BTC vs ETH Fees

Introduction

As the network gained popularity, the BTC price and transaction fees rose considerably. More investors demanded the coin leading to congestion issues the blockchain had to solve.

Skyrocketing transaction fees on Bitcoin led to bad reactions from other industry experts. For instance, Ethereum co-founder Vitalik Buterin called out Bitcoin’s underlying slow processing times and unsustainably high costs.

In a viral YouTube video from 2017, Ethereum’s creator lamented that the “internet of money (BTC)” should not cost $0.05 per transaction.

The high transaction fees on the blockchain raised concerns over whether BTC can evolve into the world’s reserve currency. Critics of the digital asset argue that the coin isn’t ready to become a globally legitimate means of transaction.

This article examines whether the world’s first crypto can live up to expectations of replacing cash someday.

A Historical Look at Transaction Fees on the Bitcoin Network

Bitcoin proponents argue that the top cryptocurrency is the future of transacting. Several parties hailed Satoshi’s gift to the world as a novel alternative to the legacy financial system. For example, many praise it for allowing users to send money at ultra-low costs.

In its early years, BTC transaction fees averaged $0.01, with remittance costs rarely exceeding that level between 2013 and 2015.

However, as more folks started jumping on the Bitcoin train, the price experienced parabolic growth. As a result, it soared above $1000 in early 2017. As the value of the coin rose to colossal levels, so did the demand for the network.

The 2017 Bitcoin boom exposed weaknesses in the underlying blockchain. These issues threatened to cripple the asset’s long-term viability as a means of transaction. BTC’s price jumped 17-fold to hit highs above $17K as more investors acquired the red-hot cryptocurrency during that bull market.

As a result, the average transaction costs hit $0.30 in January 2017. Then, the network’s number of transactions waiting for processing ballooned. The network’s fees hit $1 by the end of April and reached highs above $25 in late 2017. The transaction costs on the in-demand network peaked near $50, as seen in the chart below by Bitinfocharts.

bitcoin median fees — Bitcoin Median Transaction Fee historical chart | Source Bitinfocharts

At the time, a CNBC report highlighted that users were paying $28 on average for one transaction on the network. That’s how Bitcoin miners raked in astronomical sums from the rising transaction fees.

Meanwhile, network users decried the ever-increasing waiting times to confirm Bitcoin transactions.

Next, the median daily transaction fee declined steadily in January 2018. However, the previous hike showed that the network’s reputation of offering near-zero fees remained in jeopardy. Many argued that the blockchain was at risk of succumbing to prohibitively expensive costs.

Soaring Transaction Fees Cause a Network Split

In his whitepaper, the Bitcoin creator envisioned a future where a solid-proof mathematical algorithm would eliminate the need for centralized institutions.

In turn, the new peer-to-peer network would enable micropayments. By cutting out banks and other intermediaries, it would pass on costs to users as transaction fees.

Unfortunately, the internet of money has faced skyrocketing fees in the recent past, which undermined its utility for small payments.

Slow transaction speeds emerge from the global network’s minimal capacity to process about seven transactions per second. This technical limitation in the blockchain’s underlying technology makes Bitcoin slower than other digital infrastructure projects.

The bottleneck in BTC’s physical infrastructure prompted some community members to implement a hard fork in August 2017. That split resulted in the creation of Bitcoin Cash (BCH), a more scalable network than its predecessor.

A similar fork to the Bitcoin network took place in October 2017, resulting in the creation of Bitcoin Gold. The design of the two new digital currencies increased the size of blocks and reduced network congestion.

However, the offshoots have struggled to gain as much attention as Satoshi’s original invention or challenge Bitcoin’s market share.

Some Bitcoin advocates argue that the network does not need to become fast and efficient. For instance, they say that BTC has a similar utility to gold. So, it does not have to scale up significantly and function as a currency for small payments.

The skyrocketing transaction costs on Bitcoin have pushed several startups away from BTC, further slowing down adoption. At the peak of the fees crisis in late 2017 and early 2018, multiple companies stopped accepting Bitcoin.

The Cause and Effects of High On-Chain Transaction Fees

To understand the high fees on Bitcoin, we need to look at how the network incentivizes miners to verify transactions.

Miners receive block rewards for committing computing power to verify new blocks and add them to the blockchain. The rewards started at 50 BTC in 2009 and underwent halving every four years. Since the latest halving in May 2020, miners now receive 6.25 BTC for each Block they verify correctly.

However, block rewards aren’t the only way the network incentivizes miners to verify transactions and secure the blockchain.

Bitcoin users can attach voluntary fees to their transactions to compensate miners for verifying the transaction. In times of colossal network congestion, the number of bids can outpace the available block space.

In such cases, miners prefer to fill blocks with the highest bids. In this bidding mechanism, miners have discretion on which transactions to prioritize. They do so depending on the incentives they receive and push transaction fees to astronomical levels.

During Bitcoin’s speculative bubble in 2017, investors were willing to pay top dollar to send their coins to exchanges.

As the market boom cooled off and demand to move BTC for speculative purposes dwindled, the fees dropped dramatically. That drop in transaction costs continued as the bubble popped. So, it resulted in BTC prices plummeting from a peak near $20K to $6,000 a month later.

The Effects of High Transaction Fees

The increasing demand exposed underlying weaknesses inherent in the relatively limited amount of transactions that Bitcoin can process.

Experts argue that BTC fees can spike higher than users pay for on traditional payment networks with enough congestion.

Uneconomical transactions could make it impossible for crypto enthusiasts to use Bitcoin as a payment option. This would prompt more businesses to back away from the network.

Another reason why BTC could fail to gain traction as a legitimate means of transaction is high volatility. Typically, Bitcoin transaction fees can fluctuate in a short period due to wild price swings. This issue makes BTC payments unviable for day-to-day use.

For Bitcoin to solve the payments problem plaguing the legacy financial system, fees have to drop. Also, the change has to be big enough to make the crypto viable for micropayments.

Moreover, the cryptocurrency’s price volatility needs to calm down considerably. Also, merchants worldwide must receive an easy and convenient way to accept BTC payments.

BTC Transaction Fees in the Latest Bull Market Cycle

Since late 2020, more institutional investors have bet on the world’s premier cryptocurrency, driving prices to new highs.

As a result, more institutional players have swarmed the market looking to cash in on the crypto frenzy. Consequently, the Bitcoin community has grappled with preventing the network from plummeting.

The sky-high prices coincided with record-high transaction fees of $59. This eclipsed the average transaction fees present during the previous bull market.

Data from mining pool stats shows that high transaction fees came with a drop in the Bitcoin hash rate. The fall was nearly 25% and hit a low of 125 EH/s.

The latest stats from ychart.com place the average transaction fees at just under $3. Also, they show the BTC price trading tightly between $46K and $48k.

The chart below from ychart.com shows how average transaction fees have risen and dropped over the past year.

btc fees last year — Bitcoin Average Transaction Fees | Source ychart.com

The Push to Unclog Congestion on Bitcoin

As fees soared to untenable levels in 2017, some BTC devotees sought new ways to scale the network. The fees crisis highlighted that Bitcoin’s hard-coded block size limit was the problem. More precisely, it deterred the network’s ability to handle more transactions as demand soared.

To try and solve it, code developers and other parties implemented innovative technologies. This way, they could increase Bitcoin’s payment volumes while eradicating the crippling fees.

As mentioned above, some Bitcoin users decided to create a spin-off of the mainstream blockchain in 2017. They successfully created the Bitcoin Cash protocol, which expanded the block size limit from 1 MB to 8 MB. The hard fork resulted in a more scalable rival network that processed more transactions per Block.

The “small block” faction of the blockchain has outlined different ways to solve the congestion issue. The remaining group focused on a technological upgrade as soon as the frustrated big-block advocates branched off to form BCH. And, they called it “Segregated Witness” or “SegWit.”

The new update’s design increased network capacity by separating cryptographic signatures from the rest of the one-megabyte block data. The result would essentially be a de-facto increase to the block size limit, helping the network process more transactions.

After going live in August 2017, the Segregated Witness faced some implementation hiccups. Essentially, the upgrade required all users to modify their Bitcoin software to a more efficient transaction format.

Unfortunately, software providers took time to roll out the necessary changes. The initial excitement about the transition to the network wore off soon after. Also, very few Bitcoin transactions adopted the new format.

Per data from OTX charts, about 33% of bitcoin transactions were using Segregated Witness by July of 2019. That slow rollout and adoption meant that the upgrade wasn’t as effective as most proponents had hoped.

Over the years, more companies have implemented the necessary software changes. This led to higher Segregated Witness adoption and gave the network more breathing room.

However, the new format would only double network capacity at best. Therefore, the network would require more radical changes to solve congestion and hefty fees on Bitcoin.

Bitcoin has a lot riding on the Lightning Network

After the limited success of Segregated Witness, the Bitcoin community pinned their hopes on another upgrade, the Lightning Network. This solution would introduce a second layer built on the existing bitcoin blockchain.

The new payment infrastructure aims to solve hefty fees and slow transactions plaguing the global network. It creates a new avenue for processing transactions off-chain without miners’ input. This way, it would free up the underlying chain to handle more capacity.

Therefore, Lightning Network allows users to create a channel outside the existing distributed ledger network. The implementation enables users to transfer BTC at a lower cost by shifting some of the more routine transactions off-chain.

So far, Lightning has been the best answer to soaring on-chain transactions. Also, it has had great success in recent years. Most of it is due to its capability to offer low-fee BTC payments that average just fractions of a cent.

Crypto proponents argue that Lightning was a much-needed technology to transform Bitcoin into a viable day-to-day payment means.

However, detractors claim that the solution undermines Bitcoin’s original purpose as a platform for trust-less and decentralized transactions without intermediaries. Another criticism for Lightning is that it is a poor fit for some Bitcoin applications.

The layer-two solution has enjoyed increased adoption since its launch. That’s mainly because more regular users seek cheaper ways to transact on Bitcoin.

Lightning Network in El Salvador

Lightning hit a significant milestone as the leading solution to the Bitcoin fees problem in June 2021. The one triggering it was Strike, a payments firm that offers low crypto remittances via Lightning. The company decided to work with El Salvador as it moved to adopt Bitcoin as legal tender.

Strike founder Jack Mallers now serves as El Salvador’s Bitcoin development partner. He offered to drive low-fee payments in the country via his company. The partnership will help tackle uneconomical fees from Bitcoin transactions, which would make the digital asset unusable for most Salvadorans.

The second layer infrastructure should continue expanding Bitcoin’s payment volumes while slashing fees. So far, the addition to the underlying blockchain has demonstrated a bigger capacity to solve Bitcoin’s problems than Segregated Witness.

The innovative solution should fulfill its supporters’ hopes of relieving the network’s congestion. However, more BTC users need to switch to the new-fangled Lightning transactions. If that should happen, Lightning could be the answer to a resurgence of Bitcoin fees as the cryptocurrency approaches new all-time highs.

How Bitcoin Users can cut on Transaction Costs

Despite the efforts to reduce congestion in Bitcoin, high transaction fees continue to exist. Also, they pose a severe problem as more users rush in to invest in cryptocurrency.

As a result of high demand, the number of transactions awaiting verification has ballooned in recent months. As a result, it caused fees to shoot up again.

As BTC prices continue surging, many market participants are desperate to find ways to cut costs while using the network. Luckily, there are ways to lower transaction costs before experts figure out how to eliminate the fees menace.

One strategy is to send a transaction when the network has less congestion. For example, it could happen over the weekend when there is less on-chain activity.

If your transaction isn’t urgent, you can try attaching lower fees and wait it out. The miners receive more incentives to prioritize transactions with higher costs. However, they will eventually add low-priority transactions to mine blocks.

It’s worth noting that attaching meager fees could result in your transaction failing to go through at all. So, you have to ensure that you secure a high enough fee to guarantee the transaction’s inclusion. And, you can check the recommended BTC fees at any given time on websites like mempool.space.

It is also essential to use a wallet, allowing users to bump up the fees even after sending the transaction. Wallets such as Blockstream Green and Electrum support this feature. Also, they will enable the user to adjust the fees if the transaction takes too long.

Another strategy to cut down on transaction costs is to set up a channel on the Lightning Network. This approach allows users to send multiple payments with lower fees than those on legacy transactions.

Again, not all wallets support Lightning transactions. Be sure to go for a Lightning-specific wallet such as Breeze and Phoenix. Moreover, find out if the account receiving the payment accepts Lightning before sending the transaction.

Finally, using a wallet that supports SegWit transactions can help save more on transaction fees. This change that the Bitcoin community adopted in 2017 can slash costs up to 30% in a best-case scenario. Using bech32, a format tailor-cut for SegWit transactions can decrease the fees even more.

Bitcoin Vs Ethereum Transaction Fees

In the past, Ethereum creator Vitalik Buterin has criticized soaring transaction fees on Bitcoin. However, his project also faces a worsening fee crisis that threatens to drive users away from the blockchain.

A look at Ethereum gas fees shows that users found it increasingly costly to run microtransaction payments as the network enjoyed more success. Case in point, the average transaction fees on Ethereum surpassed previous records in February of 2021.

Gas fees rocketed to a new lifetime high of $23.43 that month. That’s when they broke the previous record of $19 from a month before. The soaring cost of transacting on ETH correlated with an impressive price rally that Ether had enjoyed since January.

The mounting demand for ERC-20 tokens amid the ETH rally saw peak transaction fees. Moreover, they doubled from the levels recorded during the decentralized finance (DeFi) boom of 2020.

The gas fee-driven turmoil only got worse as ETH went on to fresh highs above $2,500. This took place in April, after the Berlin hard fork implementation.

The ensuing price pump caused unprecedented congestion on the network, causing fees to shoot to the moon. Average size transactions started costing $60 to $100, making the Ethereum network practically unusable for the average person.

At the peak of the gas fee menace, one Reddit user decried having to pay a whopping $94 for a routine Uniswap trade. Many in the community condemned the ridiculous gas prices on the network. They asserted that slow and expensive transaction costs were not acceptable as the new normal.

Per the chart below from crypto tracking website Messari.io, gas fees on Ethereum are averaging at $24, with the ETH price trading just below $3K.

Ethereum Average Transaction Fees | Source Messari.io

In comparison, the average fee for a single BTC transaction peaked at $63 in April. This indicated that the two networks face similar scaling problems. In both cases, crippling costs make the networks less accessible to casual users and undermine their long-term viability.

The Principal Causes of Ethereum's Crippling Gas Prices

The second most popular cryptocurrency has been enduring spikes in gas fees in recent months. Users battered with jaw-dropping prices to process simple transactions attribute the untenable costs to a convergence of factors.

For one, the explosive growth in the DeFi ecosystem has seen new projects cropping up regularly. These protocols that facilitate peer-to-peer lending without relying on third parties have experienced astronomical growth over the past year.

The total value locked (TVL) in DeFi applications exploded. They went from approximately $530M late last year to hit highs of over $83 billion in less than a year. Millions of new users seeking low APR loans now drive this meteoric growth in open lending protocols.

Data from BitinfoCharts shows that the number of DeFi users increased significantly.

active addresses ethereum (eth) — Bitcoin Median Transaction Fee historical chart | Source Bitinfocharts

They went from just over 110,000 in February 2020 to over 1.4 million a year later. The rush of activity on the network led to ballooning gas fees. This way, they threatened to cripple the growth of the DeFi movement. Some exchanges, including Binance, have temporarily stopped ERC-20 withdrawals due to high fees. New entrants to the market, such as SushiSwap, spiked gas wars. That’s how they exposed Ethereum’s inability to scale up to counter rising usage in ERC-20 projects.

In recent months, the non-fungible tokens (NFTs) market’s renaissance has also contributed to mooning gas fees on Ethereum. Per data from BitInfoCharts, Ethereum fees hit $38.306 for the first time in three months in August 2021. This happened as the NFTs market saw revived interest from investors. The stats showed that transaction costs rocketed by 110% in August alone.

ethereum fees — Bitcoin Median Transaction Fee historical chart | Source Bitinfocharts

The nightmarish fees prompted Messari researcher Ryan Watkins to predict that more users would opt for more efficient chains. And, this could take place before Ethereum rolls out Layer 2 solutions.

“So long as Ethereum gas prices remain this high, new users will continue to onboard into the crypto-economy through newer chains like Solana, Avalanche, and Terra that offer a far better UX,” Watkins tweeted.

So long as Ethereum gas prices remain this high, new users will continue to onboard into the cryptoeconomy through newer chains like Solana, Avalanche, and Terra that offer a far better UX.

It sucks, but that’s just how it is until Ethereum’s L2s ecosystem fully rolls out.

— Ryan Watkins (@RyanWatkins_) August 29, 2021

Among the main drivers of the increasing gas fees was the Ethereum-based NFT game Axie Infinity. This project now boasts almost 1 million daily active users. In July, the play-to-earn gaming platform using NFT creatures eclipsed the revenues of more established protocols. Among them are MarkerDao and PancakeSwap. Also, now it is amongst the top NFT marketplaces.

The network has also had to contend with increased congestion due to rallying ETH prices. This comes on top of the increased strain on Ethereum resulting from the DeFi and NFTs boom. Since late last year, Ether has embarked on an impressive run to new lifetime highs above $4,000.

Ethereum Miners Capitalize on the DeFi Craze

ETH miners have been primary beneficiaries of rising gas fees on the second-largest blockchain. In January of 2021, data from CoinMetrics pegged the monthly miner revenue at $830M, representing a 120% jump from the previous month.

As Ether approached new lifetime highs in April, the monthly miner revenue hit a whopping $959M as demand for the network mounted. Per data shared by the Block, miners on Ethereum earned an average of $530M in transaction fees alone between January and April of this year. The revenue peaked at $1.3B in May.

ethereum (eth) miners revenue defi — Monthly Ethereum Miner Revenue | Source The Block

Naturally, the bidding system on Ethereum pushes miners to charge exuberant fees in times of mounting network congestion. This way, the network’s essential workers limit its principal use cases in DeFi and NFTs.

The high fees sparked outrage in the Ethereum community, with many calling for an overhaul of the existing pricing model. Vitalin Buterin and other Ethereum core developers proposed various upgrades to remove miners’ control of gas fees.

Solutions to Ethereum's Gas Fee Crisis

As gas fees on Ethereum got out of control in 2020, Matter Labs developers launched a trustless layer-2 protocol, “zkSync.” The team expected the solution to facilitate scalable, low-cost transactions on Ethereum and fix congestion on the blockchain.

The zkSync beta product debuted on the Ethereum Mainnet in mid-2020, promising to process over 200 transactions per second (TPS). Despite offering users low fees of about $.01 per transaction, the Layer-2 solution cannot solve Ethereum’s gas fee problem.

The immediate solution to Ethereum’s high fees is the imminent Ethereum 2.0 upgrade. For instance, it should see the protocol migrate from the current Proof-of-Work (PoW).

The change will usher in the Proof-of-Stake (PoS), making miners obsolete and solving the issue of crippling fees forever. The network overhaul to PoS will also introduce multiple Shards (side chains) to increase network throughput radically.

Ethereum developers are currently working on the PoS architecture, which should come out in 2022. Meanwhile, the network is rolling out other updates. They should act as temporary solutions to the network’s problems before the eventual transition to ETH 2.0.

The most notable upgrade, EIP 1559, was activated in August as part of the London hard fork. The long-awaited protocol improvement introduced a BASEFEE. This serves as a standard rate for the whole network, making fees more predictable and affordable.

The community is portraying widespread support for the upgrade. That’s due to its capacity to overhaul the current auction-style model and introduce fair gas fees. Still, Ethereum miners oppose the upgrade, claiming that it will eat into their profits.

Nevertheless, the upgrade was successfully implemented on August 5th and is working as designed to tighten the supply of Ether. However, it was not the primary intention of the EIP-1559 fork to explicitly lower gas fees. It only allows for fairer prices by limiting high bidder overpayment.

EIP 1559 also introduced a burn mechanism that removes gas fees from circulation instead of awarding them to miners. According to Etherchain’s burn tracker, the protocol upgrade has burned over 335,000 ETH since its activation. The network projects EIP-1559 to burn up to $5 billion worth of ETH coins per year, drastically reducing inflation on the network.

As the burn mechanism takes out more ETH from circulation, some market participants argue that it could turn the Ethereum network into ultrasound money.

However, Ethereum won’t become utterly deflationary until full implementation of its shift to POS. At that time, the network will burn more tokens than it issues to validators, transforming Ether into a deflationary asset.

The eventual end to the gas fee dilemma on Ethereum could be a turning point in the widespread adoption of the blockchain. DeFi and NFT projects on the network will likely explode after the shift to PoS. Also, ETH prices should rally amid reducing supply.

That said, delays in moving Ethereum to a PoS mechanism have allowed other smart contract platforms to grab a significant market share. More scalable and affordable projects like Solana and Cardano threaten to dethrone the world’s second-largest blockchain in recent months.

Final Thoughts

This in-depth guide has analyzed the historical evolution of transaction fees on both Bitcoin and Ethereum. Also, it examined their causes and effects.

Scaling problems have long plagued the internet of money, making transactions slow and expensive. Luckily, there are solutions in the works to make Bitcoin more scalable and reduce transaction costs.

Ethereum developers have also been working to introduce changes that will make the network more efficient soon. In the long run, we should expect practical solutions from both networks.

Referrences

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