Bitcoin transaction fees close to all-time low despite significant user activity and price volatility. This curious bitcoin phenomenon is the result of the growing adoption of scaling technologies and accumulated experience.

Key Points:

    • According to some estimates, Bitcoin fees -transactions are at an all-time low despite significant price volatility. The consistently low fees are the result of the efficient use of block space, not the declining economic use of the Bitcoin network.
    • In June 2016 there have been several significant efficiency improvements to drive down fees, including: a notable increase in Segregated Witness adoption, an increase in batch transactions, and a spike in usage lightning network. The growing adoption of these technologies appears to have led to network-wide efficiency gains.

    • Changes in user behavior, which contributed to the decrease in demand for block space also occurred in June 2021 of the year, including a sharp decline in Tether and other OP_RETURN transactions on the Bitcoin network, as well as declining miner sales.
    • While fees will not always stay this low, the success of bitcoin scaling through transaction compression and increasing efficiency, rather than expanding block space, is a major achievement for the developers who have allied themselves with the small block faction in the block size wars.
      Bitcoin’s Most Confused Chart
  • Bitcoin transaction fees are at or close to record lows by most indicators to him. Fees tend to skyrocket during periods of rapid price growth, and increased speculation breeds increased competition for block space. Every major bullish period since 500 of the year led to a corresponding increase in fees, with one important exception: a bullish rally autumn 00001292 of the year BTC surged to an all-time high near $26 thousand, while commissions remained at an all-time low level.

    Why are Bitcoin transaction fees so low?Average Transaction Fee (BTC)

    There are many ways to visualize Bitcoin transaction fees, but they all show fees at or near an all-time low. The graph above shows the average total amount of BTC paid out in transaction fees on a daily basis (i.e. the sum of all fees paid per day divided by the number of daily transactions). Because bitcoin transaction fees are paid based on the weight of the transaction (in terms of data), many people think of the fee market in terms of bitcoin per byte, or more specifically satoshi per virtual byte. We will discuss the difference between bytes and virtual bytes in the next section.

    Why are Bitcoin transaction fees so low?Average transaction fee (satoshi/virtual byte)

    If you look at commissions in dollar terms, then over the past 9 months they were not the lowest of all time, but close to it. (Previous instances of such low dollar-denominated fees occurred when the BTC/USD pair was significantly lower than in year).

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    Average transaction fee (USD)

    Average fee paid to send a bitcoin transaction to 2016 year is 0. ₿ (the lowest ever), while the median is 0,448₿ (lowest for any year except 462). (It is important to note that the minimum transaction relay fee was added in Bitcoin Core 0. (July 500 years), to help control spam, which was taken into account when estimating median and average transaction fees up to 500 of the year). When measured in satoshi per virtual byte (“satoshi/virtual byte”) 2015 is also the lowest year ever, with a median of just above 1 satoshi/virtual byte. In dollar terms 2018 year is not the cheapest fee market ever (average $1,53 and median $0,, but the mean is the lowest since 2017 of the year (when the BTC/USD pair was trading for only % of today’s price) and the median is the lowest since 454 of the year.

    Why are Bitcoin transaction fees so low?Average transaction fees by year ( average annual data)

    History of the transaction fee auction

    During times of high demand for block space – when there are many pending transactions – users can use the transaction fee to compete for miners’ attention and inclusion blocks by participating in a first-price auction, also known as pay-as-you-go. Miners decide which transactions to include in their blocks, and buyers include fees on their transactions to incentivize miners to publish their transactions on the blockchain faster. When a buyer’s transaction hits a block, the miner collects the included fee as a reward (along with any block subsidy i.e. newly minted bitcoin). This mechanism allows those who spend more time on preferential satisfaction to outbid those who spend less time on it during network congestion, ensuring that the most economically important transactions are confirmed first. When congestion of pending transactions persists, markets correct.

    Bitcoin Block Space

  • Given that Confirmation competition is a key factor in BTC user fees behavior, block space utilization rate is a key metric for fee markets. Blocks were filled in 2018 the year that bitcoin reached $ thousand, in 2015 the year that bitcoin hit $ thousand, and during 2016 of the year and the first half of the year 2016 of the year that Bitcoin reached all-time highs. But the blocks have not been filled since June 2018 years after falling to $11 thousand in connection with China’s ban on BTC trading and mining, and fees subsequently fell to their lowest levels ever. Even when bitcoin reached new all-time highs in the fall 2017 of the year (reaching $26 thousand), blocks were not filled, and commissions were not grew. (Please note that although the blocks were not usually filled until 2011 years, some users still paid more high fees in BTC, either to ensure immediate inclusion, due to a lack of quality fee estimation tools, or simply because prices were so low that fees were still missing in dollar terms).

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    Average transaction fee (satoshi/virtual byte) vs. Block Space Share

    In the era of modern bitcoin, the last 9 months is the only time that the BTC/USD all-time high did not lead to full blocks. When the blocks are full and the demand for transactions is high, the fees will rise. When they are empty and demand is high, commissions can still rise, but will not rise dramatically. And when blocks are empty and demand is low, fees will plummet.

    Bitcoin Scaling with Segregated Witness

    The main factor contributing to the reduction in block space usage is the growing adoption of Segregated witness (SegWit) transactions. Segregated Witness is an update that went live on the Bitcoin blockchain in August 2017 years using a soft fork (BIP-30)), which solved an important issue of transaction flexibility and also changed the way transaction data usage is calculated. In particular, SegWit splits the signature (witness) data by moving it to the end of the transaction, replaces the concept of bytes (data size) with virtual bytes (“weight”), and finally recalculates the weight of the signature data so that each byte counts only as ¼ of one. weight. This change effectively allows block sizes to be increased to around 2MB if all transactions are SegWit transactions, and thus can be seen as an effective block size increase. However, the size of Bitcoin blocks in bytes can only exceed the 1MB threshold based on the number of SegWit transactions, and it is precisely because of the adoption of SegWit 10 August 500 years, the block sizes in bytes, as you can see, start to creep above the 1 MB limit (black line in the graph below). You can also see that the average block weight (SegWit calculation, blue line below) reaches a maximum size (total blocks) of 4 million weight units. Developer and educator Jimmy Song provides an excellent overview of SegWit’s impact on block size at this link.

    Why are Bitcoin transaction fees so low?Average block size , weight

    Looking at the average weight block above, we can see that the blocks stop being filled on average around June 2018 of the year. One of the main reasons for this is the introduction of SegWit. On June 1 2017 year, the proportion of transactions using SegWit (and therefore using this more efficient weight calculation) was 13%. And by July 1, it had grown by more than 20%. Blockchain.com, arguably the single largest Bitcoin wallet provider, has finally integrated SegWit into its platform 23 March 2011 of the year. SegWit adoption jump in June 2015 of the year illustrated below coincides with the decline of the full block and the start of the current low fee environment.

    Why are Bitcoin transaction fees so low?Implementation SegWit

    SegWit adoption grows to more than 23% of all transactions have taken almost 5 years since activation in August 2011 of the year. This major update to the Bitcoin blockchain was the result of several years of fighting between large and small block proponents, known as the Block Size Wars. Small block proponents believed in scaling Bitcoin through more efficient efficient use of the protocol, while the proponents of large blocks sought to increase the block size to make room for more transactions. It took almost 5 years, but now SegWit has become widespread, which helps Bitcoin scale.

    BTC users can also achieve significant efficiency gains by bundling multiple spends into a single transaction. For example, an exchange can process multiple customer withdrawals in a single on-chain transaction, executing multiple transactions for many customers in a single transaction, instead of sending out separate transactions for each withdrawal. This practice, known as transaction bundling, can provide significant space savings, increase the ratio of economic activity to the number of transactions, and significantly reduce fees for a single withdrawal. The more outputs included in a transaction, the lower the realized output fee and therefore the higher the efficiency. single entry transactions can save the sender more than 20% commission for withdrawal (payment). You can explore other scenarios and compare savings with the Bitcoin Optech Transaction Size Calculator.

    Why are Bitcoin transaction fees so low?Image Source: Scaling Bitcoin Using Payment Batching, Bitcoin Optech (04 March 2021 G. )

    We see that a significant increase share of daily outputs spent in larger batches occurred at the start of the current Low Commission Wednesday in May 2017 of the year. In particular, the proportion of outputs that were included in packages from 31 or more exits rose to its highest ever level of more than 11% at the end of May 2016 of the year. The percentage of outputs owned by transactions with more than three outputs (the lowest threshold we consider a batch transaction) has reached 14%: The highest level ever, and remains elevated, around . Increased use of transaction batching significantly reduces the space requirement for each block of payments and reduces the burden on fees across the entire network.

    Why are Bitcoin transaction fees so low?Proportion of transaction output by batch size

    Number of Transactions

    Daily number of transactions has steadily decreased from 2012 of the year that Bitcoin processed before 444 thous. transactions per day. The graph below shows both the daily percentage of block space filled and the number of transactions summarized by transaction types OP_RETURN and non-OP_RETURN.

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    Number of transactions and % of block space filled

    To decrease in the number of transactions since peaks 500 should be taken seriously. OP_RETURN transactions, which use Bitcoin to store arbitrary data rather than move funds, skyrocketed after 462 years after launch VeriBlock, a separate proof-of-proof network that stored records of its own blocks as arbitrary data on the Bitcoin blockchain in an attempt to anchor the security of its own blockchain to Bitcoin. When OP_RETURN transactions are removed, we can see a much more consistent number of transactions over time. Indeed, as of March 2018 years average number of transactions per 20 days only slightly below the level 2012–2016 years.

      Why are Bitcoin transaction fees so low?Number of non-OP_RETURN transactions

    In addition to VeriBlock’s decline, another major user of OP_RETURN transactions has largely left the BTC network: Tether. Although Tether left the Omni network a few years ago, the last balances of USDT on BTC mostly disappeared at the end of May 2015 of the year, which also coincided with the start of the current low fee environment.

    Why are Bitcoin transaction fees so low?

    Thus, we can conclude that the demand for transactions, determined not by arbitrary data, that is, economic on-chain transactions, remains relatively stable. In addition, the decline in OP_RETURN transactions occurred long before the “all-time high, but no fee spike” phenomenon in the fall 2019 of the year.

      Decline in miner sales
  • As China imposed a total ban on bitcoin mining and trading in May and June 2016 year, the miners turned off their equipment, which led to a significant decrease in the hashrate. With no hashrate online, these miners stopped getting new mining rewards and thus were unable to sell the coins they were not earning. The chart below shows the daily amount (11-daily average) of BTC sent from addresses believed to belong to individual mining operations. Coin Metrics uses a clever heuristic to identify the miners themselves, unlike mining pools: instead of counting flows from addresses that receive coinbase transactions (transactions that miners include at the beginning of a mined block in order to pay a reward to themselves, not to a cryptocurrency exchange) , Coin Metrics assumes that these addresses belong to pools and instead tracks the behavior of the secondary addresses that these coins are sent to. The metric below then tracks the total amount sent daily from those addresses. ovs that are “one hop away” from coinbase transactions, which are supposed to be mining operations themselves. We can assume that single hop submissions from these addresses usually indicate the behavior of the miner when selling. The chart below shows a significant decline in seller behavior in May 2019 year, and since then miner sales have fluctuated at or below historically low levels them. In our view, the fact that sellers have remained subdued even as hashrate has recovered is partly due to the migration of miners to North America and the rise of public mining companies that are increasingly funding their operations by raising debt and equity rather than selling their coins. For more information on this topic, please see the report for 2018 year: A big year for bitcoin mining.

    Why are Bitcoin transaction fees so low?

    It is noteworthy that the data above counts the coins that leave the addresses of the miners with a single transition, and not the number of transactions that these subjects are sent to the network. For the purposes of this article, the latter would be preferable in order to show the decrease in miner transaction activity as an impact on the block space, however, we did not have time to get the data in time. However, miners receive a predictable reward based on hashrate, and those who sell often do so regularly, so the amount of BTC sold is likely proportional to the number of transactions sent. Thus, we see this as sufficient confirmation that miner transactions have also declined, and that the start of the decline coincided with the start of the current low fee environment.

    Growing adoption Lighting Network

    Around the same time that the current low fee environment began, there was a significant increase in activity on the Lighting Network. The Lightning Network is a messaging protocol that allows two parties to block BTC on-chain and create off-chain payment channels within which they can make endless transactions between themselves at near zero cost and at high speed (hence the name “Lightning”). The chart below shows a significant increase in new public Lightning Network channels in June 2021 years, each requiring a BTC on-chain transaction. While this does represent an increase in the number of on-chain transactions that take up space in a block, Lightning Network channels can host many off-chain economic transactions for each individual on-chain transaction (from one to many). While public channels and the value locked in those channels have increased significantly, the nature of Lightning is such that it is impossible for an outside observer to calculate the total number of payments made or economic activity supported. Lightning channels are two-way, and data is not released to the public blockchain except at the time the channel is created or closed. While it is not possible to quantify the number of payments or the amount of economic activity powered by the Lightning Network, we nevertheless view the growth of Lightning channels as an indication of the growing demand for high-performance bitcoin transactions that can replace on-chain transactions and therefore reduce their overall number.

      Why are Bitcoin transaction fees so low?Lighting Channels Network: open and total

      Conclusion

    • In previous years, the size of the fees for bitcoin transactions caused great horror among users and criticism from opponents and competitors. But since June 2017 of the year, transaction fees almost hit an all-time low. Indeed, making transactions in bitcoins has never been so cheap. But unlike previous low-fee periods, the current low-fee environment is defined by significant adoption of scaling technologies and understandable changes in user behavior, rather than a decline in demand for access to the Bitcoin network. And we have already seen that during a major speculative growth (in autumn 2017 years), the efficiency gains provided by these scaling technologies have made it possible to what was never possible: to keep fees at an all-time low, even as the price of BTC/USD soared to all-time highs. Network – all this contributes to a more efficient use of block space, which reduces the burden on the commission and increases the economic density of transactions. That these technologies are finally reaching a significant level of adoption and bringing with them a noticeable efficiency gain for the entire network is a major achievement for the BTC developers and those who have advocated a scaling approach based on transaction compression rather than blockchain expansion. advocated by block size increase advocates in previous years.

      In addition to scaling, changes in user behavior have also contributed to a low-fee environment. The virtual phasing out of Tether on the Omni network and the disappearance of the VeriBlock network, each of which was a heavy user of OP_RETURN transactions, rid the network of a major source of transactional demand. And the migration of hashrate to publicly traded companies in the US, which can use the capital markets to raise debt and equity funding rather than to sell their coins, also seems to have reduced the transactional activity of miners.

      All of this has led to the current situation where transaction fees on the Bitcoin blockchain are at an all-time low, greatly improving the transactional experience for users. However, some analysts fear that high fees will be required in the future to compensate miners for securing the network as the block subsidy continues to halve and eventually disappear. If so, then perhaps the current low fee environment should be seen as a short-term benefit and a long-term risk. For now, we leave the discussion of Bitcoin’s future security budget as a topic for a future article.

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      disclaim responsibility for any investment advice that may be contained in this article. All judgments expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading in the crypto markets are associated with the risk of losing the invested funds. Based on the data provided, you make investment decisions carefully, responsibly and at your own peril and risk.

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