It’s more than SegWit…

Coinbase has announced that it is incorporating SegWit. (If you don’t know what that is, I just wrote an explainer for CoinDesk.)

That is jumping-up-and-down good news. SegWit is a bitcoin protocol upgrade that will significantly increase transaction capacity without touching the block size limit, by changing the way the data is stored. Although it activated on the bitcoin network in August last year, adoption has been slow – at time of writing, only around 14% of bitcoin transactions use the new format. Since Coinbase is the largest wallet provider out there, its contribution should push that needle up.

Source: Giphy
Source: Giphy

Why is that a good thing?

Mainly because fees need to come down. The high demand for bitcoin during the December price spike pushed fees up to almost $60 per transaction. That makes bitcoin almost unusable for anything other than speculation and investment. And that is an unsustainable main use since buying something just because you think the price will go up without an improvement in the underlying fundamentals is a pyramid scheme. And they always crumble, eventually.

If, however, you expect bitcoin’s price to go up because it serves a solid function, because it is useful to society, then its increase in value will be more sustainable.

But for bitcoin to be used for transfers or payments, fees need to come down.

They have been coming down. While exact reasons are unclear, it appears to be mainly due to lower demand from speculators and investors. However, less congested blocks – whether from lower trading-related demand or SegWit or a combination – are good for the network’s users.

Freeing up space in blocks will have the effect of shortening confirmation times. Some transactions have recently had to wait hours to be confirmed, as those that pay higher fees get preferential treatment. With more space available, there’ll be less price-based selection of transactions and faster confirmations – which will offer a better service, which will attract more users.

And as SegWit rolls out across the network, more users won’t necessarily result in higher fees this time around. Hopefully.

And now for the juicy stuff…

Tucked away at the bottom of the article was the titbit that Coinbase has a full-time engineer working on Lightning adaptations (if you don’t know what Lightning is, here’s an explainer I wrote for CoinDesk). That is perhaps the most intriguing part of the entire post.

Lightning promises to multiply the capacity of the bitcoin network, allowing transactions in off-chain channels. Since these do not have to follow the bitcoin protocol, except for when they anchor to the network for net settlement, fees are set by the relaying nodes (not the miners) and confirmation times are almost immediate. Smaller transactions such as buying a cup of coffee, and even microtransactions, would go from being thoroughly impractical to possibly useful.

While the technology is still very much in beta, development is galloping along. If it continues to proceed apace, we could see it become available this year. That Coinbase is actively working on Lightning integration indicates that the spread could be fast, and the level of service offered to users of the bitcoin network could be kicked up to a new level.

Notice I stressed users. Lightning won’t affect investors or traders much. And that is what most excites me. A step forward in enhanced functionality for users.

This announcement about SegWit – while on the surface expected and no big deal – is a big step towards taking bitcoin back to what it started out to be. A step forward to go back? Yes. And about time.