Bitcoin transaction fees climb as blocks fill to capacity. Miners collect fees in addition to their 12.5 BTC block reward. Some recent blocks have yielded over 2 BTC in fees. That revenue helps miners
Bitcoin transaction fees climb as blocks fill to capacity. Miners collect fees in addition to their 12.5 BTC block reward. Some recent blocks have yielded over 2 BTC in fees. That revenue helps miners but creates pressure for individuals and businesses that moved funds cheaply in the past. Anyone accustomed to low on-chain costs must find new ways to move bitcoin.
The bitcoin network handles over 300,000 transactions each day, yet it's unclear how many users depend on the peer-to-peer properties that define bitcoin. As on-chain fees rise, those without specific need for the network's security guarantees may explore alternatives. In bitcoin's early years, moving funds between your own wallets was free. That activity now costs money. Two regulated companies gain nothing from broadcasting their transactions across a blockchain.
Measuring inter-institutional transfers proves difficult because the industry doesn't publish data. But one bitcoin company provided insight. Ben Davenport, CTO at BitGo, told MiningPool that half of his company's customer transactions flow to other BitGo customers. "Presumably some good fraction of the external 50 percent also belong to other services which don't use BitGo, like Coinbase, Xapo, or other exchanges not using BitGo," Davenport said. "So I'd estimate as high as 75 percent of transaction flow involving companies is inter-institutional."
Companies can manage balances off-chain and submit only final settlement to the blockchain at day's end, an approach the industry has discussed for years. Jimmy Song, principal blockchain architect at Paxos and former VP of Engineering at Armory Technologies, explored this on Medium. Song suggested that services like Coinbase and Purse could strike bilateral agreements where payments occur off-chain with final settlement on-chain later. Coinbase and Purse do this now. Purse accepts deposits from Coinbase customers through Coinbase's internal ledger, and Purse CEO Andrew Lee said this represents 25 percent of all Purse deposits. When asked if high on-chain fees might encourage more partnerships of this type, Lee said, "If fees continue to go up, things like that will make sense." Purse's user base in India generates significant outflows. Could an off-chain deal with Unocoin, the India-based exchange, help? "Yes, we have a partnership already," Lee said. "If fees continue to go up, things like that will make sense." Lee believes on-chain fees remain too high and protocol-level fixes are needed.
BitPay CEO Stephen Pair told Bitcoin Magazine his company is adapting to full blocks.
Off-chain agreements between trusted institutions work for regulated companies, but the less-regulated parts of the bitcoin world, including darknet markets, need trustless approaches. The lightning network enables this. Smart contracts embedded in lightning prevent cheating on off-chain transfers. Code itself enforces promises. Less efficient versions of the lightning network are possible today, but full activation of Segregated Witness would unlock the complete system. Blockstream's Liquid and Stash's voting pools offer alternatives. These systems allow groups of centralized institutions to hold and transfer user funds through a single multisig address.
