On 17 December 2023, Bitcoin’s network fee rose to $38, a level that was last seen in April 2021. This surge has raised questions about Bitcoin’s scalability and efficiency in handling high-volume transactions. While experts believe this surge is due to congestion in the memory pool (mempool), there is more to it. Let’s uncover the mystery behind the sudden spike in network fees and explore ways you can minimize your transaction fees.
The spike was due to a sudden increase in network activity. It is speculated that this was primarily due to Bitcoin Ordinals.
Ordinals is a protocol that allows users to store content such as art, images, text, or video to a Satoshi — which is the smallest denomination of Bitcoin. In simple terms, Bitcoin Ordinals are just like non-fungible tokens (NFTs) on the Bitcoin blockchain.
The recent surge in Bitcoin’s network fee is due to the rise of ordinals. Global Bitcoin users created over 1.2 million new ordinal inscriptions between 15 and 18 December, which clogged the network with over 300,000 transactions awaiting confirmation. Due to an excessive number of transactions awaiting validation, miners prioritized the ones with higher fees. Thus, users seeking quicker confirmations were forced to pay inflated fees.
Ordinals were first introduced by Casey Rodarmor in January 2023. Since then, the Bitcoin community has been divided into two groups: traditionalists and innovators. On one side, there are people like Luke Dashjr, a core developer, who criticize ordinals for “spamming the blockchain.” Others like Udi Wertheimer are excited about the value that ordinals can bring to the Bitcoin ecosystem.
While ordinals may add new use cases to Bitcoin, they have made transactions more expensive and slower to settle. Over the years, the average transaction fees have increased by 25x, according to research by Blockworks.
The recent spike in network fees highlights a fundamental vulnerability in Bitcoin’s network. Despite being robust and decentralized, Bitcoin is unable to handle large transaction volumes. Here, layer 2 solutions like the Lightning Network can help.
Lightning Network is a second layer built on top of the Bitcoin blockchain that facilitates off-chain transactions. Payments made via the Lightning Network are faster, more affordable, and highly efficient. If a large number of users start using the Lightning Network, it will automatically reduce the congestion on the main blockchain.
Network fees play a crucial role in maintaining the Bitcoin network’s sanctity by preventing double spending and other fraudulent activities. At its core, Bitcoin was built to make global transactions affordable, efficient, and timely. To align with this purpose, Bitcoin will need to embrace newer solutions that reinforce its status as a resilient and disruptive virtual currency.
Bitcoin was built to become a stronger and resilient virtual currency that can stand the test of time. The network fee spike, despite being inconvenient, proved Bitcoin’s antifragility and demonstrated its robustness to adapt to challenges.
As of 24th December, the average network fee came down to $10.7 as the congestion in the mempool reduced. However, the Bitcoin ecosystem needs scalable solutions to handle the heavy volume of transactions that may follow after the next halving event in 2024.
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