Why are Bitcoin transaction fees so low?

Bitcoin Transaction Fees Close to Record Low Despite Significant Activityusers 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, the commission forbitcoin 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.
June 2021 saw some significantefficiency improvements that drive lower fees, including: a notable increase in Segregated Witness adoption, an increase in batch transactions, and a dramatic increase in Lightning Network usage. The growing adoption of these technologies appears to have resulted in network-wide efficiency gains.
Changes in user behavior thatcontributed to the decline in demand for block space also occurred in June 2021, including a sharp decline in Tether and other OP_RETURN transactions on the Bitcoin network, as well as a decrease in miner sales.
Although fees won't always stay the samelow, the success of bitcoin scaling by compressing transactions and improving efficiency rather than expanding the block space is a major achievement for developers who have allied themselves with the small block faction in the block size wars.

The most confusing bitcoin chart

According to most indicators, the commission forbitcoin transactions is at or close to an all-time low. Fees tend to skyrocket during periods of rapid price growth, and increased speculation breeds increased competition for block space. Every major bull run since 2012 has resulted in a corresponding increase in fees, with one major exception: a bullish rally in the fall of 2021, when BTC surged to an all-time high of around $69K while fees remained at an all-time low.

There are many ways to visualizebitcoin transaction fees, but they all show fees at or near record lows. 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.

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 it was in 2022.)

Average commission paid per shipmentbitcoin transactions in 2022 is ₿0.00004541 (the lowest ever), while the median is ₿0.00001292 (the lowest for any year except 2011). (Importantly, a minimum transaction relay fee was added in Bitcoin Core 0.11 (July 2015) to help control spam, which was taken into account when estimating median and average transaction fees through 2015.) When measured in satoshi per virtual byte (“satoshi/virt byte”), 2022 is also the lowest year ever, with a median of just over 1 satoshi/virt byte. In dollar terms, 2022 is not the cheapest fee market ever (average $1.86 and median $0.53), but the average is the lowest since 2019 (when BTC/USD traded just 10% of today's price). ), and the median is the lowest since 2016.

History of the Transaction Fee Auction

In times of high demand for block space- when there are many pending transactions - users can use transaction fees to compete for miners' attention and block inclusion by participating in a first-price auction, also known as a pay-as-you-go mechanism. 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 the congestion of pending transactions persists, the markets correct.

Bitcoin block space

Given that competition for confirmationtransactions is a key factor in BTC user fees behavior, the level of block space usage is a key metric for fee markets. Blocks were filled in 2017 when bitcoin hit $20k, in 2019 when bitcoin hit $13k, and throughout 2020 and H1 2021 when bitcoin hit all-time highs. But blocks have not been filled since June 2021 after falling to $29,000 due to China’s ban on BTC trading and mining, and fees subsequently fell to their lowest level ever. Even when bitcoin reached new all-time highs in the fall of 2021 (reaching $69k), blocks weren’t filled and fees weren’t rising. (Note that while blocks were not generally filled until 2017, some users were still paying higher fees in BTC, either to guarantee immediate inclusion, due to a lack of quality fee estimation tools, or simply because prices were so low that commissions were still missing in dollar terms).

In the era of modern bitcoin, the last 9 months -the only case where the BTC/USD all-time high did not result in 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, commissions will plummet.

Scaling Bitcoin with Segregated Witness

The main factor contributing to the reductionuse of block space is the growing adoption of Segregated witness (SegWit) transactions. Segregated Witness is an update that went live on the Bitcoin blockchain in August 2017 via a soft fork (BIP-148) that addressed an important issue of transaction flexibility and also changed how 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 signature data weight 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, bitcoin block sizes in bytes can only exceed the 1MB threshold based on the number of SegWit transactions, and it is because of the adoption of SegWit on August 24, 2017 that block sizes in bytes are seen to be starting to creep above the 1MB limit (black line). in the chart 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.

Looking at the average block weight above, wewe can see that the blocks stop being filled on average around June 2021. One of the main reasons for this is the introduction of SegWit. As of June 1, 2021, the share of transactions using SegWit (and therefore using this more efficient weight calculation) was 53%. And by July 1, increased by more than 70%. Blockchain.com, arguably the single largest Bitcoin wallet provider, has finally integrated SegWit into its platform on March 31, 2021. The surge in SegWit adoption in June 2021 illustrated below coincides with the full block decline and the start of the current low fee environment.

Growth of SegWit adoption to over 80% of alltransactions took almost 5 years since activation in August 2017. This major update to the Bitcoin blockchain was the result of several years of fighting between large and small block advocates, known as the Block Size Wars. Small block proponents believed in scaling Bitcoin through more efficient use of the protocol, while large block proponents sought to increase the block size to make room for more transactions. It took almost 5 years, but SegWit is now widely adopted, helping Bitcoin scale.

Scaling Bitcoin with transaction bundling

BTC users can also achievea significant increase in efficiency by combining several expenses into one 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 exits included in a transaction, the lower the realized exit fee and hence the higher the efficiency.

As the experts at Bitcoin Optech explained,adding just 4 additional recipients to a typical single input bitcoin transaction can save the sender over 60% in withdrawal (payment) fees. You can explore other scenarios and compare savings with the Bitcoin Optech Transaction Size Calculator.

We see that a significant increase in the proportionof daily withdrawals spent within larger batches occurred at the start of the current low fee environment in May 2021. In particular, the proportion of exits that were included in packages of 100 or more exits rose to its highest level ever, at over 23% at the end of May 2021. The percentage of outputs owned by transactions with more than three outputs (the lowest threshold we consider a batch transaction) reached 53%, the highest level ever, and remains elevated at around 50%. The 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.

Number of transactions

The daily number of transactions is steadyhas been declining since 2019, when Bitcoin was processing up to 500,000 transactions per day. The graph below shows both the daily percentage of block space filled and the number of transactions summarized by OP_RETURN and non-OP_RETURN transaction types.

To decrease in the number of transactions since the peaks2019 should be taken seriously. OP_RETURN transactions, which use Bitcoin to store arbitrary data rather than move funds, skyrocketed after 2018 after the launch of 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 secure the security of your 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 2022, the 30-day average of transactions is only slightly below 2019-2021 levels.

In addition to lowering VeriBlock, anothera major user of OP_RETURN transactions has largely left the BTC: Tether network. Although Tether left the Omni network a few years ago, the last balances of USDT on BTC mostly disappeared at the end of May 2021, which also coincided with the start of the current low fee environment.

Thus, we can conclude that the demandper transaction, 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 of 2021.

Decrease in sales of miners

Since China has imposed a complete ban on mining andbitcoin trading in May and June 2021, the miners turned off their equipment, which led to a significant decrease in the hash rate. 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 (30-day 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 that are “one hop away” from coinbase transactions, which are assumed 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 2021, and miner sales have hovered at or below historically low levels ever since. 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, check out the 2021 report: A big year for bitcoin mining.

It is noteworthy that the above datacount the coins that leave the addresses of the miners with a single transition, not the number of transactions that these entities send 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 of Lighting Network

Around the same time that the currentenvironment of low fees, activity in the Lighting Network has increased significantly. 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, 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.

Conclusion

In previous years, fees forbitcoin transactions caused great horror among users and criticism from opponents and competitors. But since June 2021, transaction fees have all but reached 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 the major speculative growth (Fall 2021), the efficiency gains provided by these scaling technologies allowed us to do something that was never possible: to keep fees at an all-time low, even as the price of BTC/USD soared to an all-time high. maxima.

Regarding scaling, implementationSegregated Witness, transaction batching, and the Lightning Network all contribute to more efficient use of block space, which reduces fee burden and increases the economic density of transactions. That these technologies are finally achieving significant levels of adoption and bringing with them noticeable efficiency gains for the entire network is a major achievement for BTC developers and those who have advocated for an approach to scaling based on transaction compression rather than blockchain expansion. which was advocated by proponents of increasing block sizes in previous years.

In addition to scaling, changes inuser behavior also contributed to the creation of low pay conditions. 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, removed the main source of transactional demand from the network. 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 sell their coins, also seems to have reduced the transactional activity of miners.

All this has led to the current situation wheretransaction 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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