Journal of Financial Market Infrastructures

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What drives Bitcoin fees? Using SegWit to assess Bitcoin’s long-run sustainability

Collin Brown, Jonathan Chiu and Thorsten V. Koeppl

  • We use the adoption of the SegWit protocol to identify an aggregate demand function for Bitcoin transactions.
  • Using block-level data, we can then estimate the impact of congestion and the US dollar price on fee rates.
  • Our estimates show that fees alone cannot keep the Bitcoin blockchain tamper-proof.
  • Hence, sustained large increases in the US dollar price of Bitcoin are necessary to keep mining rewards large enough to rule out double spending.

Can Bitcoin remain tamper-proof in the long run? We use block-level data from the Bitcoin blockchain to estimate the impact of congestion and the US dollar price on fee rates. The introduction and adoption of the segregated witness (SegWit) protocol allows us to identify an aggregate demand curve for Bitcoin transactions. We find that SegWit has reduced fee revenue by about 70%. Fee revenue could be maximized at a block size of about 0.6 megabytes when SegWit adoption remains at current levels. At this block size, maximum fee revenue would be equivalent to one-eighth of the current average block reward. Hence, large sustained price increases are required to keep mining rewards constant in the long run.

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