use of space on the bitcoin blockchain became increasingly scrutinized. Exchanges faced pressure to batch transactions to make better use of this scarce blockspace. (Some had already been doing for years)
Bitcoin’s scaling issues in times of high transaction volume means it takes longer and costs more to send your bitcoins. The digital currency’s mempool (the pool of unconfirmed Bitcoin transactions on the Bitcoin network) last became congested in December 2017. But, many users believe a more efficient use of the network’s blockspace can alleviate such scaling issues.
Exchanges, mixers, payment processors, and mining pools, are responsible for the preponderance of throughput at times of mempool congestion. One way in which they could alleviate the congestion entails ‘batching’. This is done by combining multiple outputs into a single transaction. Entities that send multiple transactions simultaneously can cluster outputs into a single transaction to more efficiently use blockspace and save them on transaction fees.
Since each transaction comes with overhead in the form of fixed data, if you combined 10 payments into one transaction, rather than sending them individually, you can save block space. So, batching allows users to send more transactions into the blockchain.
Transactions can have virtually unlimited number of inputs or outputs. (The record, for instance, stands at 20,000 input and 13,107 outputs) Each transaction has at least one input and one or more output. The input takes up most of the space because it includes the relevant digital signature. Outputs account for generally 15-30% of the space in a transaction.
Bitcoin users can keep transactions small and save fees by using fewer inputs or to include an almost unlimited amount of outputs – that is, transactions to different people – in the same transaction. The latter option, called batching, means that bitcoin transactions can “aggregate” thousands of individual economic transfers.
As Coinmetrics.io points out, there is no concrete definition for a batched transaction. In its study of batching, it defined a batched transaction as having three or more outputs. Mostly mining pools or exchanges employ batching. As Coinmetrics writes:
We find it helpful to think of a Bitcoin transaction as a mail truck full of boxes. Each truck (transaction) contains boxes (outputs), each of which is full of some number of letters (satoshis).
So when you’re looking at transaction count as a measure of the performance and economic throughput of the Bitcoin network, it’s a bit like counting mail trucks to discern how many letters are being sent on a given day, even though the number of letters can vary wildly.
The truck analogy also makes it clear why many see Bitcoin as a settlement layer – just as mail trucks aren’t dispatched until they’re full, some envision that the same will ultimately be the case for Bitcoin.
Coinmetrics data shows that about 12% of all transactions on the Bitcoin network today are batched, accounting for approximately 40% of all outputs and between 30-60% of all transactional value.
Each output contains the instructions for where to send specific bitcoins. In a single transaction, there can be more than one output. All ouputs share the combined value of the inputs where value is the number of Satoshi (1 BTC = 100,000,000 Satoshi) that an output will be worth when claimed. Each output from a single transaction can be referenced only once by an input of a subsequent transaction. The entire combined input value, therefore, must be sent in the output.
If you want to send 25 BTC, but the input is worth 50 BTC, bitcoin creates two outputs worth 25 btc. One output goes to the destination, and one back to you (known as “change”, this is essentially the sender sending funds back to themselves).
When multiple inputs are used, there are usually multiple coins being used in a transaction. Since transactions can feature multiple outputs, users can send bitcoins to more than one recipient in a single transaction. Similar to a cash transaction, the sum of inputs – which represent the coins used to pay – exceed the intended sum of payments. When this happens an additional output is used, returning the change back to the payer. Input satoshis not accounted for in the transaction outputs become the transaction fee.
Outputs Per Day
The phenomenon of batching has led to websites like Outputs.Today which track ‘outputs per day’, contending its a “better indicator of overall economic activity on the bitcoin blockchain than transactions per day.”
Since one transaction can include multiple outputs, the number of total outputs is more significant than the number of transactions, according to the website. “Large players in the Bitcoin space use batching – the process of including multiple outputs in a given transaction – to reduce their overall transaction fees. Therefore, looking at only transactions misses an important part of the picture.”
The website tracks data starting in January 2018, which is a limitation, but we can see ‘Average Outputs Per Block’ in 2018 roughly followed ‘Average Transactions Per Block’.
On January 4, 2018 we saw the average output per block reach a high of 7,420. The peak for Transactions Per Block came much earlier when there were 2,532 transactions per block on January 4.
Throughout 2018, the Average Outputs to Transaction Ratio has declined, perhaps indicative of declining overall economic activity on the bitcoin blockchain amid consolidating prices.