Revenue from network fees dropped to a 12-month low in June, representing less than 5% of the total dollar-value of block rewards from last month. A steady uptrend over the past year in revenue share from fees is now fully broken following a slight decline in May.
A healthy Bitcoin network in part will be defined by steady increases in fee revenue over the next three years before the 2024 mining subsidy halving. Fees are important to replace the gradually decreasing subsidy and thus sustain the network’s security through mining profitability.
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Why is fee revenue decreasing?
Fee revenue is lower because fewer people are transacting on the Bitcoin network.
Data from Coin Metrics shows both the number of daily transactions and the number of active address making those transactions are declining. Variance in these levels is significant from day to day, but the trend is easily visible.
Why are users sending fewer transactions?
One explanation for this could be significantly slower block times as Bitcoin’s hashrate currently sits over 40% off it’s highs. Since the next difficulty adjustment is still a day away, far fewer miners are still trying to add new blocks at a difficulty level set for a much larger total hashrate, resulting in slow blocks.
Even if blocks are slow, users can still send Bitcoin transactions, albeit with delayed confirmation times. But this is where the data gets even more interesting.
Far fewer people are even trying to send transactions. Right now, mempools are pretty empty, showing that users simply aren’t much at all. When hashrate drops but the number of people trying to transact on Bitcoin doesn’t, the mempool fills up with transactions waiting to be added to the blockchain, causing transaction fees to climb as well.
That’s not happening now though.
Fewer transactions are confirmed when blocks are slow. But right now, fewer people are sending transactions to the mempool to be confirmed, leaving miner mempools relatively empty.
Due to this transaction activity drop, miners are trying to pack as many transactions into new blocks as possible. Average daily transactions are nearly all-time highs of around 2,500.
When network activity, fee revenue, hashrate, and all the other currently depressed Bitcoin network metrics (including the price) will recover is an open question. For now, the mining sector of the Bitcoin industry is still grappling with the shock of China’s crackdown on miners.
Before miners see any meaningful recovery of hashrate and network activity, they might be waiting until at least Q1 2022.