Bitcoin Network Is Changing The World Through Skyrocketing Fees

Bitcoin network

The mainstream Bitcoin network, some feel, has moved away from its initial objectives.

Transaction fees for Bitcoin payments can go as high as $28.

What is wrong with that?

Well, there is nothing wrong with that per se.

Except for the fact that you wouldn’t want to use it for small payments.

And this is why some believe Bitcoin is itself destroying its value for people who want to use Bitcoin for small transactions.

Think back to the time when the market first heard about Bitcoin.

Bitcoin had three huge selling points.

These selling points came in the form of cheap, fast and convenient online transactions.

This is why people wanted to use Bitcoin for their transactions in the first place.

When Satoshi Nakamoto, the founder of Bitcoin, announced the new technology in a white paper he mentioned something unique.

Unique in the sense that Satoshi believed that the cost of any mediation actually increased transaction costs.

He also believed that it limited the actual minimum and practical transaction size.

Moreover, Satoshi also said that conventional payment methods cut off the possibility for any and all small casual transactions.

Felix Salmon, an economics reporter, wrote back in 2013 that with Bitcoins, people would have the opportunity to engage in transactions which would take place across continents.

Moreover, time zones would present no problems when people who engage in transactions via methods such as Bitcoin.

Bitcoin would also get rid of time lags.

Most of all, according to Felix Salmon, Bitcoin would enable minuscule transaction fees.

And most of what Felix had said back in 2013 did come true.

But it didn’t remain “true” for long.

In fact, until the very beginning of the current year, 2017, one could find that Bitcoin fees remained or rather tended to remain a fair amount below $1.

Most of the times, the transaction fees did not go above $0.10.

This lead to many Bitcoin supports to make claims about how cheap Bitcoin had become.

They pointed out that Bitcoin networks required much less fees than what merchants had to pay in order to accept credit online credit card payments.

Now things have changed.

Many media reports have pointed out, especially in the last couple of months, that Bitcoin’s network is falling behind.

In other words, Bitcoin has risen in popularity even more.

And that’s the problem.

bitcoin_network

The first popular cryptocurrency is struggling to meet demand.

Its popularity has basically outstripped Bitcoin network’s capability to deal with such a fast rate of growing demand.

Consequently, this has lead to some major changes in the way Bitcoin works.

So much so that the Bitcoin of today is nothing like the Bitcoin of the old.

It is a completely or rather radically different beast now.

The Bitcoin Network now charges a high fee.

In fact, just a couple of days ago, the average Bitcoin network transaction fee rose to around $28.

No one needs to question the fact that high transaction fees present a huge problem.

Why?

Because such changes come with huge implications for the Bitcoin network.

And the way people are using Bitcoin.

We also can’t ignore the kind of businesses that such high transaction fees is giving rise to.

People are building some strange businesses on top of such high transaction fees.

We are already seeing companies move away from Bitcoin.

Especially the ones that are really trying hard to actually realize Satoshi’s Bitcoin vision.

His vision that Bitcoin would act as a platform for online small casual transactions.

These companies are starting to lose confidence in Bitcoin.

And hence have begun to shift to alternative Bitcoin networks.

Why?

Because it is simply not possible to support transactions which are small when each Bitcoin network transaction costs more than $20 in transaction fees.

BitPay and The Headache That Is Rising transaction Fee

What is BitPay?

Bitcoin is actually one of the very first and very successful Bitcoin startups.

What does it do?

Bitpay tries its best to make it easy for small and ordinary businesses to engage and accept Bitcoin payments.

The way Bitpay works is that it accepts Bitcoin payments on the behalf of merchants.

Then, Bitpay provides merchants with the options to immediately convert their Bitcoin payments to conventional currencies such as dollars or others.

How does this help merchants?

BitPay basically insulates merchants from the network’s, Bitcoin’s, volatility.

If we are talking about the very early years, Bitpay actually had the capability to accept Bitcoin payments that amounted to less than a few pennies.

As mentioned before, that has changed.

Especially in the last year or so.

Bitcoin network has seen transaction costs go even higher.

bitcoin_network_bitpay

Because of low capacity, transaction costs have skyrocketed.

And they don’t look like coming down anytime soon.

This has led BitPay to itself raise its transaction fees as a response to higher Bitcoin Transaction fees.

BitPay actually mentioned this problem in a blog post that the company published back in March.

BitPay wrote that Bitcoin transaction fees had reached an average of $1 for every transaction across the whole Bitcoin network.

Moreover, the company said, such high transaction costs had made Bitcoin uneconomical for online users who wanted to complete micropayments which did not go above $1.

Bitpay also officially announce that the company would shortly begin to charge its customers for Bitcoin transaction fees that the company itself had to pay when it received any Bitcoin network payment.

The fact that customers started to come to the company with their complaints about the slower Bitcoin payment times because of increasingly congested Bitcoin network also didn’t help Bitpay’s cause.

This is probably a good time when most of our readers would wonder about how does Bitcoin network deal with congestion?

Well, Bitcoin network manages to deal with congestion by essentially auctioning off, of what is now, scarce capacity.

The Bitcoin network auctions it to the highest bidder.

What does that mean for the end user?

The end users can avail the option of paying the higher fee.

As an exchange, they can get their Bitcoin payment delivery immediately.

On the other hand, users can also opt to pay the lower fee.

But then they would have to wait until the Bitcoin network clears out the congestion.

Generally speaking, the Bitcoin congestion does decline enough.

Usually, it does manage to make room for low-fee transactions to complete.

But of course, customers have to wait a long time.

Which isn’t always desirable.

Or feasible.

Naturally, the more the number of people who use the Bitcoin network to pay for their transactions, the more the congestion rises.

And as congestion rises, it raises the transaction fees even further.

It keeps on increasing until it becomes a more dicey proposition.

Bitpay published a post on its official blog last month which had rather interesting to say about the whole situation.

The blog post said that with the continually rising costs of all Bitcoin network miner fees, features such as refunds had become very costly to send.

BitPay also wrote the customers who involved themselves in mistaken payments only got to receive partial online refunds.

Why?

Because Bitpay had to deduct the rising miner fee costs from the Bitcoin they sent in the first place.

Bitpay also mentioned in the blog post that one Bitpay merchant’s customer recently managed to spend around 0.003853 Bitcoin on an online payment.

The customer mistakenly did not pay the full amount.

But underpaid by only a small fraction.

When it came to refunds, the company could only refund the customer around 0.0027 Bitcoin because of rising miner fee costs.

Companies Are Moving Away From Bitcoin Because Of High Fees

mainstream_bitcoin_network

If BT doesn’t recognize its fundamental problems, it will be sidelined by other cryptocurrencies.

The situation is bad.

There is no doubt about it.

But that isn’t stopping Bitpay from processing Bitcoin payment.

The company recently announced that Bitpay would enable users to accept payments with Bitcoin Cash, a rival version of Bitcoin.

Just for comparison’s sake, currency the Bitcoin Cash network fee is averaging around 25 cents.

As mentioned before, the mainstream Bitcoin network fee is averaging around $20 in recent weeks.

Bitpay will provide merchants with two options.

And merchants can decide which option they want to accept as payments.

In other words, merchants can either accept payments via Bitcoin Cash or just the mainstream Bitcoin.

Or even both.

Steam, a video game giant, recently announced that the company would stop accepting any and all Bitcoin payments.

Steam cited the skyrocketing Bitcoin transaction fees as the reason why it wanted to move away from Bitcoin.

The company also wrote that at the moment, the company had found it untenable to support payment methods such as Bitcoin.

And hence decided to take it off its menu of payment options.

BitCart, an online gift card merchant, switched to Dash, a Bitcoin rival, from Bitcoin.

It did that about six months ago in June.

BitCart announced back then that it Bitcoin, as a method of online payment on its platform simply unsustainable.

BitCart also said from a merchant’s point of view, Bitcoin represented a nightmare if nothing more.

A lot of people use Bitcoin for remittances.

At least that is something you would find many media sources mentioning as a frequently used application for Bitcoin.

And it is true that several companies around the world are working together in order to build international money transfer applications and services which are actually based on Bitcoin.

These internet money transfer applications and services will then compete with conventional payment methods and networks.

Conventional payment networks include well-reputed companies such as Moneygram and Western Union.

All is not going well though.

Why?

Because back in October, some of the services that were backing international money transfer services based on mainstream Bitcoin backed off.

Bitspark, one of the companies involved in the project, said that it had decided to move away from Bitcoin.

Why?

Again, because of mainstream Bitcoin network’s unpredictable and high transaction fees.

That’s great, but what is Bitspark using instead of mainstream Bitcoin?

Right now, we know that Bitspark is moving forward by shifting to supporting Bitshares.

Bitshares is like Bitcoin in the sense that both are cryptocurrencies.

It is just lesser-known than mainstream Bitcoin.

Readers should have little problem in noticing that almost all of the developments that we have mentioned have occurred before a certain time.

For clarity’s sake, many of the above-mentioned developments took place well before the actual big run-up of increase Bitcoin fees over the last couple of weeks.

Let’s compare the transaction fees of Bitcoin from a couple of months back to now.

Before November came around, the average daily mainstream Bitcoin network fees rarely went above $5.

Fast forward to last week however, and one will find that the daily average mainstream Bitcoin network fees have consistently floated above $20.

As far as the mainstream Bitcoin network is concerned, this is nothing but an existential crisis for the cryptocurrency.

Or for any business that came into existence in order to facilitate small and even medium-sized mainstream Bitcoin transactions.

The thing readers need to understand here is that a $5 Bitcoin transaction fee managed to push away a few businesses in a short amount of time.

They are not using the platform anymore.

How many businesses will move away from Bitcoin now that the transaction fee is soaring just over $20?

One imagines, many companies will simply abandon Bitcoin now.

And then one has to contend with Bitcoin’s speculative mania.

It shows no signs of stopping.

And if one goes by it, many are speculating that Bitcoin transaction fee could go even higher.

Rather easily.

The Future Of Bitcoin Is Riding On The New Lightning Network

Needless to say, Bitcoin insiders are actually aware of this huge problem.

However, their only real solution, which comes in the form of Lightning, is, even now, months away.

Some believe it might help mainstream bitcoin solve its problem of high transaction fees and congestion.

Others say it won’t solve the underlying problem.

To understand that problem we have to understand how does the mainstream Bitcoin network works.

How does it work?

The mainstream Bitcoin network takes advantage of the blockchain technology.

It is built on it.

What is a blockchain?

Think of it as a shared global ledger.

The blockchain is organized into data structures.

We call these data structures as blocks.

The Bitcoin network creates a new block every 10 minutes.

Moreover, if we are talking about size then each of the newly created blocks can go up to 1 megabyte.

This essentially leaves some room which is sufficient for more or less 2000 Bitcoin transactions for each block.

The mainstream Bitcoin network has introduced a recent upgrade.

This upgrade is likely to double each block’s limit.

The upgrade is called segregated witness.

Bitcoin backers hope that it would become fully operational in the coming months.

A certain section of the Bitcoin community wants something else.

It wants to further increase the 1-megabyte block size.

Or rather block limit.

It wants the mainstream Bitcoin network to go even higher.

Why?


So that the network can support more transactions per given unit of time.

So what’s the problem then?

The problem is the community of developers.

The developers who fundamentally control the mainstream Bitcoin standard software.

They have resisted increasing the block size limit.

Why?

They argue that it is very important to make sure that individual and ordinary Bitcoin users have the opportunity to comprehensively participle in the mainstream Bitcoin’s P2P (peer-to-peer) networks.

Big block advocates are understandably frustrated by such arguments.

And some of them seceded from the original Bitcoin network community back in August.

These big block advocates created a new form of Bitcoin called Bitcoin Cash.

Bitcoin Cash essentially makes use of the same code.

However, Bitcoin Cash has increased the size of each of its block to 8 megabytes.

All of that is great.

Except that now, small-block supporters, or faction, firmly control the mainstream Bitcoin network.

Moreover, these small-block people have actually outlined their vision for the cryptocurrency’s future.

They envision a new payment layer.

They are calling it Lightning.

Small-block faction says that they will build the new Bitcoin on Lightning.

The details of the new technology are still not clear.

And developers are working on it.

Businesses that rely on Bitcoin transactions as a cheap and fast form of payment will have to find a way to cope with all the turmoil surrounding expensive and slow transactions.

They could use Dash or Bitcoin Cash if they are desperate enough.

Or simply let the customers pay the rising transaction fee costs.

 

Zohair

Zohair

Zohair is currently a content crafter at Security Gladiators and has been involved in the technology industry for more than a decade. He is an engineer by training and, naturally, likes to help people solve their tech related problems. When he is not writing, he can usually be found practicing his free-kicks in the ground beside his house.
Zohair

Latest posts by Zohair (see all)

COMMENTS

WORDPRESS: 0

Bitcoin Network Is Changing The World Through Skyrocketing Fees

by Zohair time to read: 10 min
0