Yesterday, Binance announced that it had to temporarily suspend bitcoin withdrawals due to network congestion issues.
An hour and a half later, however, it immediately reactivated them.
Binance and bitcoin congestion
Over the past few days, both Bitcoin and Ethereum have experienced network congestion.
For Ethereum, the problem seems to have been caused by an excess of requests for transactions in FLOKI tokens, but especially in PEPE tokens, given the impressive hype generated by its boom.
For bitcoin, the problem seems to have been caused by Ordinals, the equivalent of NFTs on the bitcoin blockchain.
Until the 25th of April, there were no abnormal transaction volumes, but from the following day they started to increase.
If there were less than 370,000 transactions on Bitcoin’s blockchain on the 25th, there were over 346,000 on the 26th, peaking at over 683,000 on the 1st of May. That is almost doubling in less than a week.
However, while the spike on 1 May was an isolated one, exceeding the 600,000 daily transaction limit, the last two days have seen this limit consistently exceeded, creating a huge queue of transactions waiting to be executed.
As a result, fees and times have skyrocketed, prompting Binance to suspend withdrawals during peak hours.
The fee boom on the bitcoin network
The most eye-catching figure, however, is that of fees.
If you look at the median fee, rather than the average, it was just over $1.5 by 30 April. By 1 May it had risen to almost $2, and then yesterday it shot up to over $11.
Because each block added to the Bitcoin blockchain can only physically hold a certain number of transactions, due to the 1MB limit, and because a block is mined every 10 minutes or so, it is not possible to increase the number of transactions validated each day at will.
The only way to speed them up, by jumping the queue, is to increase the fees, and so when the network is congested, the fees inevitably skyrocket.
Since May 2021, at the height of the bull run, the median fee per transaction on the bitcoin blockchain has not exceeded $10.
The impact on mining
All of this mainly benefits the miners, who simply make more money.
In fact, the profitability of Bitcoin mining went from $0.07 per THash/s per day on 25 April to $0.11 yesterday, an increase of 57% in about two weeks.
This is also due to the fact that the hashrate has not increased accordingly, as it takes time to increase a hashrate that is already at a peak.
In addition, the difficulty is also close to all-time highs, so it is not necessarily worthwhile for miners to invest in increasing the hashrate at the moment, not least because the fee boom may be temporary.
Binance suggests implementing Bitcoin Lightning Network
The solution already exists: the Lightning Network (LN).
In fact, LN transactions do not need to be recorded on the blockchain.
They therefore do not need to be placed on a block, and therefore do not need to be paid high fees to miners to induce them to place them on the first available block.
The problem is that many exchanges, including Binance, do not yet support LN and therefore do not allow fast and cheap off-chain BTC transactions.
It is no coincidence that only yesterday, after the incident, Binance announced its intention to integrate it.
In fact, given that the suspension only lasted an hour and a half, one could be forgiven for thinking that it was a publicity stunt to let as many people as possible know that they intend to integrate Lightning Network as soon as possible.
Note that Ordinals only exist on-chain, outside of LN. In other words, BTC transactions via LN will not be affected by spikes in on-chain transactions of the equivalent of NFTs on Bitcoin.
The problem on Ethereum
On Ethereum, however, the problem, which has different causes, is even more serious.
Indeed, the median fee rose from $1.8 on 9 April to a peak of almost $14 on 6 May.
It must be said, however, that Ethereum’s Layer-2s, such as Arbitrum, Polygon or Optimism, are now widely used, so the solution to the problem is already there.
However, even on Polygon, fees have increased, from less than 100 Gwei in January to over 600 on 27 April. This is still a very small amount compared to Ethereum’s $14.
The switch from Proof-of-Work to Proof-of-Stake has reduced Ethereum’s fees, but only slightly.
In fact, they remain consistently higher than bitcoin’s.
The real and only solution to the problem for now is Layer-2s such as Lightning Network, but these are not yet in widespread use, despite the fact that they are already widespread. Suffice it to say that the total capacity of the entire LN network is still less than 5,500 BTC, compared to the approximately 68,000 BTC exchanged daily on Binance alone.
However, it is possible that the problems caused by the current level of congestion will lead more and more users to prefer Layer-2 transactions to traditional on-chain Layer-1 transactions.
Source: https://en.cryptonomist.ch/2023/05/08/binance-suspends-bitcoin-withdrawals/