The minimum number of confirmations needed to crypto transact…

Customary Practice’ is emerging in terms of minimum numbers of confirmations needed to have confidence in executing Crypto transactions.

There seems to be a paucity of available analysis in terms of determining and defining how many confirmations (nodes) are needed to ensure a high degree of confidence in a crypto transaction.

Using emerging commercial marking practice as a starting benchmark seems like a pragmatic way to establish indicative guidelines. Customary Practice has been first established around the crypto token Bitcoin. Bitcoin to be usable had to address the risk of digital “double spend”, i.e. an individual using the same digital footprint to transact more than once.

The Bitcoin solution was to have each transaction validated through Proof of Work (PoW) which required that the transaction be confirmed as valid and unique through running a complex algorithm (“mining”). Once this mining was completed a confirmation could be issued that the transaction was considered valid. These confirmations usually can be completed within 10 minutes depending on how many nodes are participating at any given time and the volume and size of the transactions. The so-called memory pool (Mempool) holds the transaction in their waiting room and then nodes, using each miner’s criteria, select transactions for mining. While it is understood to be quite rare, it does happen that a transaction does not get mined, then after 72 hours the submitted transaction will disappear from the Mempool.

Since there are certain technical risks to confirmations most exchanges will require different numbers of independent confirmations before they will process a transaction. The number of confirmations an exchange will require are directly related to the economic value i.e. the “dollar” size of the equation. The operating rules differ by exchange but the customary practice seems to fall into the following general direction:  for low value transaction (under US $100) only 1 or 2 confirmations are usually required*. For transactions up to the $1,000 range three confirmations are fairly normal.   For amounts up to $1MM it would be typical to expect 6 confirmations,.   

*Again as noted, there are some crypto wallets for whom the minimum number of confirmations required to be received before a transaction is processed is at least three.

Author Credit: Hollis W. Hart

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