Peter Todd: The Majority of Bitcoin Users Don't Think Fees Are All That High
Ahead of the Amsterdam bitcoin meetup that will be hosted by Primalbase on January 31st, Binary District conducted an exclusive interview with Bitcoin Core developer Peter Todd to discuss the current state of bitcoin, its scalability issues, high fees and the adoption of Segregated Witness (SegWit). Since mid-2017, the Bitcoin network has been struggling to process transactions with low fees in a timely manner. As millions of new users have started using bitcoin as a store of value and a digital currency, the Bitcoin network has quickly become congested with unconfirmed transactions and pending payments.
According to Blockchain, the second most widely used bitcoin wallet platform behind Coinbase, the size of bitcoin blocks average at 1.05MB, ie. larger than the hard-capped block size of 1MB. The size of the bitcoin mempool, which is the holding area for unconfirmed and pending transactions, remains above 100 million bytes. This is relatively high considering that the daily transaction volume of bitcoin is in the range of 250,000 to 300,000 transactions.
In contrast to Ethereum, which has been processing over 1.2 million transactions per day for several weeks, bitcoin has only been settling about 20 percent of the daily transaction volume that the Ethereum network does.
Todd explained that if large-scale bitcoin wallet platforms, like Coinbase and Blockchain, integrated SegWit — the transaction malleability fix and scaling solution from the Bitcoin Core development team — transaction fees would immediately decrease by large margins. Cryptocurrency hardware wallet development firm Ledger, which recently raised $75 million in a Series B funding round led by Draper Esprit, noted that the integration of SegWit immediately decreased bitcoin transaction fees by around 35 percent.
While SegWit was activated and officially integrated into the Bitcoin network in August 2017, most major bitcoin wallet platforms and exchanges have yet to include support for it. Given the lack of SegWit-enabled transactions and wallets, the adoption rate of SegWit has remained below 13 percent over the past few months.
BitcoinCore.org, the official website of the Bitcoin Core development team, notes that only 18 bitcoin platforms have deployed SegWit to date. 87 platforms are ready, 23 are in progress of integrating SegWit, and 24 are planning to support SegWit transactions. Blockchain and Coinbase are two of the 87 platforms ready to integrate the scaling solution.
“Adding SegWit to a wallet isn't all that difficult — although it does require some work — so that low adoption rate is a strong sign that the majority of Bitcoin users don't think fees are all that high.”
Todd criticized large wallet platforms for their inefficient adoption and integration of SegWit, even though it would immediately reduce transaction fees for the wallets that use it. However, he suggested that “If wallet's aren't using it, that's a strong indication that they don't actually consider transaction fees as being high enough to make it worth the effort to adopt SegWit”. He went on to say “Adding SegWit to a wallet isn't all that difficult — although it does require some work — so that low adoption rate is a strong sign that the majority of Bitcoin users don't think fees are all that high.”
High Fees And Inefficient Settlement of Transactions
Even with SegWIt at 100 percent adoption, in the long-term, specifically if the user base of bitcoin continues to grow so rapidly, the transaction fees will inevitably rise without on-chain scaling or second-layer solutions. SegWit provides around 35 percent reduction in fees but considering that bitcoin fees are around $5 for median-size transactions, fees will still amount to nearly $3 per transaction. Moreover, when the Bitcoin network becomes congested and the daily transaction volume spikes, fees often rise up to between $10 and $15.
High fees and the inefficient settlement of transactions prevents a seamless user experience for new users looking to use bitcoin as a digital currency. However, Todd stated that bitcoin is not in direct competition with any other cryptocurrency as it is working to become the most secure and decentralized cryptocurrency in the market. Todd explained that high fees are a trade-off for bitcoin’s security.
“Bitcoin and those other currencies are not in as direct competition as you might think: Bitcoin has made a different security/cost trade-off than other currencies with larger block sizes.”
On whether high transaction fees could negatively affect new users, Todd said “Of course it will. But when you get down to it, Bitcoin and those other currencies are not in as direct competition as you might think: Bitcoin has made a different security/cost trade-off than other currencies with larger block sizes, and thus those currencies don't compete in quite the same markets”.
There are several research papers opposing the claims of Bitcoin Core developers regarding high fees. Most recently, Cornell professor Emin Gün released a research paper — “Decentalization in Bitcoin and Ethereum Networks”. In this paper, Sirer proposed that Bitcoin’s level of decentralization and security can be maintained if its block size is increased by 1.7x. He argued that the size of bitcoin blocks can be increased to 2MB and still not have a major impact on node synchronization.
“Bitcoin nodes generally have higher bandwidth allocated to them than Ethereum. Compared to our previous study in 2016, we see that the median bandwidth for a Bitcoin node has increased by a factor of 1.7x. The typical Bitcoin node has much more bandwidth available to it than it did before. Higher allocated bandwidth indicates that the maximum block size can be increased without impacting orphan rates, which in turn affect decentralization”.
On EOS, Tezos and IOTA
Since early 2017, initial coin offerings, better known as ICOs, have started to raise more capital through this distributed ecosystem of investors than venture capital firms. EOS, for instance, raised more than a billion dollars during its unprecedentedly long ICO, which is still ongoing. Telegram, the popular encrypted messaging application with nearly 200 million active users, recently announced its controversial bid to raise over $2 billion in an ICO.
Todd has voiced concerns about many of the projects that have raised an immense amount of capital in such short time periods. He has publicly spoke out against Tezos, the third most popular ICO in history behind EOS and Filecoin, for not having launched a product as of yet despite raising hundreds of millions of dollars.
“Things like Tezos may make sense as small-scale projects with research grant budgets on the order of $100k; it makes no sense for such projects to be raising tens of millions of dollars each.”
He also criticized other successful ICO projects, including IOTA, for having poor technologies and unsecured networks. He added, “IOTA has used home-grown crypto that was laughably insecure, and they have a central coordinator that the whole network relies on. Obviously, if that coordinator goes down, so does IOTA.”
Earlier this month, due to the growing criticisms from experts like Todd and researchers at the MIT Media Lab, the IOTA Foundation had released an official statement with regards to the “single point of failure” criticism.
“In October, the Coordinator, a special node currently securing the network during its infancy, was taken offline temporarily after a potential security vulnerability was identified. Once the issue was resolved the network resumed normal operations. This incident was openly communicated to the community and involved the full support and active participation of the IOTA node operators,” said the IOTA Foundation.
The process of how the Coordinator, or the special node of IOTA, was taken down was not disclosed and this lead to much criticism from experts in the cryptocurrency sector.
Todd emphasized that, in terms of technology and adoption, the cryptocurrency sector is still in its infancy. He maintained that as innovative scaling solutions for the Bitcoin network are implemented, bitcoin will be able to operate as a robust store of value and an efficient digital currency in the long run.
Blockchain is lauded as the most disruptive technology since the internet — in terms of its potential. As a technology, it is still relatively immature and, as some would argue, experimental. Before it can rightly hold this title, it is imperative that the issues surrounding the security and scalability of blockchains are resolved. So, to help us in this endeavour, Binary District has invited Peter Todd to give his take on how to maintain the security and stability of blockchains, especially with its rapid proliferation and adoption by various industries.
Todd is one the most vocal actors in the space and an ardent proponent of maintaining decentralisation. He is particularly critical of blockchains that propose a centralised base protocol layer. While many other experts and developers may hold opposing views as to how to efficiently scale blockchains, Todd’s is outspoken and clear on where his priorities lie — maintaining decentralisation and security. Ultimately, in the dynamic world of blockchain ambivalence get you nowhere.
To join us on the 31th January 2018, register here.
Illustrations by Ilya Martynov
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]