Why Bitcoin Transaction Fees Drop?
The substantially high Bitcoin transactions fees have been a predominant topic in recent times, especially last year.
But the conversation has shifted as transaction fees are plummeting in 2018.
Such is the severity of the situation that Bitcoin miners are collecting slightly less than a third of the total fees they were gathering in late in 2017.
Only a few months after the trades hit a record high in December last year clocking $34.09, the median transaction fee has dropped to an unexpected low of $0.20 in 2018, according to figures derived from the most recent cryptocurrency fees charts.
And while there have been numerous emerging theories attempting to explain this concern, cryptocurrency analysts submit that there is more than a single reason as to why there is a decline in the transaction fees.
In their proposals, they cite the following major reasons, among others:
# 1: Fewer Bitcoin Transactions
Currently, there are only about 190,000 Bitcoin transactions on a daily basis, as outlined by Blockchain.info data.
This is a significantly lower number of transactions compared to the more than 400,000 daily transactions recorded in December 2017.
At the time, the market surge had hit its peak, and the fees were considerably high.
Bitcoin’s functionality mandates for the concurrent operation of numerous computers. However, the quantity of data these machines are able to process at one time is also limited.
The network records an increase in transaction prices whenever there is significant traffic demand. This is known as the Bitcoin scalability problem.
Transactions are only writable on the blockchain at a given rate, and once the capacity surpasses its limit, it can get backlogged and the recording of a single transaction can even take a whole day.
This, of course, reduces the number of transactions and subsequently the transaction fees.
Nonetheless, developers are looking to establishing a solution to this problem that could also be the cause of the drop in transaction fees.
# 2: Segregated Witness
SegWit, as it’s popularly known, is a proposed update to Bitcoin’s operations. It is meant to solve numerous issues in Bitcoin’s blockchain.
The concept is an example of a typical “soft fork” or an alteration to the Bitcoin protocol starting at a particular block.
This new type of transaction rearranges the format of data storage in Bitcoin blocks and enhances transaction capacity.
SegWit facilitates the building of second-layer solutions to boost transaction speed. The most common one is called Lightning Network, which is now used by both Litecoin and Bitcoin.
This protocol builds transaction channels outside the blockchain, enabling the movement of funds by users to several predetermined locations.
After the adequate distribution of funds, a final version of all these transactions is written into the Bitcoin blockchain.
It is somewhat similar to submitting a final transactions’ draft rather than creating numerous transactions on the blockchain.
Payment protocols such as Lightning Network (run by SegWit) have in the past been touted as the remedy to the earlier mentioned problems of scalability.
Nonetheless, according to SegWit Party, the tracking site for SegWit, Bitcoin transactions which have been finalized by this protocol are increasing daily. They jumped from 15 percent to 30 percent this week.
Therefore, despite SegWit working well towards helping scale down network congestion, it nonetheless is not the only reason for decreased fees.
# 3: Batching Transactions
“Batching” is yet another technological upgrade which might be resulting in the declining fees. Cryptocurrency exchanges such as Coinbase usually write all the Bitcoin transactions into the blockchain.
Not only can this be time-consuming, but it is also quite ineffective.
Nonetheless, transaction batching allows the sending of payments to numerous recipients through a single on-chain transaction.
Today, the use of batching has significantly increased starting from 2017 with the most prominent use noted in late November. What’s more, reports also indicate that this approach can save transaction fees by up to 80 percent.
Based on the impulsive increase in the use of batching and its supposed ability to reduce transaction fees, it is therefore easy to see why transactions fees have steadily dropped.
# 4: Declining Hype and Interest
Finally, it is worth noting that over the years, the overall interest in Bitcoin has substantially declined.
Based on data from Google Trends, after the December 2017 market crash, the overall Bitcoin searches on Google have steadily plummeted.
This diminishing hype around Bitcoin outlines that fewer individuals are now interested in transacting it, a factor that could inspire reduced network traffic.
Taking into consideration all these factors, it gets somewhat easier to identify why Bitcoin transaction fees are dropping so significantly.
Nonetheless, the wide array of different variables involved makes it hard to pinpoint a single reason for the same. It is more or less a combination of these and other factors.
As these various variables change once more in the near future, the fees could also skyrocket quite easily. It only remains to be seen what will happen next.