El Salvador’s Bitcoin Fee Problem (and Solutions)

Bitcoin fees would make the cryptocurrency mostly unusable for Salvadorans. Here's how the first country to adopt BTC plans to tackle the fee problem.

By David Z. MorrisLayer 2
Jun 25, 2021 at 4:22 p.m. UTCUpdated Sep 14, 2021 at 1:17 p.m. UTC
By David Z. MorrisLayer 2
Jun 25, 2021 at 4:22 p.m. UTCUpdated Sep 14, 2021 at 1:17 p.m. UTC

There were two big pieces of news yesterday out of El Salvador, which – let’s all say it again – will become the first country in the world to treat bitcoin as legal tender. First, the Central American country set a Sept. 7 date for the activation of its new currency. In the course of the announcement, President Nayib Bukele clarified that “the use of bitcoin will be optional,” which may reassure those concerned about any coercive elements of the law.

Even more interesting was the announcement early this morning that El Salvador will be distributing about $30 worth of bitcoin to any citizen who activates a new state-backed crypto wallet called Chivo. It’s a serious incentive in a country where per-capita income is about $4,000 per year.

This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here

But the amount might invite skepticism if you’ve been paying attention to bitcoin metrics in recent months. In April, the average fee for a single bitcoin transaction peaked at just short of $63. Fees were at or near $30 for two weeks in late April, during which time $30 in a bitcoin wallet would have been prohibitively slow or expensive to use for anything.

On-chain fees have since dropped in dollar terms to under $7 – manageable, though still historically high. Bitcoin fees fluctuate because they’re effectively set by a bidding process for block space. During periods of high price volatility like April, speculators who need to move coins fast can bid prices way up. Even in more stable times, on-chain BTC average fees range from 50 cents up to $2 to send any amount of money, which is very affordable relative to fees from global remittance providers like Western Union, but still too much for smaller, day-to-day payments in a poor country. (Credit card fees in the U.S. are roughly 2%, which, to be clear, is itself pretty nuts.)

On-chain transaction fees have often been leveraged as a critique of bitcoin. At the systemic level, of course, that’s absurd, as fees are based on competitive bids. Saying “bitcoin fees are too high, look how much people are paying!” is the logical equivalent of Yogi Berra’s famous quip about a popular New York restaurant: “Nobody ever goes there anymore – it’s too crowded.”

That said, fee competition between low-income and high-income users seems like a real issue. Luckily, users in El Salvador will have two mitigating options.

Most importantly, El Salvador’s bitcoin development partner, Jack Mallers’ Strike, offers low-fee bitcoin payments through the Lightning Network. Lightning is a “layer two” solution, built on top of and settling to the Bitcoin blockchain, but offering BTC transactions costing just fractions of a cent. For bitcoin to work as a day-to-day payments tool, Lightning, or something like it, is a necessity.

Remittances are a slightly different story. One of the interesting and lesser-known features of the Bitcoin network is that you can choose your payment fee based on how fast you’d like a transaction settled: high-fee transactions are picked up first, but lower fee offers usually get into a block within a few hours. So for remittances, which can sometimes be less urgent than retail payments, that’s a second option.

This does raise a bunch of new questions about the El Salvador program, particularly from an educational perspective. Users in the country will have to make a new set of fairly complicated decisions about how to transact, and they deserve to have the options laid out clearly. You can be sure CoinDesk will be watching Strike and El Salvador’s progress closely.

The Festival for the Decentralized World
Thursday - Sunday, June 9-12, 2022
Austin, Texas
Save a Seat Now

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

Trending

1
CoinDesk - Unknown
Crypto Asset Managers Chase Yield With New Investment Products

A cocktail of high inflation and cash-hungry crypto firms are prompting fund issuers like Bitwise and 21Shares to get creative.

A cocktail of high inflation and cash-hungry crypto firms are prompting fund issuers like Bitwise and 21Shares to get creative.

CoinDesk - Unknown
2
CoinDesk - Unknown
First Mover Asia: Bitcoin Dominates but Altcoins Lurk

Although Terra's collapse has raised existential questions about the future of DeFi, some traders appear to be preparing for a return to altcoins; BTC remains rangebound below $30,000 in Tuesday trading.

Although Terra's collapse has raised existential questions about the future of DeFi, some traders appear to be preparing for a return to altcoins; BTC remains rangebound below $30,000 in Tuesday trading.

CoinDesk - Unknown
3
CoinDesk - Unknown
NEAR Protocol

CoinDesk - Unknown
4
CoinDesk - Unknown
MOBOX

CoinDesk - Unknown