Bitcoin network throughput
The on-chain transaction processing capacity of the bitcoin network is limited by the average block creation time of 10 minutes and the block size limit of 1Mb. Bitcoin processes on average 5 transactions per second, no more.
Bitcoin is used mainly for speculative purposes and as a safe alternative to preserve your capital. Imagine what happens when the price of bitcoin fluctuates? Traders move their crypto in/out of exchanges in panic, people spend their bitcoins for goods and services. Within a few minutes, a large number of transactions is broadcasted to the network, and congestion begins
The period when the congestion causing high transaction fees is historically repeated, usually when the price skyrockets. A low-cost transaction that would normally be confirmed immediately is now stuck in the mempool. And while the mempool is being filled, the fight begins over which transaction will be preferred.
Network fee on top of invoice amount during congestion, why?
Confirmo receives hundreds of small bitcoin payments on a daily basis. Our wallet is fragmented into thousands of small bitcoin inputs that need to be consolidated and transferred to the exchange. Such a process creates a very large transaction that may cost thousand EURO. See bitcoin fees explained.
Let's show a simplified example:
- Bitcoin wallet is worth of 10.000 EUR (fragmented into 1000 inputs, 10 EUR worth each)
- The current average BTC transaction fee is 5 EUR
If you want to empty the wallet, you need to spend every input in your wallet. Imagine a wallet containing 1000 inputs. A huge 5000 EUR (1000 * 5 EUR) fee must be paid to the bitcoin network. Only half of bitcoins (5000 EUR) is deposited with the exchange.
Is there a solution?
Bitcoin is still suitable for high-value payments, but more and more people are switching to alternatives like Litecoin or Dash. You do not want to pay 10 EUR fee for a small transaction. Although Litecoin or Dash also have a narrow place in throughput, their blocks are almost empty thus resulting in very low transaction cost. Fee comparison between Bitcoin vs Litecoin vs Dash
And what about Lightning network?
A few years ago, Lightning network seemed to be a breakthrough technology that would be used by millions of people. Although the technology is now usable today, it still lacks a global ecosystem and is difficult for many users to grasp.