The average cost of executing a bitcoin transaction is less than it’s been in a year and a half, showing the price is not the virtual currency’s only unanticipated measure these days.
But with all the discussion about rising fees, this might come as a surprise. After all, it was not so long ago that fees were so high a group of noteworthy investors and miners made a whole new version of bitcoin mostly to keep fees less.
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Backing up a bit, much of the dispute was on the fact that while called fees, these expenses are best considered as transaction costs that are required to the network, as mandatory as paying for someone to deliver a protocol service, be it SMS, VoIP or email, or even a pizza.
This is because bitcoin is a software that needs all of the many thousands of computers that operate it to stay in sync. To do so easily, there’s a ceiling on how much information the network can process at time intervals, and users need to pay more to get their transactions in at times of traffic.
So, as bitcoin became more famous in the previous year, fees rose to over $25.
Bitcoin users, those who truly depend on the protocol for essentials, have been impacted by this, as were those who believed bitcoin could be competitive with legacy payment systems.
But, bitcoin fees have been declining since the end of December.
The fees decreased drastically because the users are making less number of transactions right now. In December, there were approximately 400,000 transactions per day, while today bitcoin transactions are only 200,000.
BitGo engineer Mike Belshe told that it is really simple and there is substantially less transaction demand.
Reasons for fall:
In 2017, the heavy rush on the Bitcoin blockchain led to a bidding war over block space, especially as unanticipated interest in bitcoin continued to rise throughout the year.
Bitcoin transaction fees started 2017 at an average of $0.30, but they eventually rose to over $40 in December. As the price tripled during a month-long stretch from the month of November to December, those who were buying the currency for the first time simply did not bothered about how much they were paying in as transaction fees.
As the speculative madness around the bitcoin asset has calmed a bit in 2018, the number of dealings broadcast to the Bitcoin network has also reduced. The number of dealings added to the mempool per second has reduced by approximately 50% from the December highs.
It’s possible that bitcoin costs are now less just because the FOMO around acquiring few bitcoin before the rate goes high has become less, leading to a decrease in demand for block space.
Since transaction fees are denominated in bitcoin, a reducing bitcoin price can also mean a reduce in U.S.-dollar denominated transaction fees.
To a large extent, high transaction fees became a concern that solved itself. As fees increased, some users looked for different ways to use the network more systematically, while others stopped using the network altogether.
It’s technically viable for a single bitcoin transaction to include payments to many different receivers at the same time. This systematically packs more payments into less space on the blockchain. When fees were less, companies did not care with these types of optimizations. As fees increased, companies made them a primary issue. As a result, the number of outputs per transaction has been increasing in latest weeks, helping to soften congestion.
At the same time, as we’ve seen, high fees have also motivated few companies to simply stop using bitcoin. Some companies, like Valve, have come out of the virtual currency game altogether. Others have shifted to other blockchain networks like litecoin, Ethereum, or Bitcoin Cash where transaction fees are much less. When companies exit the bitcoin ecosystem, it helps to decrease the costs. But that is obviously not a good thing for bitcoin’s long-term future.
At the same time, bitcoin’s speculative bubble has calmed down in latest weeks, and that has likely reduced the fees as well. In December, money was pouring into the bitcoin market, and people were willing to pay a lot of money to get their bitcoins into exchanges to sell them at high rates. But bitcoin’s price has decreased drastically since the December peak of $19,500. It reached a low of $6,000 earlier in February, and by 19th February afternoon one bitcoin was worth around $11,000. A cooling market automatically means less demand to move bitcoins around for speculative cause.
Although the reasoning for the fall in transaction costs seems pretty straightforward, there could also be other reasons at play.
One explanation that has been given on social media is that a huge amount of new hashing power has come online, which has risen the frequency at which blocks are found. This would efficiently raise the potential of the network.
The average number of blocks mined per day should be approx 144, based on the 10-minute block time target, but approx 164 blocks were mined per day in the month of January 2018. However, this is not a new event.
As BitGo engineer Mark Erhardt recently mentioned out on Twitter that this digital currency has long functioned at a rate faster than 10 blocks per minute because changes to the mining difficulty are only made every two weeks. As more hashpower is added to the this digital currency’s network during nearly every difficulty adjustment period, the speed at which blocks are mined rises until the difficulty is eventually readjusted once again.
The 164 blocks per day number from January 2018 is a slightly more than normal, and 162 blocks were mined per day in December 2017 as well. For 2017 as a whole, the average number of blocks mined per day was approx 153, which is near the historical average per day.
So, if an additional 10 blocks were being mined per day in December 2017 and January 2018, then there was ultimately a rise in the supply of block space by more than 600MB over that time, as blocks have been little bit over 1MB in size each.
In addition to the rise in supply of block space by way of more blocks mined on a regular basis, there have also been a number of efficiency changes made in terms of how the blockchain is used by those who want to make transactions. Bitcoin writer and researcher David Harding just wrote on this topic on the Bitcoin Wiki. Some methods of reducing transactions fees mentioned by Harding included transaction batching, Segregated Witness (SegWit), dynamic fee anticipation and UTXO consolidation.
Transaction batching is when a payment is sent to many receivers via one on-chain transaction. Data made available by outputs.today tries to show a irise in the use of batching over the course of 2017, including an noticeable rise beginning in late November 2017.
Another article written by Harding shows this method could make transaction fee savings of up to 80%.
Another way to reduce transaction fees for everyone is to use SegWit, which is a soft fork that has made a increase to the block size limit (and thus the supply of block space). That increase to the block size limit is only enabled if users take advantage of the feature. At press time, around 14 percent of transactions were using SegWit.
The big question is what will happen if usage of the bitcoin network keeps on increasing. A hard-coded ceiling on the size of blocks ceils how many transactions the bitcoin network can process per second. Some in the bitcoin community wanted to just increase the block size. But they did not get what they wanted and became so irritated that they launched a rival network called Bitcoin Cash last August.
Since they have left, the mainstream bitcoin network is being managed by bitcoin’s small block group. Instead of just raising the maximum block size, they have concentrated on a technological upgrade called Segregated Witness that differentiates cryptographic signatures from the rest of the blockchain data. These signatures are not counted against that one megabyte block size ceiling, so this is an actual block-size raise. It went into effect in August, which should have assisted with the capacity concerns the network went through last fall.
The problem is that users had to change their bitcoin software to use a new, more systematic transaction format. But it takes time for software providers to roll out the required changes, and the process has been slower than supporters had expected. Six months after the upgrade went into effect, only approx 14% of bitcoin transactions use the new format, a number that has hardly changed since initial enthusiasm about the upgrade subsided around October 2017.
The slow rollout by few bitcoin companies has angered few bitcoin supporters. Coinbase, which is one of the most famous services for purchasing, selling, and storing bitcoin has been a famous target of criticism.
Coinbase has informed that updating software for a company of its size will take time. Coinbase says it plans to start assisting Segregated Witness by the end of February.
Other companies are hard at work on the enhancement as well, which means the world should see a consistent rise in Segregated Witness adoption in the upcoming months. That should give this cryptocurrency world a bit of breathing room.
But Segregated Witness is not a solution. If 100% of transactions use the new format, it will approximately double the network’s capacity. More rise in capacity will need more radical changes.
Hopes on lightening:
This crypto currency community’s longer-term goal is a new payment network called Lightning that functions as a second layer over the present bitcoin network. It could drastically enlarge the bitcoin network’s capacity by shifting daily transactions outside the blockchain.
In theory, Lightning should allow a remarkable expansion in the practical potential of the bitcoin network. But there are many practical problems ahead. Lightning will be the right fit for some bitcoin applications and a bad fit for others. It remains to be seen how much of the bitcoin users will finally switch from old fashioned bitcoin dealings to new fashionable Lightning ones.
And Lightning will also see the same problems as Segregated Witness, even after the network is officially launched in the market, it will take few months, if not years, for it to be accepted as a means of transaction. Indeed, Lightning is a bigger change than Segregated Witness, so people can anticipate the shift to take longer. This means that even if Lightning attains all of its supporters’ expectations, years might go by before it can make a huge impact in demand for the underlying bitcoin network.
All of which means that a revival of bitcoin fees is a real likelihood. A lot relies on what happens to bitcoin’s price in the upcoming times. If bitcoin’s rate increases, people are expected to see bitcoin fees hit new highs as well. On the other hand, if the bitcoin bubble continues to shrink, fees are expected to remain less. In that sense, a decreasing bitcoin price could be a blessing in disguise.
Putting all of this data together, it becomes easier to comprehend why bitcoin transaction fees have been reducing so rapidly this year. However, the large number of varying variables at play make it difficult to say there is a single reason that fees have reduced. As these variables change again in the future, fees could increase rather fast once again.
Disclaimer: views expressed here are of the author and do not reflect those of Groww.