Bitcoin transactions have increased exponentially since they first started eight-years-ago and now blocks are experiencing traffic that can make transactions sluggish.
Although it can be frustrating, congestion is useful to examine, because it can help to determine block size. What happens with congestion is that bitcoin’s mempool (a storage system that holds transactions before they move forward), increases its storage size to absorb peak loads, and then the network can catch up during off-peak times.
In other words, the network is keeping up with exponential demand. Congestion is a reality, but transactions are still getting through.
It is expected that by 2020 there will be around 20 transactions per second on the network, however this may not happen. Currently, the bitcoin network is used as a store of value, but by 2020, its price volatility may become stable enough for it to be a currency. When that happens, merchants will begin accepting it widely as a form of payment.
Using bitcoin for smaller purchases
Many bitcoin users, including businesses, have said that fees have increased so much that using the currency for smaller purchases, like buying coffee, is no longer feasible.
Some have said that as people move toward using less expensive, alternative cryptocurrencies, the bitcoin network will lose payments.
There is still exponential growth of transactions per second but bitcoin’s core function is transmitting high values. As bitcoin become less volatile, this could change and we may see it used for everyday purchases like a cup of coffee, instead of its current role as a store of value.
About a year ago, miners were debating if large or small bitcoin blocks were more favorable for higher profits. Some said large blocks would allow for more transactions, and more fees to be generated. However in Q4 2016, we saw how peak hour congestion hit the network and it seemed that large blocks were not ideal. A demand-driven market has meant higher revenues and as the average block size has hit 95 percent of its maximum, the mempool has increased, and users have pushed their way into blocks as quickly as possible. Miners, who are motivated by short-term profits will aim for maximum block size, yet still small enough to keep blocks 95 percent filled.
What is the ideal block size for users?
Users are ideally looking for fast confirmation times, reasonable fees, and good security. It’s important to note that higher fees mean greater security for miners, who can then afford to compete with greater revenues.
Currently, fees contribute to an important part of miners revenue – 1.5 BTC fees v.s. 12.5 BTC in reward subsidy. At the next halving, when the subsidy drops to 6.25 BTC, fees will become critical to network security. The ideal balance is to find fees that are too low, and promise better security, while at the same time being reasonably priced.
Typically, the ideal block size with the best fees, security, and confirmation times is around 80 %.
A summary of best bets for ideal block size
Despite transaction delays, 1 MB blocks will keep pace with network demand. The best block size for maximizing a miner’s revenue will be small enough to congest the network, at around 95% filled or more.
Transaction confirmations begin to lag when blocks are above 80% filled. Here, fees will be reasonable but not exorbitant, however not so low that they will affect security. The best network will balance security, miners’ revenues, speed, and transaction costs.
As stated earlier, the ideal block size is 80% filled, but this size should be dynamic, adjusting to network transactional demand. With that rate, median confirm times will be unaffected, while demand will stay high enough to be desirable to miners and ensure network security. This rate would still be about four times less that the congestion-driven price that is most common today.