ZoneBitcoin EditorialIf you have used Bitcoin recently, and especially during the month of December, you must have certainly noticed the increase in fees. Some transactions were able to reach $40 on Saturday, December 16, and remember that this is an average because transactions reached fees of more than $50.
The fees are so important that the rewards with the fees exceed those of the creation of the blocks which is set at 6,25 BTC. Indeed, block 821,485 recorded fees of 7,314 BTC.
This increase in fees on the on-chain network is not insignificant because it exceeds the record of the year, dating from December 06, 2023, with a cost having exceeded $27 per transaction. Historically, transaction fees range from $0,50 to $3. As you can see in the graph below, during periods of high demand (like 2021 in particular) transaction fees tend to increase.
Increasing fees on the blockchain network may impact the processing speed of transactions. Overall, this can cause delays in block execution and slow down the network in its operation.
This led to heated debates on social networks with different opinions on the situation. We felt it was appropriate to take stock of transaction fees in order to better understand the underlying mechanics.
What are transaction fees on the Bitcoin network?
Bitcoin transaction fees are an essential part of the blockchain network. Transaction fees on the Bitcoin network are financial incentives for miners who secure and verify transactions. In fact, when a user makes a transaction, they can choose the amount of fees they are willing to pay for miners to include their transaction in a block.
The higher the fee, the more likely the transaction is to be processed quickly by miners. This generally pushes users to pay ever higher fees for transactions to take place.
Indeed, one must imagine that there is a limited number of transactions that can be carried out. Thus, if we want a transaction to be processed, it will cost more than the others for it to be taken into account before the others. Even more, the more important a transaction is (in terms of data), the more expensive it will be in terms of fees.
What determines transaction fees?
Several factors contribute to fluctuating transaction fees on the Bitcoin network. Among them, network congestion is one of the most important. When the number of pending transactions in the mempool is high, users are incentivized to pay higher fees to speed up the confirmation of their transactions.
⚙️ A mempool (short for “memory pool”) consists of the queue of pending and unconfirmed transactions for a cryptocurrency network node, in this case, the Bitcoin network.
In reality, Bitcoin transaction fees are primarily determined by two factors: the “size” or data volume of the transaction, and user demand for block space. The faster a user wants their transaction to be confirmed, the more they are willing to pay higher fees.
Knowing that a block can contain a maximum of 4 MB of data, there is a limit to the number of transactions that can be processed in a block. A larger transaction will occupy more block data. So larger transactions generally pay higher fees per byte.
If you send a transaction using a Bitcoin wallet like BlueWallet, the wallet allows you to choose your fee rate. This fee rate will be calculated in satoshis per unit of data that your transaction will consume on the blockchain, abbreviated as sats/vByte. The total fees paid by your transaction will then be this rate multiplied by the size of your transaction.
Why are transaction fees currently increasing?
Roughly speaking, the more transactions there are to process, the higher the fees. The increase in transactions can be related to a market circumstance. For example, it turned out that the appearance of "Registrations Ordinals and standard BRC-69 clearly led to an increase in transactions. These new types of NFTs on Bitcoin are metadata attached to each satoshi that already has an ordinal number and is on the Bitcoin blockchain.
Today, more 47 million registrations were created, which represents a considerable amount of additional data on the network.
Transaction fees also tend to reflect how quickly the user wants their transaction to be validated. When a user initiates a bitcoin transaction, it enters the mempool. After validation, it is included in the block. Miners choose which transactions to validate and include in the block. So, when there is an accumulation of transactions awaiting validation, this pushes miners to prioritize transactions with higher fee rates. Most miners target transactions with higher fees because naturally they are looking to maximize their revenue. When the number of network transactions starts to decrease, transaction fees also decrease.
Please note: The on-chain transaction fees of the Bitcoin network should not be confused with the fees charged on exchange platforms such as Binance For example. Platforms charge fees for the services they offer. This usually consists of a fixed fee with a percentage of the total transaction volume.
What are the negative effects of rising fees on the network?
Rising transaction fees on Bitcoin can lead to several negative effects, the most important of which are:
- Increased costs for users: Bitcoin users have to pay higher fees to ensure their transactions are processed quickly. This can make using Bitcoin more expensive, especially for small value transactions.
- Longer confirmation times: Transactions may take longer to be confirmed and added to a block. This can be particularly concerning and distressing for users who need fast transactions, for example, for online payments or business transactions.
- Congestion and heaviness of the Mempool: An increasing number of pending transactions in the mempool can cause congestion, meaning transactions must wait to be included in a block. This can create a situation where many transactions are waiting to be processed.
- Lack of relevance of Bitcoin as a means of payment: Rising fees may reignite the debate over the suitability of Bitcoin as an everyday payment method, as high fees may make other solutions more attractive for everyday transactions. Paying for a coffee on the bitcoin network then becomes difficult and therefore not economical.
- Adoption slowdown: High transaction fees may deter new users from adopting Bitcoin, especially those seeking alternatives to traditional financial systems due to lower costs. For example, the diaspora who prefer to use Bitcoin could turn away and opt for traditional operators.
- Migration to alternative blockchains: Users unhappy with high fees on the Bitcoin network could be encouraged to use alternatives, which could encourage migration to other blockchains offering lower fees, such as the TRON network for example.
What to think about the increase in fees on the network: The debate is still ongoing
This is not the first time that the issue of network fees and the scalability of Bitcoin is put on the table, provoking heated discussions on the subject. Some people see this as a strong gap for the Bitcoin network and believe that many users will turn away to prefer other, faster blockchains.
Indeed, a situation where a user had to send $10 in bitcoin and pay $30 for a transaction would be considered heresy. This would constitute an obstacle to the mass adoption of Bitcoin.
Conversely, others have pointed out that this also allows bitcoin miners to be able to make their activities more profitable, and therefore, to allow the network to be more and more secure. Indeed, once a miner has validated a new block, he receives the transaction fees and the block subsidy associated with this block. The sum of the transaction fees and the block subsidy constitutes the total reward of the block. Consequently, when transaction fees are high, miners are more rewarded. It must be understood that when miners are sufficiently rewarded, they are more incentivized to continue to "work" on the network.
Finally, other people have rather insisted on the need to work on layers 2 and suggestions for improvements to bring to the Bitcoin network. This is notably and unsurprisingly the case of Muneeb Ali, the founder of Stacks, a layer 2 solution on Bitcoin, who recalled that fees had multiplied by 600 in the space of just one year.
Among the solutions, we can also cite the most popular layer 2, namely the Lightning Network, which offers fast and low-cost transactions by carrying out transactions above the main network. This therefore limits the congestion of the latter.
Outlook for the future
The recent rise in Bitcoin transaction fees once again raises crucial questions about the future of Bitcoin as a payment network. The debates on the scalability of Bitcoin relate to the need to optimize existing protocols, explore new solutions or find a balance between security and accessibility to as many people as possible.
Members of theBitcoin ecosystem, developers and investors are looking at these issues to shape the evolution of the Bitcoin network. The future of Bitcoin will depend on the community's ability to find innovative solutions to further improve the network.
The debate is open…
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