Bitcoin (BTC) lived to die another day this week, rising 10% after breaking US$6,800. Overall, price remains down 63% from the record high in December. The market cap stands at US$114.69 billion, with US$3.58 billion traded in the past 24 hours.
Despite mining profitability currently near an all-time low, hash rate and difficulty continue to post record highs. While many factors influence mining profitability, such as price, block times, difficulty, block reward, and transaction fees, decreasing profitability adds to the risk of further centralizing mining, both by mining pool and geographically. The next Bitcoin block reward halving is slated for May 2020.
Meanwhile, the number of transactions per day has averaged 180,000-200,000 since June. This metric has declined significantly for all cryptocurrencies. Transaction costs have also declined significantly, as has the average transaction value in USD, which can be partially attributed to the decline in the price of Bitcoin.
Using a 30-day Kalichkin network value to transactions (NVT) ratio, BTC remains in the upper-third of its historical range. NVT has not been this high since January 2015 but has begun to turn downward recently, which suggests increasing on-chain network usage based on the dollar amount being transacted.
Additionally, inflection points in NVT can correlate with extreme highs or lows in price. With the rise of alternative on and off chain methods to send transactions (batching and Lightning Network), what the new normal for NVT is, under these circumstances, may take many months to determine.
Although NVT is difficult to compare between coins that use different transactions types, the ratio can be used to assess a network’s relative utility over time. ADA, DOGE, ZEC, XRP, GNO, LOOM, DCR, TRX, DASH, and OMG are currently the only coins with an NVT lower than BTC.
Unconfirmed transactions have decreased dramatically this year as well. There are currently around 2,000 pending transactions, most of which were sent with a 1 satoshi fee. Since July 13th, pending transaction spikes have declined significantly. This is in stark contrast with December of last year, when pending transactions regularly exceeded 150,000 and peaked at more than 250,000.
There was a large uptick in unconfirmed transactions in July, which can be attributed to UTXOs being cleared. UTXOs are similar to loose change, and accumulate with transactions. If transaction fees are high, they continue to accumulate and remain unspent, but when transactions fees are low, it becomes financially viable to collect the change. Consolidating UTXOs not only unlocks BTC but also decreases blockchain bloat. Coinbase had been identified as one of the biggest offenders of UTXO accumulation, with one wallet accruing almost 7.2 million UTXOs by January of this year. The wallet has since been consolidated to ~21,000 UTXOs.
On-chain transactions per day have not only declined due to a lack of network use but also transaction batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually. The ratio of outputs per transactions has risen significantly since this time last year, suggesting the practice has become a mainstay. There have also been several days this year with a spike in outputs, indicating a concerted effort towards increase transaction efficiency.
Further, since October 2012 (block 201403), the use of op-return outputs per transaction has increased dramatically. OP_RETURN is the code used to embed metadata in a transaction. Normally, only one OP_RETURN output is allowed per transaction. If someone wants to insert N pieces of data in the blockchain, they have to make N transactions, resulting in a separate fee for each transaction.
Transactions with multiple OP_RETURN outputs decreases fees by reducing the number of required transactions. The Bitcoin protocol makes these transactions possible, but they are not relayed by peers on the network, so they need to be sent to miners directly. Since the transactions are still valid, miners can mine transactions with any number of OP_RETURN outputs, so long as the block does not exceed the block size limit.
Transaction fees, which increased dramatically throughout 2017, have also dropped since late December and remain relatively low. This fee reduction is multifactorial. Although a decrease in transactions per day means fewer transactions need to be cleared, SegWit, which currently accounts for ~37% of transactions, has also been a significant contributing factor in the average fee decline.
A SegWit transaction occupies less block space than a traditional transaction, allowing SegWit users to pay less in accumulated fees to achieve the same number of transactions. Daily SegWit usage has steadily increased since January. A spike in SegWit usage in November was likely due to the proposed SegWit2x hard fork which failed to activate.
The SegWit soft fork also enabled the possibility of further second…