One argument is that the quick rise of the Bitcoin Lightning Network, which permits transactions outside of the blockchain, acted as a catalyst.
To put things into perspective, each Bitcoin transaction is a financial transaction. The payment then divided between the miners. When the network is overcrowded and the demand for transaction processing outnumbers the supply of miners, users often pay a premium.
On April 21, the average transaction price on the Bitcoin network reached an all-time high of $62.8 per transaction, after miner failures in China slowed block formation at a time when the cryptocurrency’s demand was high.
The decongestion of the mempool
Bitcoin miners have grown less cynical and remain engaged in processing transactions, which might explain the fee reduction. As a result, the mining difficulty, which measures how difficult it is to confirm a Bitcoin transaction, falls.
Another possible reason for the decreased transaction cost is the decongestion of the mempool, which is the collection of all pending transactions before they acquire confirmation. A transaction is maintained in the mempool until confirmation is received when it is sent to the Bitcoin network. A large mempool may encourage miners to prioritise more profitable transactions because each BTC block must be at least 1MB in size.
In these cases, customers often pay a premium to avoid their trapped transactions in the mempool. This raises the total transaction cost of the Bitcoin network.
The Bitcoin mempool has been substantially smaller than its maximum capacity, as shown in the graph below.
Bitcoin traders and holders are utilising the cryptocurrency less
The average number of transactions has been drastically reduced in recent months. The average number of transactions per day was over 350,000 at the start of 2021. But it has subsequently decreased to approximately 250,000 and 213,000 per day.
Another explanation for the lower transaction costs might be because Bitcoin traders and holders are utilising the cryptocurrency less. As demand lowers, the cost per token drops, cutting transaction expenses.
In the meantime, Ethereum’s price has fallen in line with the rest of the crypto market. At the time of publishing, the average transaction cost on the Ethereum network was $4.90. Down from $69.92 on May 12, 2021.
As the new week begins, Bitcoin (BTC) is trading at $57,000, concluding a tumultuous few weeks that saw the price plunge.