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.
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.