Have you noticed the change in Bitcoin fees?
The transaction fee is processed by and received by the bitcoin miner. When a new bitcoin block is generated with a successful hash, the information for all of the transactions is included with the block and all transaction fees are collected by that user creating the block, who is free to assign those fees to himself.
I saw the headline in Coin Telegraph and couldn’t believe it: “Bitcoin Transaction Fees Significantly Decrease, Charlie Shrem Pays $0.25 Fee”. Even though I know and trust Charlie Shrem, I still thought this news was a fluke.
For those who haven’t been following the ugly geek war happening behind the scenes of Bitcoin, here’s a recap, oversimplifying a complex situation:
As little as two years ago, Bitcoin’s median transaction fee was as low as $0.02 worth of bitcoin. That means half of all bitcoin transaction fees cost less than $0.02 and the other half cost over $0.02.
With Bitcoin, there are fees to send, not receive. (This is the reverse of credit cards, where the merchant pays a fee to receive.) In the past, if one wanted, one could send bitcoin with no fee and it would go through, just without any priority. As you can see from this chart, the median transaction fee has shot up mostly in the last six months or so, and it has risen has high as $3.00 worth of bitcoin!
That means that had I wanted, in the last few months, to go buy a $2.00 drink at Corner News with bitcoin here on Main Street in Keene, NH, it might cost me $3 just to send the $2, making it a $5 drink! No sane customer would pay a crazy fee like that. This dramatic rise in fees has destroyed bitcoin’s previous usefulness for microtransactions. No more bitcoin-operated snack machines, no more using bitcoin for small online tips, no more Watch-my-Bit micro-donation video streaming service.
It was getting harder and harder, due to the rising fees, to want to spend and promote bitcoin. Bitcoin is essentially broken for small dollar uses, meaning it’s far less useful as an actual currency, which is what it was intended to be. Sadly, there is a group of bitcoiners who want Bitcoin to be damaged in this way, and they somehow believe it will stay on top of the world’s hundreds of cryptocurrencies, though it’s been losing its market dominance over the last several months, as the competing cryptocurrencies have been rising to meet the consumer demand for a fast, low-fee crypto, like Bitcoin once was.
Technically, the schism revolves around how to solve the growing pains that Bitcoin has been experiencing. The reason the fees have shot up is because the Bitcoin network is full of transactions and people sending the transactions are bidding up the fee prices to ensure their transactions get priority. Bitcoin has become so popular worldwide that the “blocks” are full. The blocks are what create the “blockchain”, which is the decentralized, distributed, immutable ledger that is the guts of the Bitcoin network. The blocks are “mined” onto the blockchain by powerful computers doing very complex math.
As I understand it, and I’m not a Bitcoin programmer, when the blocks are full, all the lower-fee transactions that didn’t make it into a block go into the “mempool”, where they have been piling up in large quantity. That means that not only have Bitcoin’s fees been super-high, but also that transactions with lower-than-the-median fees can get stuck, sometimes for DAYS. Bitcoin, despite its amazingly high price (over $2,500 at this moment), is pretty busted compared to how it was.
At Sunday’s meetup of the Keene Bitcoin Network at Rick’s Ice Cream, we put the claims of low fees to the test. Darryl pulled up his Airbitz wallet and sent me $1.00 worth of bitcoin. The recommended fee from Airbitz’ calculations was $0.01! Unbelievable, right? Recommended fees have been as high as $1.50-$3.00 in recent weeks, but sure enough, his transaction went through and was confirmed in under four minutes! Don’t believe it? I couldn’t either, but here it is on the blockchain. See for yourself. I then sent $1.00 worth of bitcoin to Darryl with my Airbitz wallet, and it recommended a $0.08 fee. Again, confirmed in under four minutes! (Bitcoin transactions can be seen on the network usually immediately after they are sent, but they “confirm” after being included in a block. They then keep getting more confirmations after that.)
There are two very important questions, first, which bitcoin wallet software is working properly and recommending the new, lower fees and which ones are still recommending the higher fees?
According to our testing, Airbitz and Blockchain.info’s wallets are working correctly, recommending saner fees, while Mycelium and Jaxx are still making very high fee recommendations. We had Jaxx’s Chief Operating Officer, the very same Charlie Shrem, on my talk radio show, “Free Talk Live” on Sunday night to talk about the new, lower-fees and if Jaxx will be updating their wallet to reflect it. Since we did not do an exhaustive check of the wallet software available, please feel free to post the normal recommended fee levels from your wallet(s) in the comments.
Today’s recommended fees are higher than Sunday’s. As I am writing this on Independence Day afternoon, Airbitz recommended a $0.47 fee to send, then it recommended $0.70 for a subsequent transaction. Perhaps this respite from insane fees will be short lived, but for now $0.47-$0.70 still feels a lot better than $2.50. The fact is, due to the mempool decrease that happened over the last month, bitcoin is now cheaper and faster than in recent months. However, the second important question is why did the mempool decrease as much as it has, when it did?
This question leads into conspiracy territory, because there’s probably no way to really know why the mempool dropped by over 100 MB in approximately one month’s time. However, it’s very interesting that the beginning of the drop coincided with the “New York Agreement” (Segwit2x). At the end of May, people representing some major bitcoin companies and 83% of the mining power in the Bitcoin world came together at a conference and after years of debate finally hammered out an agreement to implement both of the competing proposals to fix Bitcoin’s network capacity issues. It was shortly after this agreement that the mempool size began to fall. Why? Some have suggested that the Bitcoin network was being spammed with junk transactions and that whoever was spamming it, ceased after the agreement was put in place. That’s obviously speculation, but if it’s true, then who was doing the spamming? Was it the people supporting small blocks? The people supporting large blocks? Both of them? Heck, was it Satoshi Nakamoto, the anonymous and disappeared-for-years creator of Bitcoin? Who knows, but I hope whoever it was doesn’t start it up again. Whoever it was, was willing to spend a good amount of money doing it, as it has gone on for weeks, if that’s indeed what happened.
Others have said that it wasn’t the cessation of spamming, but that it was just the market choosing to use other cryptocurrency. On its face, this seems like the more reasonable explanation, given the high fees would drive away all the small dollar transactions from Bitcoin and into the arms of the eager, low-fee competitors like DASH. Indeed, when looking at a chart of confirmed bitcoin transactions per day, there is a decline over the last month, though not as drastic as the decline on the mempool chart.
I’m not a Bitcoin engineer or statistician, so I’m sure there are various interpretations and other charts to look at. However, if the explanation is that people all of a sudden started dropping off of spending bitcoin, then why did that drop happen so consistently over the last month, but not prior, when fees were equally as bad for quite a while? Why did the drop coincide with the New York Agreement? Obviously, correlation is not causation, but the coincidence is remarkable.
The next question is what will happen in the Segwit2x/UASF controversy set to possibly boil over on August 1st? That’s a subject for a separate, somewhat more technical article. A quick google will reveal a large variety of opinions on the subject.
If you’re a libertarian and lover of cryptocurrency, you really ought to move to New Hampshire as part of the NH Freedom Migration – the Bitcoin capitol of the world! If you want to connect with other cryptocurrency users already here in NH, please check out the Shire Bitcoin Forums.
P.S. In case you were wondering why I used different capitalization for Bitcoin, it’s because as I understand it, “Bitcoin” refers to the Bitcoin network as a whole concept, while “bitcoin” is the currency aspect of it. Thanks for reading and sharing this article!