Why is Bitcoin Facing Scaling Problems and Who is Benefitting from them?
Bitcoin is one of the most fascinating ecosystems that one can find in the financial world. With constant developments and innovations, the Bitcoin network attracts huge amounts of talent and developers.
And since Bitcoin is open-source, anyone can join and do with Bitcoin what they like, which was ever since its inception one of the key positives connected to Bitcoin. It however seems that the recent situation connected to Bitcoin fees, transaction times, NFTs, or the whole scaling solution of the Bitcoin network is splitting the community into different camps.
While the first one is happy with the development as it leads to more creativity and bigger profits for miners, the second is considering this a waste of time, space and potential of Bitcoin. In this article, we will present key information connected to the current congestion of the Bitcoin network, its possible solutions and future development, as well as the whole debate surrounding this rather controversial, but very hot, topic.
What do you need to know?
Before we go into specifics of the current situation on Bitcoin, it might be best to look over some of the crucial specifics and terminologies.
- Memory pool size (mempool): represents the queue of pending valid transactions that are waiting to be added to blocks, often measured in vbytes.
- Maximum block size: as Bitcoin’s network has a limited capacity to process transactions, the maximum block size is 1 MB. This indirectly means that about 7 transactions a second can happen on average, with blocks being generated in 10-minute intervals on average.
- BRC-20 tokens: new token standard on Bitcoin that is helping with adoption and creation of NFTs on Bitcoin via Ordinals.
These are just some of the key concepts that need to be understood when it comes to the debate surrounding the current congestion problems of Bitcoin and the scaling potential of the biggest cryptocurrency. With this in mind the question thus remains, what is really happening with Bitcoin?
What is happening?
To put it very simply, transacting on Bitcoin right now might not be the best option. The network is currently clogged due to huge amounts of NFTs being minted right on Bitcoin. This is something that has become popular after the Ordinals “entered” the Bitcoin world at the end of January this year. However, current developments have allowed for more and more NFTs being easily created on Bitcoin, which has led to some unexpected side effects.
First of all, the transaction times have been prolonged significantly. The current average confirmation time of transactions on the network has been at its highest in almost 2 years. Similar levels have been seen mostly during bull markets in 2017 and 2021. However, in days, the prolonged average confirmation time of transaction was mostly affected by huge demand for transacting in Bitcoin, while the recent spikes are mostly influenced by the current craze.
New highs have been for instance reached in “average transactions per block” metric. Only recently have we seen 4,500 transactions per block at the beginning of May, which is more than double of the previous high that was reached in 2019.
The same logic applies to confirmed transactions per day. With almost 700,000 confirmed transactions per day, the Bitcoin network has reached its new ATH in this metric on May 1st.
Another spike was also seen with the fees per transaction, both in USD and BTC. As with the average confirmation time, the levels of fees that we are currently seeing have not been around since 2017 and 2021, both bull market periods. This spike means that it can be rather unfeasible or uneconomical to send transactions on Bitcoin right now. It also points to the scalability issues of Bitcoin, which we will delve into later.
With the spike in transaction fees, one group of the whole Bitcoin ecosystem is really happy. And those are miners. Their revenue has risen significantly in the past couple of weeks due to huge volumes of transactions. Thanks to this, their revenues have recently skyrocketed, helping some of them stay in the game as we have seen several bankruptcies of Bitcoin miners last year.
It may look like most of these numbers are quite positive. It is thus rather counterintuitive to realize that some of these ATHs or recent highs might actually be met with resentment from groups of the Bitcoin ecosystem. As was previously stated, while miners are happy with the latest developments, many are pointing to the fact that the scaling debate has to be reintroduced once more due to huge problems that BRC-20 tokens caused.
Why is everyone looking at BRC-20 tokens?
Recent problems with the scaling of the Bitcoin network are mainly connected to the explosive demand for a new and rather unprecedented type of token standard. The BRC-20 token standard, which is in a way similar to the ERC-20 token standard on Ethereum, has allowed anyone to mint new tokens on the Bitcoin network through Ordinals.
Ordinals, also known as Bitcoin NFTs, have been around only for a couple of months, but they have clearly shaken the Bitcoin industry to its very core. They allowed for embedding of digital art, text, jpegs, PNGs and so on, right into the transactions. This is now mostly visible through the extreme rise in transaction fees and also waiting time for validation of transactions into the blocks.
“The primary driver of this congestion and the related surge in transaction fees are inscriptions that use the BRC-20 minting standard.”
Those were the words of Head of Research and Content at Luxor Technologies, Colin Harper. At its peak, almost 400,000 transactions were unconfirmed on the Bitcoin network. This is significantly higher than we saw during the previous bull markets in 2017 and 2021.
What are the solutions?
The current situation cannot prevail, if Bitcoin should make it. No matter what the “end goal” for the biggest cryptocurrency is, and whether there is one, as of now, Bitcoin on-chain transactions are either unusable due to long waiting time or extremely expensive compared to its counterparties.
However, if you really want or have to transfer some amount of capital in cryptocurrencies, here are three different options that might help you save on Bitcoin transaction fees.
1. Use layer-2
With the layer-1 (on-chain) network being congested, it was never a better time for layer-2 technologies to shine. The Bitcoin Lightning Network or Liquid Network should be used for transactions much more now, to allow for not only fast, but also cheap transactions off the chain. However, it needs to be stated that it is not recommended to use the layer-2 solutions for larger amounts, as they are more prone to technological problems than layer-1. These scaling solutions are still in their infancy, yet, they can be used seamlessly.
2. Use different cryptocurrencies
A slightly counterintuitive solution, especially if you already own bitcoins, but using other cryptocurrencies might help you with saving on transaction fees. If you decide to do that, make sure that you select a network that is not as congested as Bitcoin’s. Popular and rather safe alternatives might include Ethereum (ETH), Litecoin (LTC), Monero (XMR), Dogecoin (DOGE) or Polygon (MATIC).
3. Be patient
If you really have to transact on the Bitcoin network, then the only option that you have right now is to be patient. It is more than plausible that this spike in transaction fees that occurred during the network congestion, will slowly calm down. The fees will for sure decrease and the time it takes to verify any Bitcoin transaction will speed up again. Sometimes it can also be a good idea to wait for off-peak hours for transactions such as weekends.
What’s next?
The current situation is obviously far from ideal. That, however, does not mean that it is unchangeable. Or that it will not be resolved in the near future. There are already many people working on effective solutions. Moreover, many expect the current craze around the BRC-20 tokens, which is connected to not only Bitcoin NFTs, but also different types of new meme tokens, to die down. For example, Harper sees the mania going away in the near future.
“Surging fees will price out some transactions for sure, but I doubt that this BRC-20 minting mania will last too much longer. Fees may become elevated like this from time to time with different inscription mints or other demands for block space, but they will revert to the mean eventually.”
This would only be a short-term solution though. In the long term, people cannot count on the fact that some mania or craze will disappear or that the interest in it will vanish. That would not be the right solution in the long run. Thus, one might wonder, what the viable resolution to this might be.
Scaling seems to be the clear go-to answer. Implementing new scaling solutions such as different layer-2 (mostly Lightning Network) can allow for throughput of many more transactions than the basic on-chain setup. We have already witnessed many changes and improvements not only on Bitcoin (with SegWit for instance), but also on other networks (such as Ethereum or Polygon).
Scaling has been considered one of the most critical points in cryptocurrencies for eternity. In combination with security and decentralization, scaling is one of the three key problems of so-called “Blockchain Trilemma.” Thus, improving on scaling solutions of the Bitcoin network will without any doubt lead to either a sacrifice of decentralization or security of the network unless most of the solutions are implemented on layer-2 solutions.
Which side of the debate are you on?
Recent situations with congestion of the network and problems related to high transaction fees and long waiting time for transaction verification also shows a rather unpleasant split within the community. While one side of Bitcoiners, mostly miners and NFT enthusiasts, love the current development, the other side complains about the fact that someone is wasting the potential of biggest advancement since the internet on useless jpgs.
The debate around this topic is obviously much more complicated. While Bitcoin was always open-source and thus anyone can use it the way they like, pushing it to limits with NFTs that are worthless can actually damage its name and future potential. While each side definitely has their own story, only time will tell whether this craze will perish or whether fees of dozens of dollars for transactions are actually the future of on-chain transactions.
The arguments can clearly go both ways and thus the real “truth” or assessment of what is right and wrong is only in the eye of the beholder. The question then stands, which side of the debate are you on?
Conclusion
As the recent events in the Bitcoin world have shown, the scaling of the biggest cryptocurrency is far from optimal. Having to wait sometimes days to have a transaction approved can discourage people from adoption. Enormous transaction fees will likely have the same effect.
On the other hand, should Bitcoin overcome this obstacle, it will once again prove that it is not only resilient, but also extremely flexible to accommodate the needs of anyone and everyone who wants to join the network and use it for their benefit.
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