Bitcoin can process an average of about 12,000 transactions per hour, or about 288,000 daily. Its peak capacity is about seven transactions per second, or a maximum 604,800 transactions per day. The value of these transactions consistently exceeds $1 billion daily, according to Blockchain.com.
In contrast, the payment network processing the most money in the world, FedWire, settles approximately 811,000 transactions worth $3.9 trillion every day. Although FedWire does not operate ‘round-the-clock, the US Federal Reserve has announced plans for a 24/7 payment service called FedNow for July 2023.
Blocks of data on Bitcoin’s ledger contain an average 2,000 transactions. Miners process blocks about once every ten minutes. According to Blockchain.com, average confirmation times range from 3.5 minutes to 13.2 minutes.
Miners will typically choose the transactions with the highest transaction fee per byte to include in the next block. Fees are based on how many bytes a transaction uses and how fast the sender wants to send the bitcoin rather than the “dollar value” of the transaction.
If the Bitcoin network is not very congested, someone may settle tens of millions of dollars’ worth of bitcoin within an hour for less than $1 in fees. This certainly beats the capability of FedWire today.
Importance of scaling Bitcoin transactions for everyday use
The growth of Bitcoin as a financial settlement layer is impressive, yet more growth is needed to make it competitive with “mainstream” interbank settlement services like FedWire.
A few years ago, SegWit effectively doubled Bitcoin’s data processing capability. Bitcoin’s prior 1MB block size limit increased to 4 million weight-units (WU) which had the effect of doubling usable block space to about 2MB if every transaction used SegWit.
The increase in block size did not entirely prevent congestion, of course. The mempool, which temporarily stores unconfirmed transactions, ballooned in size in 2013, 2017, and 2020. This increase in congestion had the side effect of driving up transaction fees.
Some are hopeful that Layer 2 or 3 solutions could help scale Bitcoin. These off-blockchain and pre-processing solutions only write data onto the base (Layer 1) Bitcoin blockchain when necessary.
Layer 2 scaling solutions ⏤ including Bitcoin’s most popular Layer 2, the Lightning Network ⏤ could bring Bitcoin closer to a peer-to-peer electronic cash system for everyday transactions.
Through a Layer 2 solution like Lightning, Bitcoin holders who currently use the technology mostly as a store of value could switch to using it for daily purchases when they can more easily buy coffee with it.
Many are also hopeful that changes in tax law could help increase the utility of Bitcoin; currently, there is no de minimus tax exemption for Bitcoin transactions in most developed countries, so each and every transaction must be itemized and reported to tax authorities.
Transaction fees key to long-term security
Bitcoin’s transaction fee market is important for combatting certain types of mining attacks. Nodes can reject blocks that do not follow consensus rules baked into Bitcoin’s code. However, miners could attempt variations of a majority hashrate (“51%”) attack that injects blocks with empty or malicious transactions.
This form of attack competes with legitimate miners who pursue the incentive of transaction fees plus Bitcoin’s block reward subsidy for including transactions in blocks.
More decentralized than smaller digital assets
Bitcoin nodes and mining rigs exist all around the world. Over 10,000 Bitcoin full nodes are accessible on all six permanently inhabited continents. The US and Europe have the highest concentration of Bitcoin full nodes.
Less decentralized coins tend to possess vulnerabilities that make them more vulnerable to attacks like the dreaded double-spend. A fork of Bitcoin, Bitcoin Cash, suffered a double-spend attack that cost an exchange $12.4 million on July 17, 2022. The same thing previously happened in May 2019 but Bitcoin Cash never solved the issues that led to it ⏤ including failing to increase the hashrate devoted to securing its alternate version of Bitcoin.
Bitcoin remains the most valuable blockchain in the world, with tens to even hundreds of billions of dollars worth of transaction settlements each month. While the dollar value is still a fraction of the amount that FedWire processes daily, it could compete with mainstream settlement options if it continues to scale through Layer 2 solutions.