Crypto's utility as a payment tool

[alani123]

How do we measure the level of utility that can be derived from using a specific payment method?
For this example let's suppose that the level of utility a payment method can offer is measured as the relationship between monetary value transacted vs. fees paid.

If we apply this to bitcoin, we can see how "efficient" it can be under certain scenarios. Minimum fees/transaction are desired.
For this example I'll set the sat/byte fee as a constant of 193 sats per byte. Amount of money (in monetary value) intended to reach the recipient can be any constant.

For a (very) standard transaction of 250 bytes, one would spend 0.0004825 BTC.
At a hypothetical price of $7.000 per BTC, the cost of the transaction would be $3.3775.
At a hypothetical price of $9.000 per BTC, the cost of the transaction would be $4.3425.
And so on...

We see that bitcoin's utility as a payment tool has an inverse correlation with bitcoin's market value.
If the market price of BTC goes up, fees for transferring the same value with bitcoin become more expensive.

My question is, can this be fixed, especially in a way that doesn't compromise decentralization and bitcoin's immutability?
And should it be fixed in your opinion?

[ranochigo]

My question is, can this be fixed, especially in a way that doesn't compromise decentralization and bitcoin's immutability?
And should it be fixed in your opinion?

Given an infinite resources, the value could be fixed such that this doesn't affect Bitcoin's stability. The value can't be fixed to respond to changes in the exchange rate vs fiat but it could only be fixed to a certain Bitcoin amount. It would be hard for the network to reach a consensus about the value of Bitcoin unless there is a central authority (exchange, weighted average of exchanges) to decide this.

Bitcoin's realistic minimum fee is 1 satoshi/byte.

Assuming that you're talking about minimum fees for a transaction to get confirmed within a timeframe, it shouldn't be fixed. Bitcoin's capacity is not infinite and will probably never be. The fees market won't be affected much even if you were to impose such a restriction. The miners can only include that many transactions and not all the transactions above the fee rates would be cleared in the timeframe; the restriction would be pretty useless.

[pooya87]

We see that bitcoin's utility as a payment tool has an inverse correlation with bitcoin's market value.
If the market price of BTC goes up, fees for transferring the same value with bitcoin become more expensive.

that is not the whole story. in fact you have forgotten one thing because you are looking at the very recent history. in fact with price rise, fees have gone down in bitcoin terms. for example when price was less than $1 the fees were around 0.1BTC and as the price went up, the fees went down too. or a couple of years ago fees were fixed at 10k satoshi per transaction.

keep in mind that as far validity of a transaction is involved, the minimum valid fee is zero. it is the "fee market" that decides how much it should be. and fee market is affected by the competition (for the scarce block space) and the price.

~bitcoin's immutability?

immutable means "unchangeable", and immutability of bitcoin means its blockchain is not going to change. for example when your transaction is included in a block it won't reverse or be undone.

[stompix]

For this example I'll set the sat/byte fee as a constant of 193 sats per byte. Amount of money (in monetary value) intended to reach the recipient can be any constant.

This is a very poor approach at it...
Let's continue your example but increasing the value a bit more:

At a hypothetical price of $9.000 per BTC, the cost of the transaction would be $4.3425.

So for 90k$ per BTC we will have 43$ on average.
And for 900k$ we will have 430$ on average.

You realize that this extrapolation is pretty lame, even if bitcoin would be worth x amount, people are not going to spend thousands in fees if there is nothing to gain from it.
Excluding a massive FOMO with rising prices when everybody is rushing his coins around there is really no incentive to move your coins at such fees.

Just as demand for transaction space drives the price up, so will a higher price drive demand down.

[alani123]

We see that bitcoin's utility as a payment tool has an inverse correlation with bitcoin's market value.
If the market price of BTC goes up, fees for transferring the same value with bitcoin become more expensive.

that is not the whole story. in fact you have forgotten one thing because you are looking at the very recent history. in fact with price rise, fees have gone down in bitcoin terms. for example when price was less than $1 the fees were around 0.1BTC and as the price went up, the fees went down too. or a couple of years ago fees were fixed at 10k satoshi per transaction.

Indeed I used recent sat/byte fees and prices but this is just for the sake of forming an example.
If you are to introduce more variables in the equation, then you have to be able to prove a correlation. Fee value vs BTC price has a direct connection based on bitcoin's technology alone.
To support the claim that through time fees go down as prices rise, you'd need to look through years of data, see what parts of data are comparable, and account for any connection between the two.
Might be true for some periods, might be the opposite for others. And then transaction volumes must also be accounted for etc. etc. That's much more complicated and doesn't take away anything from the key observation here.

For this example I'll set the sat/byte fee as a constant of 193 sats per byte. Amount of money (in monetary value) intended to reach the recipient can be any constant.

This is a very poor approach at it...
Let's continue your example but increasing the value a bit more:

At a hypothetical price of $9.000 per BTC, the cost of the transaction would be $4.3425.

So for 90k$ per BTC we will have 43$ on average.
And for 900k$ we will have 430$ on average.

By way of example, I'm trying to show that bitcoin's mechanisms makes so there's a direct connection between price and fee-value.
Yes, in a real world scenario there are more variables, but what evidence do we have to support that if prices were to go up that much, the value of fees wouldn't follow suit?
For the record, I wasn't trying to imply that there would be perfect correlation. But rather to show what bitcoin's fundamental's can lead to for fees.

You realize that this extrapolation is pretty lame, even if bitcoin would be worth x amount, people are not going to spend thousands in fees if there is nothing to gain from it.
Excluding a massive FOMO with rising prices when everybody is rushing his coins around there is really no incentive to move your coins at such fees.

And that brings up another problem. Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.
The problem I show in my extrapolation is still very much present.
Regardless of BTC price, higher fees act as a disincentive to make transactions. So any transaction of value around the range of the fee becomes prohibitive (i.e. if you have to pay 5$ to transact, you won't want to transact anything near 5$).
Arguably, that lowers bitcoin's utility as a payment tool, which is the problem I'm focusing on here.

[stompix]

By way of example, I'm trying to show that bitcoin's mechanisms makes so there's a direct connection between price and fee-value.
Yes, in a real world scenario there are more variables, but what evidence do we have to support that if prices were to go up that much, the value of fees wouldn't follow suit?
For the record, I wasn't trying to imply that there would be perfect correlation. But rather to show what bitcoin's fundamental's can lead to for fees.

There is none:
https://bitinfocharts.com/comparison/bitcoin-transactionfees.html
https://bitinfocharts.com/comparison/bitcoin-price.html

Average fees from May 2017 till November were constantly over 2.5$, with the price being well below 6k$.
In May 2018 till October, with the price constantly above 6k the average fee was below 1$.
In January this year with prices over 10k we were still below 1$, now with prices below that we're at around 3-5$.

Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.

Nope, it's not.  

[DeadCoin]

My question is, can this be fixed, especially in a way that doesn't compromise decentralization and bitcoin's immutability?
And should it be fixed in your opinion?

This is only my opinion and please allow me to share it with here.

In my opinion, it cannot be modified or repaired because bitcoins have their own decentralized order for its transactions. Because of this, every bitcoin transaction has its own transaction fee and it depends on the bitcoin sender, they had different rates, especially when it is used for paying bills and receiving and sending bitcoin to fellow bitcoin users in different kind of wallet addresses.

And immutability is the definition of irrevocable, therefore any price and rate regarding bitcoin transactions cannot change. And while the basis of the minimum fee for transactions made by bitcoin cannot really change because bitcoin has its own time frame in every transaction it makes.  That's all.

[hatshepsut93]

And that brings up another problem. Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.
The problem I show in my extrapolation is still very much present.
Regardless of BTC price, higher fees act as a disincentive to make transactions. So any transaction of value around the range of the fee becomes prohibitive (i.e. if you have to pay 5$ to transact, you won't want to transact anything near 5$).
Arguably, that lowers bitcoin's utility as a payment tool, which is the problem I'm focusing on here.

This is why Lightning Network exists. Small transactions will be happening there most of the time, large value transfers will still happen onchain, and in this case network fee won't be a problem, it would be comparable or smaller than what fiat systems are offering.

[Insufficient]

That could have been great. But i dont think it should be fix, bitcoin is bitcoin. Perhaps that idea can be done to other coin/s during the earliest stage.

[alani123]

[snip]
Nope, it's not. 

Just to prove that the above is wrong, here's the correlation coefficient and linear regression charted for Price vs Fees from the first day BTC went above $1 to most recent data available.
Data drawn from blockchain.info datasets

[stompix]

Just to prove that the above is wrong,

Let me quote myself again...

Average fees from May 2017 till November were constantly over 2.5$, with the price being well below 6k$.
In May 2018 till October, with the price constantly above 6k the average fee was below 1$.
In January this year with prices over 10k we were still below 1$, now with prices below that we're at around 3-5$.

I don't care about your line which is drawn purely arbitrally. I care about FACTS.
Feel free to debunk the data I posted, making graphs on random criteria is not finding stuff, is called twisting facts to make them show your reasoning is correct.

How much are fees today? About 3 times less than a week ago. Has the price decreased 3 times? Nope

What was the average fee in the last 24 h? 2.755$  , What was the average fee on the 28 of April, exactly one month go?  1$!
Has the price been cut by 2.7? Nope.

Average transactions fees:



Average price:



If you see any correlation between those two, then there is nothing left to discuss!

[alani123]

@stompix
Lineral regression and pearson correlation isn't arbitrary... 
It's what statisticians use to prove that there's a correlation... It's quite literally, mathematical proof that there exists a positive correlation between two variables.
You can't get more objective than that. I sat down and drew the chart to prove you were wrong but perhaps you don't know WHY this is proof of a correlation existing, and more so, a much more accurate and objective to show such than just displaying two different visualizations... I could go on to explain how statistical analysis works but that's too far off topic for this thread.

If you want the data:
https://www.blockchain.com/charts/market-price
https://www.blockchain.com/charts/fees-usd-per-transaction

Feel free to use my template also:
https://drive.google.com/file/d/1leJssAsb4F4gBPhr-oRABJaPb8eLecFB/view

[davis196]

Unfortunately,Bitcoin will remain as a store of value and an speculative investment asset,rather than becoming a widely accepted "payment tool". Trying to change the Bitcoin blockchain in order to lower the transaction fees will only damage the network.You know the old saying "if something works,don't touch it".
Off chain solutions like the Lightning Network might provide a solution for this issue,but I don't think that many people will trust such off chain payment method.

[kryptqnick]

By way of example, I'm trying to show that bitcoin's mechanisms makes so there's a direct connection between price and fee-value.
Yes, in a real world scenario there are more variables, but what evidence do we have to support that if prices were to go up that much, the value of fees wouldn't follow suit?
For the record, I wasn't trying to imply that there would be perfect correlation. But rather to show what bitcoin's fundamental's can lead to for fees.

There is none:
https://bitinfocharts.com/comparison/bitcoin-transactionfees.html
https://bitinfocharts.com/comparison/bitcoin-price.html

Average fees from May 2017 till November were constantly over 2.5$, with the price being well below 6k$.
In May 2018 till October, with the price constantly above 6k the average fee was below 1$.
In January this year with prices over 10k we were still below 1$, now with prices below that we're at around 3-5$.

Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.

Nope, it's not.  

I believe there is a common factor that is related both to the price and to the fees, however. I am talking about a larger than usual amount of transactions and the network getting overloaded. It can happen either when the price is rapidly growing, or when it's rapidly going down. Both events motivate some people that would normally just hodl their BTC to do something with them, and the consequence of that is higher fees for everyone. But since this can happen when the price is low as well as when it's high, I do agree that talking about the correlation between the price and the fees doesn't make sense.

[slaman29]

In general, utility is just based on transactions. But for Bitcoin, a lot of transactions can also be consolidations or people sending to themselves -- but also because a lot of things happen off chain (for example I can gamble and tip and send between accounts in a casino) this isn't tracked at all.

I'm not sure monetary value is important. Doesn't matter if I send 500 doge or 15000 satoshi, it is worth the same as I sent 5 doge or 100 satoshi right?

[ranochigo]

And that brings up another problem. Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.
The problem I show in my extrapolation is still very much present.
Regardless of BTC price, higher fees act as a disincentive to make transactions. So any transaction of value around the range of the fee becomes prohibitive (i.e. if you have to pay 5$ to transact, you won't want to transact anything near 5$).
Arguably, that lowers bitcoin's utility as a payment tool, which is the problem I'm focusing on here.

For the given dataset, if the data is accurate, then your point is valid. Though its important to note that correlation =/causation.

However, the bigger issue right now is about controlling the fees. To be able to fix fees to a reasonable level, you'll have to increase the network capacity to a fairly large extent, way more than the current capacity (whereby it might not be as viable to host a node). If you don't increase the capacity enough, then there's a risk for the mempool to get stagnant at a fixed max fee rate whereby a price ceiling is implemented to control the fees. Since you can't let miners select the fees, then you're making everyone wait longer which still decreases the utility of crypto.

If you want to control the fees, you'll have to be able to increase the capacity first.

[alani123]

And that brings up another problem. Even if the price does go way up and the correlation between price/fee value isn't great, but it's still there.
The problem I show in my extrapolation is still very much present.
Regardless of BTC price, higher fees act as a disincentive to make transactions. So any transaction of value around the range of the fee becomes prohibitive (i.e. if you have to pay 5$ to transact, you won't want to transact anything near 5$).
Arguably, that lowers bitcoin's utility as a payment tool, which is the problem I'm focusing on here.

For the given dataset, if the data is accurate, then your point is valid. Though its important to note that correlation =/causation.

I tested with real blockchain data just to prove a point that the correlation exists even with all other variables in place.

However, the bigger issue right now is about controlling the fees. To be able to fix fees to a reasonable level, you'll have to increase the network capacity to a fairly large extent, way more than the current capacity (whereby it might not be as viable to host a node). If you don't increase the capacity enough, then there's a risk for the mempool to get stagnant at a fixed max fee rate whereby a price ceiling is implemented to control the fees. Since you can't let miners select the fees, then you're making everyone wait longer which still decreases the utility of crypto.

If you want to control the fees, you'll have to be able to increase the capacity first.

This is something I didn't talk about in the OP as I didn't want to seem biased, but I like how the topic of discussion shifts towards block capacity. Makes me wonder if this is generally considered a more immutable/trustless solution than off-chain solutions (politics aside).

[Tiews223]

How do we measure the level of utility that can be derived from using a specific payment method?
For this example let's suppose that the level of utility a payment method can offer is measured as the relationship between monetary value transacted vs. fees paid.

If we apply this to bitcoin, we can see how "efficient" it can be under certain scenarios. Minimum fees/transaction are desired.
For this example I'll set the sat/byte fee as a constant of 193 sats per byte. Amount of money (in monetary value) intended to reach the recipient can be any constant.

For a (very) standard transaction of 250 bytes, one would spend 0.0004825 BTC.
At a hypothetical price of $7.000 per BTC, the cost of the transaction would be $3.3775.
At a hypothetical price of $9.000 per BTC, the cost of the transaction would be $4.3425.
And so on...

We see that bitcoin's utility as a payment tool has an inverse correlation with bitcoin's market value.
If the market price of BTC goes up, fees for transferring the same value with bitcoin become more expensive.

My question is, can this be fixed, especially in a way that doesn't compromise decentralization and bitcoin's immutability?

And should it be fixed in your opinion?

As much as cryptos and bitcoins are in fact reliable and practical and fast. There are areas that still need the proper introduction for using this. Many use it for their everyday life and find it convenient and accessible. Using cryptos and bitcoins have their added service fee, although I could see some are free especially for small transactions.

[juvo_3]

I often wonder about this as well. How the fees will be regulated after the bitcoin protocol's block reward is negligible? I think OP has made the assumption that the BTC fee volume stays constant. As far as I am aware, this is not the case. If it was the case, then their would not only be a correlation between BTC price and transaction fee (which insinuates some variance) but it would actually be a linear function, such that:

transaction fee = BTC fee volume (constant) * BTC price

either that, or I have missed something in the conversation.

Having said that, what are the driving forces for BTC fee volume?

I imagine that there is the amount of transactions that are being posted to the mempool. Therefore people would compete with higher BTC fee volumes to have their transactions posted first. but then what if there was a dip in transactions posted to the mempool and the fees drop?

In the future when the block reward is infinitesimal and the fees drop, then the miners are getting less money. Which would cause them to lower the hashing power (electricity spend) on the network. Would that lower the security of the bitcoin protocol?

So in the future, would it be that the fees should be regulated by the amount of money that the community believes should be spent on securing the network. Given that there is about 3000 transactions. It would be how much we want to give the miners in order to secure the network such that our storage of value is protected from 51% attacks etc.

What would that figure need to be, to ensure a secure creation of new block? if we know that, then we can divide that by the amount of transactions in a block and that would be the fee. Right?

[Latviand]

Unfortunately,Bitcoin will remain as a store of value and an speculative investment asset,rather than becoming a widely accepted "payment tool". Trying to change the Bitcoin blockchain in order to lower the transaction fees will only damage the network.You know the old saying "if something works,don't touch it".
Off chain solutions like the Lightning Network might provide a solution for this issue,but I don't think that many people will trust such off chain payment method.

Bitcoin can be both, as a store of value and as a payment tool for some transactions. It depends on you on how you will use it where you can benefit it with yourself. Just be careful about your wallet, bitcoin as a utility is really essential because that's one of the reason why this cryptocurrency exists.

It depends on the people and it is his choice if he really want to use it as a payment method, he should make sure about his wallet's security and safety before doing transactions because it is easy nowadays for a scammer to look for you if they know that you use cryptocurrency in your transactions.