Why Block Size Increase Is Not A Solution To High Fees
Both Bcash and Segwit2x are advertising themselves as an end to High fees with their increased block size which will allow more transactions to be processed in each block. Furthermore, Bcash goes on to suggest that applications such as Lightning will never be needed if bitcoin just keeps on increasing the block size. In this article, I will try my best to explain why increasing the block size is not a solution.
How does Bitcoin Fees work?
When bitcoin was first introduced by Satoshi Nakamoto, it didn’t include any fee structure. The fee logic was added later in the bitcoin code to prevent the spam on the network to prevent network from slowing down and bloating up. Currently, the bitcoin network charges you on the basis of amount of space you require in a block. So if your transaction size is 100 bytes and you decide to pay to 1 sat/byte in fee, you will be charged 100 satoshis. If other people decides to pay higher than 1 sat/byte fee, their transaction will be processed first. Bitcoin miners process the transactions with higher fees first as it incentivizes them more. Miners have the control to include the transactions with lower fees in case someone accidentally pays too low of a fees. There are other solutions such as RBF(replace by fee) which allows users to create another transaction which allows them to pay more for their initial transactions if their transaction is stuck in the mempool.
How block size increase helps in reducing the fee?
As the amount of transactions in the mempool increases, people start paying more and more fees in order to push their transaction to front of the transaction queue. Since there is only 1 block per 10 minutes and the block size is limited to 1MB, it can process only 2000-3000 transactions per block. If you double the capacity of the block size, you can now process double the transactions per block. This allows the mempool to empty at a faster rate which allows people to pay less. However, due to mempool spam protection logic employed by miners such as Antpool and F2Pool, transactions with fees lower than 5 sat/byte are never processed by them. This was done to prevent unnecessary transactions from filling up the blocks. Other pools still pick these transactions and process them.
Consequences of Block Size Increase
As explained in my other article, block size increase is not free. Every time the block size is increased, the cost of running a bitcoin node increases. A study by bitfury suggests that if we increase the bitcoin block size to 8MB, 95% of the current bitcoin nodes will shutdown in less than 6 months. This can also allow malicious actors to spin up malicious nodes which can be used to cause several attacks on various SPV wallets.
Lets ignore Bitcoin Nodes for a second
Networks such as Bcash do not care about node count. Even if bitcoin does the same and ignores the node cost, fees will still be unsustainable.
Currently, the value of 1 bitcoin = $7200.
Size of a normal bitcoin transaction = 226 bytes.
Avg Fees when mempool is empty = 10 sats/byte
Total fees = 2260 sats (16 cents)
If the price keeps on increasing at the current rate and doubles, the same transaction will cost you 32 cents now. If you believe that bitcoin is going to be 5x-10x of the current value, the fees will also become 5x-10x the current fees, no matter how much block size you increase. In a few years if bitcoin’s value is 10x current value
Value of 1 bitcoin = $72000
Size of Bitcoin transaction = 226 bytes
Fees = 10 sats/byte
Total fees = 2260 sats($1.60)
No matter what currency Ethereum, Bitcoin cash or Dogecoin, the fee you pay will increase with the value of the currency even if you increase the size of the blocks by 10 times because the size of the transaction remains same.
Conclusion
Block size increase does allow bitcoin fees to temporarily reduce but it still doesn’t allow you to do everyday transactions such as buying a cup of coffee, paying for a cheap burger in third world countries. The only solution right now to the fees issue is decreasing the size of transactions which segwit does or 0 fees solutions like lightning network which allows users to pay only once for a bunch of transactions that the user can decide to do in the future.
Let me know if you know any other better solution the fee epidemic in crypto.
Here is what I have learned as a miner.
Every time I get paid by the mining pool that output is attached to my Bitcoin Address. If I get paid daily, this amounts to 30 outputs per month. Now lets say I want to cash out my earnings, I have to send Bitcoin to the Address of the Bitcoin ATM. But this is not a simple My Address to Their Address. Everyone of my outputs gets tied into the the input of the transaction, which increases the transaction size. I learned this the first time I tried to cash out $500 in earnings, and when I was about to send the ATM the bitcoin my Wallet App told me the Fees would be about $137. This was due to about 16 outputs that were attached to the input of my transaction. If it was a simple transaction the fee would have only been about $17. The result is I have to consolidate all my earnings to another address, and do this afterhours when fees are lower, and I am not in a rush. Currently paying a $28 fee to consolidate 14 Outputs ( $800 worth ) to a single address. Its been over 12 hours and the transaction still hasn’t been confirmed. Paid 100 satoshis per byte, not cheap by anymeans Its this whole BS that is bloating transactions, and slowing down the network. Block size needs to be scalable by the size of the mempool, similar to the way the difficulty is scalable by the hashing power of the network. If they can’t do this, Bitcoin is doomed to fail, and another currency will take over.
You are correct that bitcoin is currently not suitable for micro transactions but even after increasing the block size, the problem will still persist. Look at ethereum that has dynamic block size. Its blockchain is currently 6 times the size of bitcoin blockchain and its fees has still grown to 4$ per transaction. No blockchain is scalable. That is why offchain scaling solutions are needed.
Regarding UTXO consolidation, schnorr signatures will remove the extra signatures from the transactions so multiple input txs will be almost the same size as single input txs but it is still under development.
Good to hear about the Schnorr signatures. I hope that becomes a reality. Good Article. I look forward to reading more. I am tired of the mainstream press making up their own facts just to write about bitcoin, when they don’t know what they are talking about.