More and more of the world’s population is becoming aware of Bitcoin’s blockbuster potential to liberate them from those fiat currencies that are being manipulated and debased by governments and central banks. As a result, more and more people have been entering the Bitcoin ecosystem to employ the virtual currency for any or all of the following use cases:
- Use as a domestic commerce payment tool
- Use as an international remittance tool
- Use as a temporary store of value
The rise in Bitcoin popularity has caused the per-block transaction occupancy to increase and bump up against the 1 MB ceiling arbitrarily burned into the protocol by Satoshi Nakamoto since its inception in 2009…
As more and more transactions contend for entry into each block, the minimum transaction fee that miners will accept for block admittance is increasing….
Assuming an average cost of 50 cents per transaction, then buying a cup of coffee for $2.50 would result in a 20% Bitcoin network tax!
As fees keep rising due to the constrained maximum transaction block size, the case for using Bitcoin as a domestic commerce tool is becoming more and more uneconomical. In the worst case, bitcoin growth can come to a screeching halt and usage can get stuck in use cases 2) and 3) as listed above.
The dynamic system diagram below models the negative feedback loop that is currently in operation in the Bitcoin ecosystem. Working around the loop clockwise, here is what happens:
- As more people use bitcoin, the blocks become more saturated (+).
- As the blocks become more saturated, the transaction fees rise (+).
- As the transaction fees rise, the transaction confirmation times rise from low proposed-fee transactions being rejected by the miners or from transactions being admitted to blocks long after they’ve been initially submitted by the user. (+)
- As the fees and transaction times rise, the number of people using Bitcoin decrease. (-)(-)
The good thing about negative feedback loop systems is that they tend toward stability. A second time around the loop shows the flip in signs:
- As fewer people use bitcoin, the blocks become less saturated (-).
- As the blocks become less saturated, the transaction fees decrease (-).
- As the transaction fees decrease, the transaction confirmation times decrease from all transactions immediately being included by the miners in the very next block to be mined. (-)
- As the fees and transaction times decrease, the number of people using Bitcoin increase. (+)(+)
The key to stable Bitcoin system growth is to untether the maximum block size and allow it to grow in step with the growth in the user community so that the strength of the two negating influences in the model (fee size and confirmation time) do not drive the new number of users down to zero. The capped 1 MB maximum block size is currently stunting Bitcoin’s growth.