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What Drives Bitcoin Fees? Using Segwit to Assess Bitcoin's Long-Run Sustainability

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Bitcoin is a decentralized payment system: a central institution to verify and settle transactions does not exist. What drives the transaction fees in this system? Can it remain tamper proof in the long run?

We develop an empirical model to study how the demand for bitcoin influences transaction fees. To identify supply and demand effects, we analyze two types of events—two rapid price increases since late 2017 and the introduction of a new feature called Segwit.

We find that Segwit reduced fee revenue by about 70%. Fee revenue is maximized at a block size of about 0.6 megabytes when Segwit adoption remains at current levels. In addition, large sustained price increases are required to keep mining rewards constant in the long run.