The median mid-day transaction cost for the Bitcoin network dropped to $ 0.79, the six-month low, on Sunday.
This is a 97% drop from the $ 34 peak reached on December 23. From mid-December to mid-January, the median daily bitcoin transaction costs were above $ 10, but steadily declined since then.
The high cost of the past few months has been a crisis in the Bitcoin network. Bitcoin fans once touted the network's zero fees as a selling point. But as expenses soared in late 2017, businesses started to pull out of the network
Game maker Valve stopped accepting bitcoin payments on its Steam platform last December and said "supporting Bitcoin as a payment option has become untenable." In the same month, Bitpay announced Bitcoin payments on behalf of merchants It set the minimum transaction size to $ 100 - though the company quickly reduced the threshold to $ 5 in response to customer outrage. Stripe, a major credit card processor, stopped accepting bitcoin payments in January, arguing that due to the high fees, payment networks have seen "fewer and fewer use cases
However, fees have declined in recent weeks. Yesterday, for the first time since September, the median bitcoin cost fell below $ 1. The question is whether these costs will remain low or temporarily alleviate. The bitcoin community is racing to implement new technologies that allow Bitcoin payments to continue expanding without incurring the cost of disabling costs.
Why bitcoin costs have dropped
To a large extent, high fees and charges have become a problem-solving problem. As costs soared, some users looked for ways to use the network more efficiently, while others stopped using the network altogether.
For example, a single bitcoin transaction can technically pay multiple different payees simultaneously. This effectively puts more payments into less space on the blockchain. The company does not bother with these optimizations when the costs are low. As the cost goes up, the company takes it as a priority. As a result, the volume of output per transaction has been increasing in recent weeks, helping to ease congestion.
At the same time, as we have seen, high costs encourage some companies to stop using Bitcoin. Some companies like Valve have completely got rid of cryptocurrency games. Others move to other blockchain networks - such as Litecoin, Ethereum or bitcoin cash - for much lower transaction costs. When a company leaves the Bitcoin ecosystem, it helps to reduce costs. But this is clearly not a positive signal for the long-term future of bitcoin.
At the same time, speculative bubbles in bitcoin have been cooling in recent weeks, which may also result in lower costs. In December last year, money poured into the Bitcoin market, and people were willing to pay the highest U.S. dollar to get their bitcoin into the exchange for sale at a high price. But since the December high of 19,500 U.S. dollars, Bitcoin prices have plunged. Earlier this month it hit a low of $ 6,000, and by Monday afternoon a bitcoin was worth about $ 11,000. Cooling the market naturally means reducing the need for Bitcoin transfers for speculative purposes.
Separation of witnesses can provide some breathing space
The big question is what will happen if the use of bitcoin networks continues to grow. The hardcoded size of the block size limits the number of transactions that the Bitcoin network can process per second. Some in the Bitcoin community want to simply increase the block size. But they did not get their way and became very frustrated that in August last year they launched a rival network called Bitcoin Cash.
Since their departure, bitcoin factions have dominated the mainstream Bitcoin network. Rather than simply increasing their maximum block size, they focus on a technology upgrade known as isolation witness, separating encrypted signatures from other blockchain data. These signatures do not count in the 1 megabyte block size limit, so this is actually an increase in block size. It came into force in August, which should help address the network's capacity problems last fall.
The problem is that users must modify their bitcoin software to use the new, more efficient transaction format. But software providers need time to make the necessary changes, and the process is slower than what advocates want. Six months after the upgrade took effect, only about 14% of bitcoin transactions use the new format - a figure that has barely changed since the initial excitement after the upgrade started around October.
Some bitcoin companies delayed posting angered some bitcoin guerrillas. Coinbase, one of the most popular services for buying, selling and storing bitcoin, has been a subject of criticism.
Coinbase insisted that it would only take time to update software for a company of its size. The company said it plans to begin supporting isolation testimony by the end of February.
Other companies are also working hard to upgrade, which means we should see a steady increase in the adoption of segregation witnesses in the coming months. This should give bitcoin world a little breathing room.
But isolation testimony is not everything. If 100% of the deals use the new format, it will roughly double the network capacity - but that's it. A further increase will require more drastic changes.
The Bitcoin community is looking to Lightning
The long-term vision of the bitcoin community is a new payment network called Lightning that serves as the second tier above the existing Bitcoin network. It can significantly expand the capacity of Bitcoin networks by diverting most of the daily transactions outside the blockchain. You can check out our recent Lightning interpreter for a complete description of how it works.
In theory, Lightning should be able to significantly expand the real power of Bitcoin networks. However, there are many practical challenges ahead. Lightning will be a good fit for some bitcoin apps and not for others, but it remains to be seen how many Bitcoin communities will eventually shift from legacy bitcoin transactions to emerging lightning deals.
And lightning will face the same challenges as the quarantine testimony: It takes months to be widely adopted, even after few years, even after the network is officially released. In fact, lightning is a bigger change than the testimony of isolation, so we can expect that this change will take longer. This means that while Lightning can fulfill the hopes of all its backers, it can take years before it can seriously weaken the demand for the underlying Bitcoin network.
All of this means that the recovery of Bitcoin costs is a real possibility. Much depends on the price of Bitcoin in the coming months. If bitcoin's price hit a new high, we're likely to see bitcoin spending hit a new high. On the other hand, the cost may remain reasonable if the Bitcoin bubble continues to contract. In this sense, the drop in bitcoin prices can be a fake blessing.