On June 7th, Bitcoin transaction fees spiked significantly, causing a temporary backlog on the network with thousands of unconfirmed transactions. Given the recent history of fee spikes, you would be looking to point the blame at the ordinal enjoyers; either some NFT trend took off, or someone project started minting a new token (BRC-20 or Runes).
While there may have been other contributing factors from that subset of users, with a couple of new mints gaining traction during that time, blockchain analysts and mempool sleuths point to activity on the cryptocurrency exchange OKX as a major culprit.
According to your preferred mempool explorers, a medium-priority Bitcoin transaction costs about $34.08 to get a miner’s attention for the next block during this period. Anyone who wasn’t willing to cough up those fees would need to wait in line with an avalanche of more than 333,400 unconfirmed transactions.
Here’s what we know:
- Unusual Activity: A large number of unconfirmed transactions, estimated at around 333,400, clogged the mempool, the waiting area for transactions on the Bitcoin network.
- OKX’s Role: According to blockchain analyst Wu Blockchain, this surge stemmed from OKX’s internal wallet management. The exchange seems to have been consolidating its Unspent Transaction Outputs (UTXOs).
As OKX began processing wallet transactions starting from block 846,867, they processed over 2,380 transactions with an average fee rate of 246.65 sat/vbyte.
This process cost 254.28 BTC, or roughly $17.6 million, at today’s Bitcoin price of $69,270.00.
While those trying to compete with OKX to send Bitcoin or manage Lightning channels might be annoyed, the miners who secured those blocks sure were smiling all the way to bank with many of the fees per block equaling or even beating the current block subsidy reward.
UTXO Consolidation and Network Strain
Centralised exchanges are still the go-to for Bitcoin liquidity, and while Binance and Coinbase make up most of the headlines, the other exchanges are still moving significant numbers.
OKX conducts around $1.7 billion in 24-hour trading across all its 526 listed pairs, with Bitcoin accounting for about 250 – 300 million of that. This means that a lot of Bitcoin flows in and out of the exchange’s wallet every day.
As exchanges accept Bitcoin deposits into their wallets and payout deposits, creating UTXOs with the change, their wallets become clogged with a large UTXO set of many smaller transactions.
Eventually, these deposit UTXOs and leftover bits of Bitcoin from previous transactions become so fractured and unwieldy to manage. Exchanges like OKX need to do some spring cleaning so their total balance is split up into UTXOs they can use more efficiently.
Regrouping or resmelting UTXOs is known as coin consolidation. It requires grouping smaller UTXOs and spending them to form larger ones, streamlining future transactions.
While a normal housekeeping practice, OKX’s large-scale consolidation overwhelmed the network in this instance. Each consolidation transaction needed to be confirmed, leading to a backlog and increasing fees for everyone.
Was it intentional?
There is no confirmation if OKX’s activity was intentional or a consequence of its internal processes, but obviously, they still felt it was worth the fee cost, having submitted all these transactions. While OKX has every right to clean up its UTXOs and do what it wants with its Bitcoin, some devs criticised the exchange for choosing to brute-force its consolidation this way, losing thousands of dollars in fees in the process.
OKX is a huge company with enough resources to get a dev to write scripts that could have taken a staggered approach to their consolidation, which would have had less impact on the mempool and resulting fees.
While it did cause a temporary speed bump, the incident highlights the potential impact of exchange activity on the more comprehensive Bitcoin network.
What this means for Bitcoin users
The good news is that the fee spike was temporary. The network adjusted, fees returned to normal levels, and all is well in Bitcoin land again.
Go ahead and claim your affordable block space.
However, this event serves as a reminder of the potential for exchange activity to influence transaction costs and why exchanges should start using layer two solutions like Lightning or side chains like Liquid or Roostock to support smaller transactions.
If exchanges start to support these alternative methods of transferring Bitcoin, they could reduce the number of UTXOs they generate or accept. While this problem will still persist, it can be reduced and delayed, delaying the need for mass considerations.
As for individual Bitcoin users, here are some takeaways :
- Be aware of network conditions: Monitor fees before initiating transactions.
- Consider dynamic fees: Some wallets allow you to set fees based on network congestion.
- Plan for delays: During peak activity periods, transactions may take longer to confirm.
- Have capital in L2: If you’re a consistent Bitcoin spender, make sure you have enough capital in a Lightning channel and enough capacity so you don’t get caught out by these backlogs.
Fees won’t fall every time
The Bitcoin network, a dynamic and adaptable system, constantly faces congestion as more users join. However, this is not a sign of weakness but a testament to its popularity and potential and a driving force to encourage scaling solutions and the deployment of liquidity into those environments.
The need for ongoing scalability solutions like the Lightning Network is not a cause for concern but a reassurance that the Bitcoin network is evolving to meet the growing demand for faster and cheaper transactions.
Users must migrate their economic activity to other layers as they get priced out of the base chain. If users push for layer two solutions, exchanges will bother supporting it, miss out on possible fees, and risk losing customers to other service providers.
