Why I believe that Bitcoin Legacy fees will never go down again (Post by Bitkorrun on Reddit)

For the past two years I have done tech support at a major cryptocurrency exchange for a living, but I can't tell you which one. Most of the people I deal with tend to be novice users, whose ability to understand this protocol is limited.

We tend to get a lot of issues with people who try to send their bitcoins to a merchant or who seek to sell bitcoins and receive a payment on their bank account. There are various use cases where rapid inclusion of their transaction in a block becomes necessary. Consider the local bitcoins phenomenon for example: How would this work if you have to wait hours until the bitcoin transaction has been included in a block? Sometimes, we also have a deposit to our exchange that we can't credit yet after a day, because the transaction still hasn't been included in a block. We tend to use a CPFP transaction for such a deposit, but this costs us money and doesn't solve the problem. If we were to charge the customer for such a transaction, we'd find ourselves losing customers: Would you want to use an exchange that forces you to pay money to deposit Bitcoin?

Sometimes, people wish to send all their Bitcoins to a particular destination address. I obviously have to tell them that this is impossible, due to the transaction fees, but they're requires to submit an exact amount for certain service providers, so I tell them to enter a custom fee. I tend to round this down to a nice number. I used to suggest 0.001, but now I tend to suggest 0.002, or even 0.003 BTC if it's really urgent.

The important thing to consider is that those customers now learn a new habit: To send Bitcoin, it's best to use a high fee. If Bitcoin transaction fees go down on the network, they won't necessarily respond to that. They have no clue what the average fee on the network is, they just know what worked the last time and so that's what they will do from now on. Compare transaction fees to an elastic material: You can stretch the material and it will recover, but it will not return to the shape it originally had. Similarly, high traffic on the network increases fees, but a return to previous conditions doesn't bring fees back to their original level.

I can tell my customers that the high load on the network is over, but what guarantee can I give them? If the Bitcoin Cash difficulty adjusts, the Bitcoin Legacy network may suddenly be stressed again, as miners return to the most profitable chain. This means that there is a sudden lack of space on Bitcoin Legacy again. I can't make a reliable prediction about how many Bitcoin blocks will be found tomorrow. I might guess at the difficulty of Bitcoin Cash, but a sudden price change in either coin or even random statistical fluctuation can cause a sudden space constraint.

My customers want a guarantee I can't deliver to them, that a deposit will be verified within the next 24 hours. I know it's likely to happen, but I can't afford to make such a guarantee. As a result, I'm forced to recommend them to simply add a very high transaction fee. As a result, the fee that we consider normal is continually psychologically adjusted upwards. When a customer emails me and wants to know what kind of fee he should add, I can't afford to suggest adding a fee that's lower than he's used to, out of some saintly moral commitment I might have to Bitcoin Legacy. I need my customers to be satisfied and minimize their complaints, so I always err on the side of high fees. I expect that others in this ecosystem are doing the same for their customers, which means that what constitutes a high fee will continually increase.

Worst of all is the fact that we now don't know what the actual demand for transaction space is. This is a well known economic phenomenon. In response to scarcity, consumers change their behavior, thereby making it difficult to judge how high the demand for a good actually is. As a result, we may now have entered a situation where people have coins they're not spending because they don't want to bother with such high fees. There may be an entire invisible backlog that we don't know about.

So, now we have Segwit activated and it's supposed to solve our problem, but I see no serious reason to believe it's having any desired effect. Mempool size has continued to grow after its activation and the promised increase in transaction space will take a very long time. In an ideal outcome, we would have an increase in space of around 70%. During a good bubble, that's how many new individuals start using Bitcoin within a few months.

The big problem I see is that we will one day have a rush for the exit. I expect that a lot of people will lose a lot of money as a consequence. The reason could be as following: People see the average transaction fee is increasing and as a result wish to sell their bitcoins before the transaction fees start to increase even further. As a result, the rise in transaction fees becomes a self-fulfilling prophecy. The growing mempool will have the effect of making people's faith in Bitcoin start to waiver, thereby causing a decline in the price. This decline in the price will have the effect of making more people choose to sell their coins, thereby making the mempool even bigger and causing the price to go down even more.

The next consequence becomes that miners lose their incentive to mine Bitcoins. When you're mining bitcoins, you do so based on an expectation of what the future price of bitcoin will be. You're not able to sell coins that you mined, until around sixteen hours from the moment you mined your block, assuming stable hashpower. If the price is going down, this creates a direct incentive for you to switch over to mining an alternative cryptocurrency. Upon doing so, you cause further pressure on the Bitcoin block space, because the same amount of people will be competing for fewer blocks.

When the problem becomes visible, exchanges like mine will shut their doors. We will first increase the minimum number of blocks before crediting a deposit, because we will be fearful of a potential 51% attack. During the August 1 episode, many customers found themselves faces with their favorite Bitcoin merchants shutting down and refusing to carry out any commercial activities. If the network is under sufficient threat, many exchanges will once again decide to shut down: We simply can't afford the risk.

If you think the rush for the exit was bad enough, now consider a situation in which the fee you're forced to pay to send your transaction is increasing every day, the price you will get for your coins on the market is going down and the places where you once bought your bitcoin now refuse to buy them back from you. If you have an IQ above room temperature, you will wake up, read the headlines in the news and try to sell your own bitcoins before it is too late. As a result, the chaos will be complete and the network will be effectively paralyzed. Bitcoin will probably never recover from this incident and the reputation of all cryptocurrencies will be damaged. It might mean the end of cryptocurrency outside of very niche uses. The Zeppelin was a perfectly fine invention, but it never recovered from the reputation damage it suffered when the Hindenburg crashed. We may find ourselves never recovering from the Bitcoin exit rush.