If you have recently tried to make a Bitcoin transaction you would have noticed a few inconvenient changes. That is, a considerable increase in transaction fees and a significant drop in the hash rate resulting in expensive and slow transaction confirmations. What is the cause of all these changes? And is this the new normal?
The double edged sword: The Bitcoin Halving
On May 11, the Bitcoin halving occurred. It was the most significant and recent development in the Bitcoin blockchain network. The Bitcoin halving refers to the halving of the Bitcoin block reward for miners. Prior to the halving, lots of excitement surrounded the possible financial volatility it would cause. Our previous article touched on the financial implications of the Bitcoin Halving.
As the dust of the Bitcoin halving has settled, the focus has now shifted to the network performance. Bitcoin halving has affected the network in various ways; hash rate, block time, fees and miner revenues. This article takes a closer look at why the Bitcoin halving effected the network in three very visible ways.
The first week after the halving saw a 30% decrease in the hash rate. Three weeks later it has since bounced back slightly to a 20% decrease. Experts had predicted this decline in the bitcoin network’s hash rate. Why has the hash rate decreased?
The hash rate is dependent on the number of miners on the network and the computing power of their machines. It is also a self regulating mechanism in the Bitcoin blockchain to maintain an average block time of 10 minutes. As a result of the halved reward, some miners have become unprofitable. It is estimated that around 15-30% of unprofitable miners have shut down their equipment.
Thus, because of the fewer miners in the network, the hash rate has reduced. In a sense, the hash rate decline confirms the decline of miners in the network.
So what does fewer miners in the network mean for fees and block time?
On May 17 2020, the block generation reached to just 95 blocks per day. This was similar to the famously low block times experienced in 2017.
This translated to block times of 14 minutes rather than the average of 10 minutes. This then has roll over consequences for the transaction fees.
This was happening because the Bitcoin network had not adjusted its hash rate based on the new decreased number of miners in the network. This block time will continually decrease back to the average of 10 mins as the network self-regulates to the reduced number of miners in the network.
As a result of the increased block times coupled with similar or increased demand in Bitcoin transactions it creates increased average transaction fees. This is because of the competition that is created in the fee market of a full mempool.
Woah that was a mouthful, lets take a step back.
The memory pool or the mempool is the first place an unconfirmed transaction goes, to await being added to a block, similar to waiting in line to an amusement park ride. Miners choose from this mempool which transactions they want to include in the next block. Each block can only accomodate 1mb of transactions, so there is a limit into how many transactions can fit into a single block. Miners naturally choose transactions offering the highest fees to increase their own revenue. A full mempool is a competitive environment. Users will compete to get their transaction in the next block by offering higher and higher fees. The higher the fee, the more likely your transaction will be chosen to be placed into a block and confirmed.
When will it get back to normal?
This period is noted by the experts as a time of adjustment. This article touched on the main reasons for slower and more expensive transactions which was a decline in the number of miners and an increased number of transactions as result of greater market interest.
The experts are saying that it will take another eight weeks for miners to come back into business after their machine upgrades. However, as the interest around Bitcoin has increased we may see these numbers as the new normal.
What do you think? Share your opinions with us below in the comments.
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