Home Archive Increased SegWit Adoption May have Finally Solved Bitcoin’s Fee Problem

Increased SegWit Adoption May have Finally Solved Bitcoin’s Fee Problem

Rahul Nambiampurath
Last Updated March 4, 2021 5:06 PM

A couple months after two of the largest cryptocurrency trading exchanges, Bitfinex and GDAX, finally adopted the bitcoin SegWit protocol, transaction fees for the currency are finally back to reasonable levels. Bitfinex, on February 20 2018, announced  support for bitcoin deposit and withdrawals using P2SH Segregated Witness (SegWit) addresses while GDAX, on February 23, introduced  a phased rollout for all its customers. By early March, both exchanges had successfully transitioned their entire infrastructure from legacy bitcoin addresses to SegWit compatible ones.

Importantly, the adoption of SegWit by exchanges came only after the entire cryptocurrency community clamored for it in a bid to reduce bitcoin fees. Nevertheless, after ignoring much of the demand for transaction batching and SegWit since the latter’s release in August 2017, it seems as if the exchanges are finally taking user feedback much more seriously.

In a blog post  dated February 20, 2018, Bitfinex announced that its upgrade to SegWit wallets was motivated by the potential for lower withdrawal fees and improved processing time for transactions on the bitcoin network. Paolo Ardino, the CTO of Bitfinex, said,

“As a premier exchange, Bitfinex is committed to improving its market-leading offering for our loyal and discerning customers. SegWit provides not only an immediate benefit for users, but also a foundation for future Bitcoin development.”

He further added,

“By supporting SegWit addresses, Bitfinex is tackling three of the biggest crypto enthusiast concerns: transaction fees, transaction speed, and total network capacity. We are delighted that through this implementation we can provide our customers with bitcoin withdrawal fees that are up to 20 percent lower, as well as faster than ever transaction speeds.”

For sending and receiving bitcoin, Bitfinex users have been provided with SegWit enabled bitcoin wallets.

Coinbase’s GDAX also made a similar statement, with the product manager at the company, Alex Sieke, publishing a blog post of his own. As of now, all bitcoin moving in and out of Coinbase and Bitfinex happens through a SegWit enabled address, allowing for smaller transaction size overhead and consequently, lower fees to be accomodated in a mined block.

Apart from these exchanges, ShapeShift, a popular service used to trade one cryptocurrency for another, also rolled out support for transaction batching on February 22, 2018. The company was already one of the only large scale SegWit adopters in October 2017, when adoption for the feature was almost non-existent. Support for both, transaction batching as well as SegWit, means that ShapeShift is currently using the most efficient means of transferring bitcoin between wallets.

As predicted, increased SegWit adoption has had a remarkable impact on bitcoin network fees. While fees were already lower than they had been throughout 2017, thanks in part to falling transaction volume, the migration to the improved protocol improved the situation further still. For instance, as of the time of writing this article, transfers can be completed for a few cents each, a far cry from the astronomical tens of dollars seen last year. A Reddit user even claimed to have transferred  $16,000 worth of bitcoin (~2 BTC) for as little as $0.20 in fees.

Perhaps motivated by the reduced network congestion, cryptocurrency exchanges also began competing to offer the lowest bitcoin withdrawal fees. On March 1, 2018, Binance tweeted  a 50 percent reduction to 0.0005 BTC per withdrawal, a move that was soon matched  by Kraken. The next day, Bitfinex decided to follow suit as well and slashed  its withdrawal fee by 33 percent, bringing their amount to 0.0004 BTC.

ShapeShift, however, currently offers the lowest withdrawal fee out of all exchanges, at a mere 0.0001 BTC.

The bitcoin mempool, an aggregate size of all pending transactions waiting to be mined, also saw a noticeable reduction in size once the exchanges had successfully migrated their infrastructure over to SegWit. Since mempool size has a rather large influence on transfer costs, this event has allowed transactions with fees as little as 1 satoshi/byte  to also be cleared relatively quickly.

Cryptocurrency fees were arguably a hotly debated and contested topic throughout 2017, as is evidenced by the birth of several new cryptocurrencies through hard forks. Chief among these was Bitcoin Cash , that saw a group of bitcoin supporters create a currency identical to bitcoin with the exception of a larger block size, from 1MB to 8MB. Many core bitcoin developers and followers, on the other hand, have opposed this ideology, stating that the move would lead to centralization.

The Bitcoin development community also intends to develop second layer platforms, such as the Lightning Network , as a solution to the scalability problem.

SegWit, along with the upcoming Lightning Network, could be bad news for bitcoin forks and other cryptocurrencies that were otherwise identical clones. For smaller transaction sizes, Bitcoin Cash fees have already exceeded that of bitcoin due to the shrinking mempool. It is clear that Bitcoin Cash developers will have to find a solution to compete. However, if transaction fees are somehow linked to bitcoin prices, as proposed by coinmetrics , not much can be said about the current situation until the currency breaches its previous all time high once again.