Bitcoin Raises Inequality

We’ve barely made it past the controversy surrounding Bitcoin’s insane energy consumption, but egregious transaction fees, that have to be paid for actually using the popular digital currency, may soon spark a whole new storm of critique – as it could now become a serious factor in worsening economic inequality.

To understand why this could be the case, we have to take a step back and examine the way Bitcoin was designed. Bitcoin has the unique property that there will never be more than 21 million Bitcoins. This property turns Bitcoin into a deflationary currency, meaning that the purchasing power of each BTC is expected to keep on increasing. Regular currencies, such as the US dollar, are actually inflationary – the purchasing power of a single dollar typically decreases over time.

The previous becomes concerning once access to the Bitcoin system becomes restricted in some way, and the current trend is that only the wealthier part of society will be able to actually take part in Bitcoin. This observation isn’t a new one, as long-time Bitcoiner and current Chief Strategy Officer of blockchain-startup Blockstream already wrote in 2016 that Bitcoin’s wasn’t meant for the poor:

The reason for this is that the costs of actually using Bitcoin are rising dramatically. This is the result of Bitcoin’s limited transaction capacity – and the fact that users can pay a fee to have their transaction prioritized. New blocks for the Bitcoin blockchain are created only once every ten minutes on average, and these blocks of transactions can only hold slightly more than 1 megabyte of data. Bitcoin transactions vary in size, but effectively this means the network can only process 3 to 4 transactions per second.

The blocks for the blockchain are created by the Bitcoin miners, who also get to decide which transactions they include in their block. Since miners get to keep any transaction fees paid by the user, they have a strong incentive to process the transactions that pay the most first. As the popularity of Bitcoin increases, so does the number of Bitcoin transactions, and the amount of people that are willing to pay to have their transaction processed in a reasonable amount of time. The website now suggests that users that want a simple transaction to be processed within an hour should pay around $20 worth of BTC. On a large transaction the required fee amount can escalate quickly. An example of this was provided by Erik Voorhees, CEO of blockchain asset exchange ShapeShift, on Twitter:

In the week before Christmas the recommended transaction fees for a simple transaction even peaked at an amount worth up to $50. During the whole month of December, the average fee paid per transaction ended up at almost $26 worth of BTC.

As these fees keep on rising, less and less people will actually be able to afford using Bitcoin. The current fee levels already exclude large parts of the global population from participating in the Bitcoin system. One African Bitcoin user illustrated this perfectly, stating:

This situation is also unlikely to change any time soon, as Bitcoin’s developers actually appear to be quite pleased with it. Bitcoin Core developer Gregory Maxwell even wrote the following on the Bitcoin-dev mailing list:

“Personally, I’m pulling out the champaign that market behaviour is indeed producing activity levels that can pay for security without inflation, and also producing fee paying backlogs needed to stabilize consensus progress as the subsidy declines.”

For the poor, the decreasing affordability of using Bitcoin means that their only option is to watch the rich enjoying the perks of a deflationary currency, while their own currencies decrease in value. In the end, they only get to share in the (environmental) costs of such a system.

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One Response

  1. Joe June 29, 2018