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I'm new to blockchain stuff. I have few questions.

  1. Why are Bitcoin fees are so high compared to Litecoin or other currencies?
  2. Why does Bitcoin use so much computing power (more than Ireland)? I heard because of its popularity the costs for securing it are also high. But what if Litecoin had same popularity (volume, max supply etc.), would it waste same computing power as Bitcoin or is Bitcoin just inefficient?
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    It is very easy to prove that no energy is being wasted in proof of work, simply attempt to rewrite the entire blockchain. You will see how necessary proof of work is.
    – Poseidon
    Feb 13, 2023 at 7:35
  • @Poseidon there are other alternatives, as Ethereum and many others show. PoW just doesn't scale to such high bitcoin prices. Oct 28, 2023 at 16:41
  • @Dr.Hans-PeterStörr Well that's funny because there actually is no cost for an attacker to rewrite the PoS portion of the Ethereum blockchain. Why again should I consider Ethereum an alternative at all if its consensus mechanism can allow for the chain to be re-written at little to no cost to the attacker? Especially on a chain where more than 50% of the full nodes are run by a single company Infura on AWS so that end users are unable to even verify that their transactions are included into a verifiably expensive chain? Eth is an inefficient central banking digital currency funded by JP Morgan
    – Poseidon
    Oct 28, 2023 at 22:11
  • Not to mention that Bitcoin is currently 3x the market cap of Ethereum and transactions are 25% cheaper on average, if we were to compare the fees on contract enabled side chains like rsk or liquid to the execution fees on eth l1 or even any l2s you will find that bitcoin sidechains are cheaper due to optimized script evaluation and execution in comparison.
    – Poseidon
    Oct 28, 2023 at 22:17
  • @Poseidon If it was like that, Ethereum would already be dead. :-) There might be some further improvements needed, admitted. The problem for bitcoin is that it already uses >0.3% of world electricity production, and the energy usage is more or less proportional to the block reward in the long term. So if it goes up to >100k$/BTC for long that spells disaster, and other concepts than PoW will be needed. Oct 30, 2023 at 8:53

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Bitcoin Fees

Why are Bitcoin fees are so high compared to Litecoin or other currencies?

They are high because the network's L1 throughput is artificially limited to 1 MB worth of UTXO state transformations* every 10 minutes. Due to Bitcoin's popularity there is more demand than that.

Whenever there's more demand than capacity, users have to outbid each other with transaction fees which results in fees (temporarily) growing. When demand drops, the backlog starts to clear and fees start coming down. The chart below clearly illustrates these cycles (source).

Average Transaction Fees

* "UTXO state transformation" is a transaction but without the input unlocking bytecode (the "witness", usually consisting of a public key + signature). Since the SegWit (BIP-141) upgrade activated in '17, the input script can live in the new data structure created by SegWit, without using up the 1 MB "legacy" space.

Why is it limited to 1 MB to begin with?

The main argument now is that the limit is there to make node running as widely accessible as possible. The Bitcoin network kept it for this reason, and current stewardship of the project maintains that decision.

This limit was first set to 1MB in 2010, by Satoshi Nakamoto himself. It was activated with block 79,401 (2010-09-12), which was the first block to have the limit enforced.

His intention was to increase it later (source).

A higher limit can be phased in once we have actual use closer to the limit and make sure it's working OK.

Eventually when we have client-only implementations, the block chain size won't matter much. Until then, while all users still have to download the entire block chain to start, it's nice if we can keep it down to a reasonable size.

With very high transaction volume, network nodes would consolidate and there would be more pooled mining and GPU farms, and users would run client-only. With dev work on optimising and parallelising, it can keep scaling up.

Whatever the current capacity of the software is, it automatically grows at the rate of Moore's Law, about 60% per year.

For a long time the limit served its original anti-DoS purpose without affecting utility of the network, and then, some time in 2015, Bitcoin adoption caught up and the limit became inadequate, which the chart below clearly shows.

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The daily frequency of blocks with fullness >90% was still <10% until January 2015 (blockchain day 2364). From then onward, blocks with fullness >90% were quickly becoming more and more frequent. Despite this, efforts to coordinate an increase of the limit were met with failure, and the problem only became worse over time resulting in most blocks becoming over 90% full and users having to aggressively outbid each other in order to transact. The frustration with this situation resulted in a subset of Bitcoin network deciding to change the "legacy" limit, which resulted in a permanent network split (a hard fork), and the bigger limit network is now known as Bitcoin Cash (BCH). The timeline of the Bitcoin scaling debate is documented here.

Shortly after, Bitcoin activated SegWit, which also increased the block size limit but in a different way - wallets needed to opt-in to make use of the extra space, and it allowed roughly 50-70% TPS increase for the typical usage.

Obviously it was not enough, since fees became high again even during 2020/21 bull run.

Bitcoin Energy Use

Why does Bitcoin use so much computing power (more than Ireland)? I heard because of its popularity the costs for securing it are also high. But what if Litecoin had same popularity (volume, max supply etc.), would it waste same computing power as Bitcoin or is Bitcoin just inefficient?

Because the network can afford it. PoW blockchain networks bid for hashes, miners sell the hashes. More bidding power, more hashes. Also, miners bid for energy and hardware -- the more revenue they have from fees and block reward, the more hardware they can buy and more energy they can afford. If Litecoin grew in market cap, then the value of block rewards would grow, then the energy used by the Litecoin network would grow as well.

I object to it being called a "waste". If there was a better use for the energy, then that better use is free to outbid the PoW use. Nobody has a right to energy others have purchased. It is theirs to spend as they like, even "waste" it if they will.

Consider comparing PoW energy use to some other energy uses:

The report found Bitcoin mining to consume 0.16% of global energy production, slightly less than the energy consumed by computer games, according to the BMC — and an amount it considered to be "an inconsequential amount of global energy." (source)

Is gaming a waste then, too? Is running a marathon a waste? You don't need that much running just to be in shape. How much energy do sports events "waste"? Everything that makes life worth living is pretty much wasting energy :) And even when energy is used "productively" - to build something, the things we build generally serve to help make life easier so we can waste even more energy during our leasure time while enjoying life haha! The concept of "waste" is subjective, we don't have a duty to nature to spend energy this or that way - every one of us spends it how he feels like, and nobody should be guilted into feeling his use is "waste".

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  1. Fees represent demand for block space and the premium over other chains should reflect the market's perception of Bitcoin's security relative other blockchains. Similar to how the internet (OSI model) is comprised of many layers, cheaper transactions in bitcoin are still possible by managing UTxOs off-chain (lightning network).

  2. Litecoin would have the same approach to energy consumption as Bitcoin (Proof-of-Work) but many other chains would not due to their use of Proof-of-Stake over Proof-of-Work. Where Proof-of-Work is an energy-based protocol, Proof-of-Stake is a capital-based protocol and highlights the need for Bitcoin's energy consumption.

There are two main benefits of Proof-of-Work (energy based) over Proof-of-Stake (capital based), IMHO:

(1) "Head starts" in a Proof-of-Work system are constrained by physics (energy consumption/hash rate), while "Head starts" in a Proof-of-Stake system are only constrained by an arbitrary rule set.

(2) The natural economic externality of Proof-of-Work is a race for cheap energy while the natural economic externality of Proof-of-Stake is increasing wealth inequality.

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