Skyrocketing fees negatively impact blockchain

One of the biggest draw cards for cryptocurrency, is that payments are quick, easy and affordable. Transactions can take place across the globe and its multiple time zones with ease, without delays, and with very low fees. In fact, Satoshi Nakamoto, bitcoin’s founder, said: “The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions.”

These same benefits are the reason that blockchain, the technology behind cryptocurrencies, is becoming popular with organisations across many sectors, and specifically in financial services. However, Richard Firth, CEO of MIP Holdings, says until last year, blockchain fees remained low, but this is no longer the case. “The soaring popularity of cryptocurrency and blockchain has overtaken its ability to cope with the demand, and this is seeing fees becoming expensive.”

According to Firth, this is having a significant impact on the way blockchain is used, as well as the businesses that are employing it. “The days of small, cheap, quick transactions are over, as these cannot be supported at current fee prices.”

Firth says fees aren’t calculated on the value of the transaction. “It doesn’t matter if you’re sending one bitcoin, or Rand, or Dollar, or 100, the transaction fee is unrelated. Instead, fees depend on the size, in bytes of the transaction once it gets incorporated onto a block on the actual blockchain.”

Firth says today, there’s nothing for nothing. “If you want to use blockchain, you need to pay the miners whose machines secure the network and confirm the hundreds of thousands of transactions that pass through it on a daily basis. At one time, the fees were negligible, and no-one paid too much attention to them. But this is no longer the case.”

When the blockchain isn’t too congested, transactions can be confirmed a lot faster. However, over and above miners earning for adding each transaction to a block, they earn the fees associated with any transactions on the block, he explains. “This number can vary widely. Miners are under no obligation to include any particular transaction in a block that they are confirming, so think of these fees as an incentive for them to process the transaction.”

Naturally, everyone is in it to make money, so miners prioritise transactions with the highest fee per byte. Senders who are in a rush to confirm their transactions are willing to pay a surcharge to push their transaction to the top of the queue, allowing their transaction to be confirmed within the next block, and take only up to 15 minutes. Lower fees will see a transaction moved down the queue, to within three blocks or so, which can take double that time.

Unfortunately, this has seen blockchain fees soaring, time to secure the transaction increasing, and created a market of additional incentives for miners, as well as a rush of users paying higher fees in order to get their transactions confirmed as a priority. “Think of it as auctioning off limited capacity to the highest bidder. Users have the option to pay a higher fee in exchange for immediate delivery or to pay a lower fee and wait until congestion reduces enough to accommodate transactions with lower fees. However, this will scare businesses away from using blockchain.”

Firth says this is something of a crisis for any organisation that has built itself around facilitating smaller transactions at lower fees. “Rising blockchain costs must be seen as a major risk for any business wanting to use the platform.”