Since its inception, Bitcoin has held the lead in mass adoption and market capitalization, remaining the most secure cryptocurrency in the context of resistance to attacks 51%.
Despite the modest throughput of the blockchain, due to the high degree of decentralization and the peculiarities of the Proof-of-Work (PoW) algorithm, the average bitcoin transaction fee has been kept near historical lows for a long time.
Even during periods of increased on-chain activity, transferring funds in the network of the first cryptocurrency is cheaper than a similar operation in Ethereum.
Armed with best practices Galaxy Digital ResearchCryplogger figured out the reasons for the significant reduction in commissions in the bitcoin network.
- The decrease in the average transaction fee in the bitcoin network is due to the introduction of innovative technologies, and not a decline in on-chain activity against the backdrop of a bear market.
- The downward trend in fees has been observed since June 2021 against the backdrop of a significant increase in the share of SegWit transactions, the introduction of batching by exchanges, and the development of the Lightning Network.
- A significant role was played by Tether’s refusal to further issue USDT on the Omni Network in favor of other, faster blockchains.
Low fees despite volatility
During busy market periods, fees on the Bitcoin network and other PoW-based cryptocurrencies tend to rise. Against the background of volatility, on-chain activity often increases, and with it the competition for a place in the block.
Since 2012, this has been the case – the bullish phases of the market were accompanied by an increase in commissions. However, there is an exception: in 2021, when the price of bitcoin reached an all-time high (ATH) near $69,000, fees remained at historically low levels.
The chart above shows the dynamics of the price of bitcoin and the average daily transaction fee. The latter indicator is calculated by dividing the total amount of commissions in BTC by the daily number of transactions.
The following chart illustrates the dynamics of the average transaction fee in dollar terms against the backdrop of the Bitcoin price trajectory.
You can find that since mid-2021, the indicator is also close to historically low values, despite the increase in the price of bitcoin against ATH.
According to Galaxy Digital Research analysts, in 2022, the average annual fee for a bitcoin transaction was 0.00004541 BTC, while the median was 0.00001292 BTC. The latter figure is the lowest, except for 2011.
The table shows that the average annual commission of 0.00004541 BTC is an all-time low.
If we count in dollars, then 2022 is not a record year: $1.86 is the average commission, $0.53 is the median. The first indicator is the lowest since 2019, but then the price of BTC was about 10% of the current one. The median value of $0.53 is the highest since 2016.
With the release of Bitcoin Core 0.11.0 in July 2015 was introduced the minimum commission is 1000 satoshi. This is done to counter spam attacks.
During periods of high demand for block space, the mempool usually contains many unconfirmed transactions. Competing with each other, users increase the size of the commission for faster inclusion of the transaction in the block.
Transactions with a higher fee are usually confirmed faster, because for economic reasons they are more prioritized by miners. For on-chain analysts, block completion rates are an important indicator of market activity.
The chart below shows that the blocks were filled to capacity:
- in 2017, when bitcoin was moving to levels near $20,000;
- in 2019 — against the background of the price recovery to the level of $13,000;
- throughout 2020 and until the end of the first half of 2021 – when bitcoin “took off” to an all-time high.
But from June 2021 until now, the blocks have not been filled to capacity. At the same time, commissions were at extremely low values.
“Even against the background of growth to new heights in the fall of 2021, when the price of bitcoin reached $69,000, the blocks were not filled to the limit, and the commissions did not grow,” Galaxy Digital Research experts shared their observations.
According to them, the last nine months are “the only period in the modern history of bitcoin” when, against the backdrop of record BTC / USD rates, blocks were not completely filled.
“When blocks are not filled amid high demand, fees can rise, but not as dramatically,” the analysts explained.
One of the main factors that contributed to reducing the load on the Bitcoin blockchain was the increase in the share of SegWit transactions.
Segregated Witness or SegWit is a protocol update implemented in August 2017 through a soft fork (BIP-148). It made it possible to increase the efficiency of the Bitcoin blockchain without increasing the block size, eliminated the problem of transaction plasticity, and also paved the way for the development of the Lightning Network.
To solve the scalability problem, Segregated Witness extracts the transaction signatures and places them in a separate data structure. When a signature is removed from a transaction, its size is reduced by approximately 47%. Thus, a block can hold almost twice as many transactions.
In addition, removing the signature from transaction inputs increases the block size from 1 MB to about 4 MB.
It took about five years for the share of SegWit transactions to exceed 80%.
The performance of the bitcoin blockchain was also positively affected by the use of batching by exchanges, that is, combining transactions into one package.
In early 2020, Coinbase started using this technique.
“By bundling transactions, Coinbase users can benefit from network fee savings of over 50%. Batching also helps free up space on the blockchain and increases the scalability of bitcoin for all network users,” explained representatives of the largest US cryptocurrency exchange.
With this technique, a single transaction that executes multiple user send requests takes up less space in each block than each processed individually.
One Bitcoin Optech article states that adding just four additional recipients to a typical single-entry bitcoin transaction allows the sender to save over 60% on fees.
According to Galaxy Digital Research, a significant increase in batching usage was noted in May 2021, which coincided with the “beginning of a period of low commissions.”
“The wider use of batching significantly reduces the use of block space per payment,” the researchers emphasized.
On-chain activity has been steadily declining since 2019, when the daily figure exceeded 500,000 transactions.
The chart below illustrates:
- block occupancy dynamics;
- dynamics of the number of transactions, including those using the function OP_RETURN.
“The volume of OP_RETURN transactions that use bitcoin to store arbitrary data instead of moving funds jumped in late 2018, after the launch of the VeriBlock project,” the researchers noted.
Using the bitcoin blockchain to secure altcoins, the VeriBlock project launched the mainnet in March 2019. At that time, according to The Block analysts and cryptocurrency industry veteran Jameson Lopp, the share of OP_RETURN transactions was at least 25%.
As you can see in the chart above, the activity of the project soon dropped, as did the number of related transactions.
In addition to VeriBlock, the OP_RETURN function was used by Tether to support the USDT stablecoin based on the Bitcoin-related Omni Network protocol.
At the beginning of 2019, Tether began to actively integrate other blockchains, including Ethereum. As a result, the volume of USDT transactions based on the Omni Network began to decline steadily.
“Despite the fact that Tether actually moved away from the Omni Network a few years ago, the last rudiments of Bitcoin-based USDT all but disappeared in May 2021. It also coincided with the beginning of the current era of low fees, ”said Galaxy Digital Research.
Decreased Miner Selling Pressure
In May-June 2021, under pressure from the authorities, Chinese miners began to massively transport equipment to other countries, mainly to the United States, Canada and Kazakhstan.
The chart below shows that since about the second half of last year, there has been a noticeable decrease in the outflows of funds from bitcoin addresses of individual miners (1-hop). The start of this process also coincided with the beginning of the “era of low fees”.
At the beginning of 2022, the indicator was near all-time lows, indicating a significant decrease in miner selling pressure.
“Slight selling pressure despite hashrate recovery is due in part to the migration of miners to North America and the growth of publicly traded mining companies. The latter are increasingly funding their operations by increasing debt and equity, rather than through coin sales,” Galaxy Digital Research analysts shared their opinion.
In early April, the share of public mining companies in the bitcoin hashrate reached 19%. According to the observations of analysts at Arcane Research, in January 2021, the corresponding figure was only 3%.
Against the backdrop of the beginning of the “era of low fees”, activity on the Lightning Network (LN) also increased significantly.
The graph below shows the rapid growth in the number of LN channels since June 2021.
“We view the increase in the number of Lightning channels as an indicator of the growing demand for high-performance bitcoin transactions that can replace on-chain transactions,” said Galaxy Digital Research experts.
The aforementioned drop in daily on-chain transactions could be partly due to the adoption of the Lightning Network, they said.
At the time of writing (05/23/2022), the LN network is supported by 17,545 active nodes interconnected by 84,799 payment channels.
In November 2021, the Taproot update is activated. The biggest upgrade of the Bitcoin network since the activation of SegWit includes several important technical improvements, the main of which is the implementation of the Schnorr signature scheme and the concept of MAST.
The update is designed to improve the privacy, efficiency and scalability of the network of the first cryptocurrency.
In the context of on-chain analysis, Taproot makes complex transactions (such as those requiring multiple signatures or delayed release of funds) indistinguishable from ordinary ones.
The data size required for complex transactions is also reduced. This contributes to lower user fees.
Among other things, Taproot reduces the cost of LN payments, making them more flexible and private.
In recent years, bitcoin has often been criticized for its low throughput and expensive transactions. However, thanks to the introduction and gradual adoption of advanced technologies, the situation has changed radically.
Now, even during periods of high market volatility, blocks are not filled to capacity, and the average transaction fee rarely exceeds the $2 mark.
Despite the regular attacks of critics, bitcoin was and remains digital gold – so far, not a single crypto asset has surpassed it in terms of capitalization. The secret of success lies not only in the first-mover advantage, but significant contributions were made by developers and the community, without which there would be no SegWit, Lightning Network and Taproot.
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