Uptick in SegWit Adoption a Positive Sign for Network Congestion

One of the longest-standing debates in Bitcoin, regarding the optimal block size, may slowly start to fizzle away as scaling solutions like SegWit make transactions smaller, effectively increasing throughput. As per Segwit.space, a monitoring interface for adoption, over 60 percent of on-chain transactions SegWit transaction format, January 6, 2019.

Optimal Efficiency of Bitcoin Blocks

Bitcoin’s primary value proposition is culled by some as ‘scarcity‘ by way of a capped supply. Another fairly scarce commodity is block space on the Bitcoin network. Blocks have a theoretical limit that allows only a certain amount of data to go into each block. High demand for block space leads to higher fees and vice versa.

SegWit reduces the size of each transaction by omitting signature data. Since each transaction consumes less block space, network throughput is able to increase proportionally by including more transactions. Increasing adoption of SegWit is a result of people realizing that the implications of increasing the block size are vast and plentiful.

The Lightning Network is also being touted as an important scaling solution for Bitcoin, migrating transactions to a second layer in order to achieve quicker finality with extraordinarily cheap fees. Of course, layer two solutions come with their own trade-offs, as the model shifts somewhat from P2P to custodian-to-custodian. Bitcoin Cash forked from Bitcoin after substantial disagreements over what should happen to the block size.

Wading Through Times of High Demand

It’s impossible to say that any single solution offers the best scaling opportunity for Bitcoin. At the same time, the development of a competitive fee market is inevitable. Solutions like SegWit offer a little buffer room, but the limit on block size introduces a situation where there are always periods of high fees – and that’s the goal.

High fees present a source of revenue for miners, so in order to maintain economic incentives and keep mining competitive, these periods of high fees are an absolute necessity. With block reward halvings reducing miner revenue from block subsidies, economic sustainability inevitably lies on the path to more fee revenue.

In order to keep Bitcoin decentralized and censorship-resistant, we just have to accept there will be periods of high demand for block space with high transaction fees.