articleStartImage

If people want to keep Bitcoin as a digital asset, due to its brand prominence, widespread acceptance and high market price, fees may be here to stay. While Bitcoin is again in a gridlock when it comes to a scaling solution, fees have not only grown, but a secondary market has cropped up, promising to ease the  process of transactions through various additional instruments.

Fees Spike Beyond Reasonable

Bloomberg recently noted that despite the enthusiasm for Bitcoin, the problem with fees is weighing down on the wider acceptance of the digital asset. Fees are not only near peak levels, in the past days they have flown "off the chart". At one point, the fees paid for a block were larger than the block reward, showing that the blocks were not filled up with spam transactions.

And while network congestion sometimes resolves by itself, on other days, Bitcoin is especially cumbersome to use:

Left to their own devices, fees tend to spiral out of control. Some are searching for solutions, not unlike the pricing mechanisms of filling up airplanes with passengers. In the future, Bitcoin may have a "dragged off the airplane" moment, especially for smaller wallets trying to get into overbooked blocks:

Possible Solutions

Stephen Pair of BitPay believes the size of fees that users readily pay will show the real value of the Bitcoin network. Bitcoin may become a valuable asset for large-scale payments, where the fees that now look very high would look normal. However, no one knows if enough high-value transactions would happen, and who would participate in such exchanges. But BitPay also believes smaller transactions will have to move off-chain.

"On-chain payments will still be the most secure option, but with adequate alternatives, demand for on-chain payments will abate. The most important competition is not between Bitcoin and an alt-coin, it is between on-chain and off-chain transactions," wrote Pair in a Medium post.

Indeed, it seems like moving money through Bitcoin may become a luxury service, even a status symbol.

Game Theory to the Rescue

Aviv Zohar believes on-chain transactions are still possible, though with a different algorithm for better price discovery. This would not eliminate fees, but optimize them, so they are acceptable for users, and incentivize miners.

"Bitcoin’s current mechanism is a pay-your-bid auction in which transactions simply include take-it-or-leave-it offers to miners for a given fee," wrote Zohar.

An alternative proposal includes the Monopolistic Price Mechanism:

  1. Users specify in the transaction the maximal amount of fees that they are willing to pay.
  2. Miners choose which transactions to include in the block (up to the block size limit). They do not have to fill up the entire block.
  3. All transactions in the block pay the same amount: the lowest fee that was specified by any of them.

This is just one possible solution, and it has its faults, due to the still unpredictable nature of discovering the right fees, or predicting the usage of Bitcoin itself:

The advantage is that this scenario would ensure non-zero, but lower fees that do not get bid up exponentially.

Resolved by Themselves

The fee problem may also temporarily resolve by itself. In that case, Bitcoin may see just temporary spikes in activity, but in the long run users would be urged to be more economical with transactions. Also, some additional hashing power may clear the backlog for a while, allowing most transactions to go through.

So it even remains unknown if Bitcoin fees could be reliably tokenized, or other payment options offered. For now, the only option are limited transaction accelerators proposed by mining pools. The rest of the mystery concerns the user behavior of Bitcoin holders, and whether they would have an incentive to move the funds often.