Opinion: High Bitcoin Prices May Not Mean High Costs for Users
During the 2017 crypto asset bubble, one of the main criticisms thrown at the Bitcoin network was that fees had become far too expensive for the average user. According to Coin Metrics, the median Bitcoin transaction fee peaked at around $35 in December 2017.
Bitcoin’s high transaction fees aren’t necessarily going to go away, but they will likely become less of a burden for users.
Some solutions are already in place. The Lightning Network allows users to make low-fee, small-value transactions on a secondary payment network, and it has already overtaken all altcoins at one online retailer. Liquid is a federated sidechain that allows traders to move their funds between exchanges more quickly with added features such as Confidential Transactions.
Additionally, altcoins such as Bitcoin Cash and Litecoin are mostly focused on providing low-fee alternatives to Bitcoin. However, this focus on the use of cryptocurrency as a medium of exchange at the base protocol level appears to be misguided.
The Lightning Network effectively allow users to batch their Bitcoin transactions and only interact with the blockchain when absolutely necessary. As Casa CTO Jameson Lopp wrote in a recent blog post, future improvements will also allow users to share the costs of these on-chain interactions with each other.
"We will eventually see the adoption of new technology that allows users to use block space more efficiently with aggregated signatures and with multiparty Lightning channels; if many users are ‘sharing’ a single on-chain transaction then it’s easy to see how the mining fee could be relatively high for the transaction, but relatively low from the perspective of each participant,” wrote Lopp.
In a recent talk at the 2019 MIT Bitcoin Expo, Nic Carter discussed a similar concept, which he referred to as economic density. Carter’s talk was mostly focused on how high levels of economic density are needed for the long-term security of the Bitcoin network.
Bitcoin’s inflation rate will eventually go to zero, which means transaction fees will one day be the main economic incentive for miners to secure the network. A high level of economic density, which Carter effectively defines as the value transacted per byte, should make these fees more practical.
However, one on-chain transaction can represent many real-world payments, which is why relatively high fees on the Bitcoin network may be less of an issue the next time blocks become full. Users won’t be paying these fees all by themselves.
Shared Economic Density Today
There are a variety of examples of increases in economic density that have already taken place on the Bitcoin network. As the below chart indicates, the average USD value of a Bitcoin transaction has shown growth since the previous bear market, although it has declined substantially since the bursting of the crypto asset bubble in December 2017.
The Lightning Network and Liquid are two examples where users are batching their own transactions by moving funds onto secondary protocol layers, but what’s perhaps more interesting in terms of mainnet Bitcoin transactions is when the cost of a single on-chain transaction is shared by multiple users.
For example, some exchanges have implemented transaction batching for withdrawals, which lowers the total impact of their users’ activity on block space (and thus lowers fees). In a 2017 article, David Harding pointed out Bitcoin users can save up to 80% in fees by batching their transactions.
Future Increases in Shared Economic Density
In the future, transactions that are shared by many different users may become much more common. These shared transactions will mostly be improved versions of blockchain interactions that already happen on the Bitcoin network today.
For example, the concept of Channel Factories allows Lightning Network users to effectively join together in an effort to touch the base Bitcoin blockchain even less frequently than they do today.
CoinJoin transactions already happen today, but they may become more enticing to users once Schnorr signatures are added to Bitcoin because these types of transactions will be cheaper than simply making a traditional on-chain transaction by oneself.
The end result of all of this is users sharing the cost of making an on-chain transaction with multiple other users, which means high on-chain transaction fees become much more manageable from a user experience perspective. It will be the fee per payment, not per on-chain transaction, that matters most to users.