What is the Bitcoin Mempool?
When a Bitcoin transaction is initiated, it needs to be verified by the Bitcoin network before it can actually go through and be processed. In order to be verified, a miner needs to add the transaction into a new block, broadcast that block to the network, and the majority of active nodes on the network need to agree that the block is valid. The new block will then be added to the blockchain, and the transaction will be completed.
The process of miners verifying transactions is a vital part of Bitcoin’s security protocol. Over the past several years, however, Bitcoin has run into some issues with this system. Namely, a new block can only be added approximately every 10 minutes, and only so many transactions can fit inside one block. As mainstream adoption began to grow, more and more transactions began to flood the network, which can only handle so many transactions at a time. This created a bottleneck effect, where transactions piled up and had to wait to be processed. The virtual waiting room where pending transactions hang out waiting to be added to a block is the Bitcoin mempool, short for “memory pool.”
What Does the Mempool Have To Do With Fees?
During the height of Bitcoin’s bull run from December, 2017 through January 21, 2018, incoming transactions flooded the network, creating a serious traffic jam. A backlog of over 100,000 pending transactions occupied the mempool at any given time.
If you tried to make a Bitcoin transaction during this time, you may have experienced a long delay and/or extremely high transaction fees. Basically, when there are a lot of people in line, people with high-priority transactions can pay more to get moved to the front. If you’re willing to shell out high fees to miners, your transaction can get processed faster; otherwise, you’re stuck waiting for the Bitcoin mempool to clear before your pending transaction finds an open spot in a block.
At the height of the overload on December 23, the average transaction fee was $34. Several companies limited support or stopped accepting Bitcoin during this time. Game company Valve stopped accepting Bitcoin on its Steam platform, citing high delays and transaction fees as the root cause. The popular cryptocurrency payment gateway BitPay briefly placed a $100 minimum on Bitcoin transactions for the same reason, although it bumped this down to $5 after user backlash.
Today, just a few short weeks later, the Bitcoin mempool backlog is clear and Bitcoin transaction fees are lower than they have been since May, 2016. What happened?
What Does It All Mean?
Like most things in the world of cryptocurrency, the short answer is that nobody knows for sure. However, there are likely several factors at play. The first and most obvious reason for the Bitcoin mempool backlog finally clearing out is that there are less transactions happening on the Bitcoin network. While various Twitter trolls have suggested that this drop in transaction volume is a sign that Bitcoin is “in decline,” the opposite actually appears to be true when looking at market dominance. Despite less transactions happening on the network, Bitcoin’s market dominance has actually regained some ground, going up to 39% as transaction fees plummeted. Given the huge influx of money into the cryptocurrency market, in general, and Bitcoin in particular during December, 2017, it is not altogether surprising to see the number of transactions waning as the media hype cycle dies down and the markets at large experience pullback.
Another factor contributing to the overflow of the Bitcoin mempool being curtailed is likely increased adoption of Segregated Witness (SegWit). Several exchanges and many third-party wallet providers have already implemented SegWit.
When a transaction gets sent to the Bitcoin mempool, there is a bunch of information that goes along with it. When a miner gets to that transaction, all of said information ends up getting added into a new block. SegWit works by “segregating” some of the information (cryptographic signatures) so that it can be stored off-chain. As a result, SegWit transactions take up less space and more of them can fit into one block, which in turn yields faster transactions and keeps the Bitcoin mempool from getting backed up. SegWit may not be a permanent fix, but it will likely help prevent overloads in Bitcoin mempool and keep fees low as developers work to implement additional scaling solutions.