July 24, 2017    4 minute read

Can BIP 91 Solve the Bitcoin Network Congestion Problem?

Keeping It Together    July 24, 2017    4 minute read

Can BIP 91 Solve the Bitcoin Network Congestion Problem?

Transaction fees have been growing in the past few years, particularly in the last few months following the recent rise in the popularity of Bitcoin. Total transaction fees have surpassed US$150,000 in H1 2017. This proves that more and more users want to use the network, and this trend is expected to keep growing. This is not good news for users who intended to use the tokens as a currency.

Why the Sudden Rise?

Bitcoin miners can control the transactions they include in the blocks they mine, therefore users can pay to have their transactions included. They do so by paying a fee to the miners.

Now, one may say that miners already get compensation for their computing power with block rewards. But this reward, initially set to 50 BTC, fell to 25 BTC in 2012 and is now only 12 coins. This phenomenon, embedded in the code is better known as “halving”. The fees are expected to grow because it has become the main source of income for the miners that need to cover their hardware and energy expenses.

This will result in miners prioritising higher fee transactions because the number of transactions per block is finite and that the block size is only 1MB at this time. Looking at the following chart below, it can be seen that fees paid per transaction have tripled in the last six months as the total transaction fees paid since January represent more than near 200,000$ at the current BTC/USD exchange rate.

Network congestion is now becoming a real issue given the growth in transactions and the limited block size. The only way to bypass this congestion is to include a higher fee, thus creating an endless circle driving fees to an all time high.

BIP 91: A Solution to the Scaling Problem?

Cryptocurrencies are gaining attention due to low transaction fees and losing that feature could be devastating. But users are acquiescing to the growing fees because they do not want to get backlogged.

Therefore even if congestion diminishes, fees are unlikely to go down since users determine the fee rate as Bitcoin is a free market. If a majority of people stick to high fees, the rest of the users are very likely to follow the trend.

Bitcoin Improvement Proposal number 91 or BIP 91 could bring hope to the scaling problem and underlying issues mentioned above.

BIP 91 is an update that would ramp up the block size to 2 MB in approximately three months without the implication of a block chain split that could cause more damage than good to Bitcoin. More transactions could be fitted in each of the blocks, resulting in faster transaction execution (decongestion of the network) and lower fees.

This is part of a much larger update called segwit2x. This larger update would also add another layer of security by sending transaction signature data separately from the blockchain. On July 20th, more than 90 percent of all hash power gave its support for this soft fork, meaning it is now adopted. This means that the update is now on-track.

Conclusions

Bitcoin rebounded and recovered from the 14th July dip that occurred, following uncertainties around the adoption of the update and fears of chain splitting.

Other cryptocurrencies such as Ethereum also rebounded as user confidence improved. While it is too early to draw a conclusion from the upcoming update of Bitcoin, it is clear that it will affect the future of the transactions and health of the Bitcoin network.

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