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Tuesday, October 04, 2016

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Edmund Edgar

So what's actually happened is that there's a cap in the protocol about how many transactions you can have per second (or to be technically precise, the size of the block containing those transactions), and we basically hit that cap at the end of 2015. Rather than just raising that cap the bitcoin community had a huge factional religious parameter war, and it hasn't been raised in 2016, so the number of transactions hasn't changed.

Demand to send transactions still seems to be going up, so the cost of sending a transaction has been increasing. I think (although I'm not confident) the amount of value in each transaction has been tending to increase, so effectively low-value transactions are getting priced out, and it's being used for progressively higher ones.

The upshot is that bitcoin is becoming progressively less useful as money, and being used increasingly as a "store of value" (or phrased less charitably, an enormous ponzi scheme). The optimistic view for how bitcoin continues to be money is that in future people will use systems that transact in bitcoins but don't normally need to send transactions to the actual blockchain. There are some quite clever designs where you can send signed transactions around off the chain and don't normally need to send a transaction to the network unless someone tries to cheat you, but at this stage they're in the realm of "clever design" rather than "practically usable system", and opinions vary whether they'll ever get from one to the other.

You could have added that the big pre-existing "off-chain" system, ChangeTip, closed in 2016, so as transactional currency I think it's fair to say that bitcoin actually declined in 2016.

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