Behind the decline in Bitcoin transaction fees: Is it a successful technological upgrade or a decline in transaction volume?

The average cost of sending a bitcoin transaction is lower than it has been in the past year and a half, suggesting that bitcoin’s price isn’t the only unpredictable metric for the cryptocurrency right now.

But with all the debate over fee increases, this might come as a surprise. After all, it wasn’t that long ago that a group of prominent investors and miners created an entirely new version of Bitcoin with the primary purpose of lowering fees.

Much of the conflict centers on the fact that fees are called “fees,” and are considered necessary network transaction costs, necessary to pay someone to deliver a service that enables the delivery of an agreement, whether that agreement is a text message, an Internet phone call, an email, or even a pizza.

This is because Bitcoin is a software that needs to keep the thousands of computers running it in sync. It's easy to do this, but there's a limit to how much data the network can handle every once in a while, and users have to pay more money to make transactions go through during times of congestion.

As a result, as Bitcoin became more and more popular last year, transaction fees soared to more than $25, according to data from data site Bitinfocharts.

Bitcoin users, the people who actually rely on the base protocol, have been affected, as have those who believed that Bitcoin could compete with traditional payment systems.

However, Bitcoin fees have been falling since late December.

So why are fees plummeting? A simple answer is that users are conducting fewer transactions now. According to data from the Blockchain.info website, we can see that in December last year, there were about 400,000 transactions per day, while today Bitcoin's transaction volume is only 200,000.

“I think it’s pretty straightforward,” Mike Belshe, an engineer at BitGo, told CoinDesk. “The transaction demand is actually decreasing significantly.”

The question, he added, is why has there been such a drop in the number of deals?

Segregated Witness and Beyond

If Twitter and Reddit are any indication, opinions on this issue are often influenced by personal politics, and in the case described here, users took sides in Bitcoin’s long-running block size debate, which at its core is about the network’s economics.

Popular Twitter personality Armin van Bitcoin cheered that low fees mean “the scaling debate is now a thing of the past,” thanks in part to growing adoption of Segregated Witness, a scaling feature at the center of bitcoin’s long-running fee debate.

There is some truth to this argument. Segregated Witness reduces transaction fees and adds more space to the blockchain, but it still isn’t widely adopted, so it’s hard to say how much it actually helps reduce fees, and there hasn’t been much of an increase in Segregated Witness usage lately. According to data from Segregated Witness tracking site SegWitizenParty, only about 10% to 14% of transactions have used Segregated Witness in the past few months.

Furthermore, SegWit does not reduce the number of transactions, it simply makes each transaction cheaper.

Another possibility, according to Belshe, is that fee prices “finally forced” some large transaction processors to implement a technique called batching, which rolls many transactions into one, leaving more space on the blockchain.

Indeed, exchanges like Coinbase have said they were working on implementing this feature in the past, and on Thursday, cryptocurrency exchange ShapeShift announced it now batches transactions, saying that 2% of all transfers on the bitcoin blockchain are made with the technology.

However, this is a theory that is hard to get definitive data to support unless an exchange officially announces that they are using the technology. “It’s hard to be 100% sure,” Belshe said.

At the same time, he believes that even if only one large exchange starts batching transactions, it could have a huge impact on the overall trading load.

This type of technical rationale adds weight to the idea that developers and those services built on top of Bitcoin can be optimized to make more space on the blockchain without compromising its core functionality.

John Carvalho, CEO of XO Media, said:

“That’s why Core is working so hard on second layer solutions and why they’re so focused on optimizing transaction sizes through different technologies like Schnorr and proofs.”

He added:

“They are doing everything they can to minimize the space that every bitcoin-related transaction takes up because it’s all stored forever.”

Abandoning Bitcoin

Others, especially those who criticize bitcoin developers for favoring a small blockchain and limited transaction space, argue that low fees are the result of people getting tired of high fees and leaving bitcoin.

“Bitcoin doesn’t work for anything that involves low fees, so people are going to switch to other means. This is a result of Bitcoin’s lower fees,” said Ryan X. Charles, founder of Yours.

Last year, Charles moved his startup off the Bitcoin blockchain and turned to other blockchains before building Bitcoin Cash.

It’s possible that some users are doing the same thing. Payment processor Stripe stopped accepting bitcoin payments in January due to the high fees, and BitPay, a startup that provides payment services for bitcoin, has begun offering support for a variety of other protocols to its merchants.

However, if they push users elsewhere, it’s unclear where exactly they’ll go. Bitcoin Cash is a cheaper alternative to Bitcoin, and the transaction volume of Bitcoin Cash is currently only about 10% of Bitcoin’s.

Jameson Lopp, an engineer at BitGo, said:

“It’s clear that high fees are not incentivizing people to switch to Bitcoin Cash.”

Bitcoin developer Meni Rosenfeld doesn’t think so. In fact, he disagrees with both theories.

He wrote on Twitter:

“The main reason for the drop in Bitcoin transaction fees is not SegWit adoption or people moving to Bitcoin Cash. It’s simply that the rush to buy crypto has calmed down.”

In fact, interest in bitcoin has been falling. Lower prices have led to fewer new investors searching for bitcoin on Google and buying and trading the cryptocurrency.

This view seems to be supported by the fact that the transaction fees of Ethereum, the second largest blockchain by market capitalization, have also dropped significantly in recent months, as have Litecoin, the fifth largest, and Ripple, the third largest.

Charles also believes that the hype cycle for cryptocurrencies may be waning, contributing to lower fees.

“I wouldn’t be surprised if the total market cap of ethereum is going down. There’s probably less demand to send transactions across all blockchains, we’ve been through a hype cycle,” he told CoinDesk.

It’s always possible that low fees are caused by a combination of the above factors.

Endless Fees

What do lower fees mean for users? In short, it shows that under the current setup, fees are likely to fluctuate over time.

The hope is that ultimately costs will always be "low" because the word "low" has a somewhat relative definition. After all, a cheap flight is probably better than an expensive bus ride.

In this context, supporters hope that Bitcoin will one day offer the best of both worlds, supporting high demand and “low” fees that reflect the quality of service while also supporting the interests of miners and computer operators who pay the actual cost of securing transactions.

“The fee market is a lever for market prices. Theoretically, demand for space on the block is infinite, so there has to be a means to control it.”

Meanwhile, fees are likely to continue to drop, creating a new “low” standard that will be friendlier to today’s internet users. For example, Carvalho and Rosenfeld believe that the much-hyped Lightning Network will help Bitcoin reach this end by moving more transactions off the Bitcoin blockchain.

If the Lightning Network does succeed, low fees could become another problem, as they might not be enough to cover mining costs when the network eventually generates all 21 million bitcoins.

For this reason, developer Greg Slepak has an almost ominous view of the future, arguing that users should “take a chance” on current low costs, adding:

“It may not come again.”