Anyone and everyone’s attention in bitcoin is currently transfixed on a single number: the amount of unconfirmed transactions building up on the bitcoin network.
Earlier on Wednesday, the number surpassed 200,000, an unprecedented level.
Professional bitcoin OTC traders FT Alphaville spoke with see this as an alarming development and one of the drivers of rival cryptocurrency ether’s growing popularity. The views of one trader:
It definitely tempts people into ether. This is the biggest problem with bitcoin, it’s not just that it’s expensive to transact, it’s uncertain to transact. It’s hard to know if you’ve put enough of a fee. So if you significantly over pay to get in, even then it’s not guaranteed. There are a lot of people who don’t know how to set their fees, and it takes hours to confirm transactions. It’s a bad system and no one has any solutions.
Transactions which fail to get the attention of miners sit in limbo until they drop out. But the suspended state leaves payers entirely helpless. They can’t risk resending the transaction, in case the original one does clear eventually. They can’t recall the original one either. Our source says he’s had a significant sized transaction waiting to be settled for two weeks.
The heart of the problem is game theoretical. Users may not know it but they’re participating in what amounts to a continuous blind auction.
Legacy fees can provide clues to what fees will get your transactions done — and websites are popping up which attempt to offer clarity on that front — but there’s no guarantee that the state of the last block is equivalent to the next one.
The recommended transaction fee at pixel time was $2.15 for the next block and $2.43 for the next hour.
With rates like that, it’s simply not viable to use bitcoin for small transactions like coffees.
What’s more, a breakdown of the share of high-value fees to low-value fees in the network, shows the proportion of high fees is building up steadily.
The below (courtesy of Jochen-hoenicke.de) shows the value in ‘satoshis’ per byte transacted, which is equivalent to 0.00000001 bitcoin per byte).
The final irony, given bitcoin’s decentralised and real-time settlement obsession, is how the market structure has evolved to minimise the cost of transaction.
Traders, dealers, wallet and bitcoin payments services get around transaction settlement choke points and fees by netting transactions off-blockchain.
This over time has created a situation where the majority of small-scale payments are not processed on the bitcoin blockchain at all. To the contrary, intermediaries operate for the most part as trusted third parties settling netted sums as and when it becomes cost effective to do so.
The problem with this approach is the lack of industry-wide standardisation. Since every entity decides on its own basis when and how frequently to settle netted payments, no guarantee can be made that the network generally is avoiding Herstatt risk. This is a scenario where the failure of one institution to honour its netted obligations can cascade across the network jeopardising the validity of all other settlements.
The FX market got around this problem by developing the continuous linked settlement (CLS) system, wherein every intermediary holds an account with a common intermediary who in a pre-agreed timeframe settles all transactions simultaneously, removing the risk between payments.
While the Bitcoin network could create a similar solution, it’s likely the structure would jar with many of the tenets the bitcoin community holds dear, such as decentralisation, while making the network look and feel increasingly non-exceptional compared to the standing system.
Nor, it must be pointed out, would the solution necessarily reduce the cost burden in the system. Bitcoin companies have been netting transactions for years to save on settlement costs and yet, even with those savings, many are moving to pass on the cost of settlement fees to customers to remain viable business models.
All of which proves bitcoin is anything but a cheap or competitive system. With great irony, it is turning into a premium service only cost effective for those who can’t — for some reason, ahem — use the official system.
Related links:
Bitcoin companies come of age; start moaning about unfair playing fields – FT Alphaville
