The past weekend brought with it a much-needed break from high Bitcoin transaction fees. Bitcoin’s average fee returned to a more acceptable rate of $8 USD (approximately $10 CAD).
In Bitcoin’s early days, enthusiasts touted the digital currency as a solution to transferring money without the high fees associated with traditional wire transfers. Unfortunately, as Bitcoin began to scale, demand on the network caused its fees to increase. The fees rose to a level on-par with, or above, the payment solutions it was designed to replace.
Bitcoin’s fees hit an all-time high on December 22nd, 2017, to an average fee of $55 USD (approximately $69 CAD).
FALLOUT FROM THE HIGH FEES
Last week Stripe dropped Bitcoin from its payment platform, stating that high fees made it ineffective as a payment solution. Stripe went on to say they would be looking into other digital currencies for the platform.
This move to find a more effective digital currency is echoed in the overall state of the marketplace. Many digital currency users are moving to other coins that offered lower fees and faster transaction times. The movement to other coins may have been one of the factors which caused Bitcoin’s overall market cap dominance to fall from 65% to 33% in the last month.
All of these signs look fairly bad for Bitcoin, who has been the ‘king of digital currency’ since its inception.
WHAT CAUSES THE HIGH FEES?
Bitcoin’s mempool, short for ‘memory pool,’ is a digital waiting area for unprocessed Bitcoin transactions. Funds sent by users wait in the mempool until Bitcoin’s miners can process the transaction.
When demand on the network is high the mempool starts to bloat with unprocessed transactions creating a bottleneck.
Bitcoin is designed to allow users to choose from a range of transaction fees. The higher the fee the user is willing to pay, the sooner their transaction will be processed. Choosing low fees during peak activity could lead to that transaction taking hours, or even days, to clear.
Often, Bitcoin users do not have a choice of what fee they wish to pay. Many wallets and exchanges automatically set a rate that is high so that transactions are processed quickly.
Bitcoin recent spike in popularity has caused a recent spike in the mempool as well. This backlog in the mempool has driven the fees up.
BITCOIN BREAKS FREE FROM ITS ESCALATING TRANSACTION FEES
The exact reason why the backlog of the mempool has decreased is unknown. Likely, the cause is a combination of a few new advances in Bitcoin technology that are slowly being implemented into the network.
The Bitcoin blockchain is comprised of many individual blocks, which are a record of all transactions processed at that time. The size of this block is limited, this has led to some of Bitcoin’s scaling issues.
SegWit is a proposed scaling solution created by its core team of developers. SegWit increases the block size limit. It also removes some of the data that needs to be stored in the block, which makes it more efficient. Increasing the amount of information stored in a block also increases the rate in which the transactions in the mempool can be cleared.
SegWit has not been fully integrated into Bitcoin, but increased SegWit adoption may be one factor leading to the mempool clearing.
SegWit also allows the implementation of second layer scaling solutions, such as the Lightning Network (LN). Although still in testing, LN has close to 300 working nodes. The developers behind LN hope that once fully implemented it will alleviate much of the congestion on the network.
The total transactions on the network have also dropped considerably since the highs it saw December. One factor may simply be that people got tired of paying the high transaction fees and are using other digital currencies.
The decrease in fees could not have come at a better time. It has given the community a much-needed break from paying high transaction fees and rekindled people’s faith in Bitcoin.
There are many bright minds working on scaling solutions, which will hopefully one day keep the fees permanently low.
Still high
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