Bitcoin blocks are bigger than ever. Since the halving took place last week, the 7-day average of Bitcoin block sizes has reached a new all-time high, according to data from Blockchain.com.
As indicated in the below chart, the data shows these larger blocks have been made possible by two key factors: the recent Bitcoin halving and increased adoption of Segregated Witness (SegWit) since the last time blocks became congested.
Halving Leads to Slower Block Times
The block subsidy, which is the newly-created Bitcoin that is rewarded to miners in each block, was halved last week, from 12.5 Bitcoin to 6.25 Bitcoin per block. This means the Bitcoin-denominated rewards for miners were effectively cut in half (ignoring revenue from transaction fees for simplicity).
A key side effect of this drop in miner rewards is that the network hashrate — a measure of the total computing power miners are using — saw a sharp decline. According to BitInfoCharts, the Bitcoin hashrate fell from 137.5 exahashes per second to 85.8 exahashes per second from May 11 to May 17, a drop of roughly 38%.
A lower hashrate means slower block times, at least until the Bitcoin difficulty adjusts. As data from BitInfoCharts shows, blocks are now mined roughly every fourteen minutes.
Since blocks are taking longer than the normal ten minutes to be mined, users have been stuffing more transactions into blocks than usual. In other words, the supply of block space has declined. This economic phenomenon can be observed via the rise in median transaction fees.
What is Segregated Witness?
While there are fewer Bitcoin blocks being mined on a regular basis, SegWit adoption is much higher than it was the last time blocks became a bit congested. According to charts.woobull.com, SegWit adoption is roughly 11 percentage points higher than it was the last time Bitcoin transaction fees rose above $1 roughly one year ago.
SegWit is an upgrade to Bitcoin that was activated in 2017. In addition to enabling much more efficient layer-two protocols, such as the Lightning Network, the improvement also caused an effective increase in Bitcoin’s block size limit.
Due to their ability to lower costs for full nodes on the Bitcoin network, SegWit transactions come at a special, discounted rate, which incentivizes users to move to wallets that have the feature enabled. While far from statistically significant, historical data appears to illustrate increased SegWit adoption after periods of increased Bitcoin network congestion.
If Bitcoin transaction fees continue to rise, it could lead to further increases in SegWit adoption. Perhaps Blockchain.com, which has accounted for as much as half of all Bitcoin network transactions in the past, will implement SegWit if fees really start to skyrocket. That said, users now also have the option of moving to secondary layers, such as Lightning and Liquid, in order to avoid high on-chain fees.