Even after the launch of the Bitcoin Taproot upgrade in late 2021, many crypto exchanges still lag to implement the first SegWit upgrade, released over 4 years ago. As a result, Bitcoin’s block space is not being utilized to its full potential by its biggest users and potentially hindering its widespread adoption.
Which Crypto Exchanges Dominate Bitcoin’s Traffic?
Centralized cryptocurrency exchanges (CEXs) continue to serve the vast majority of investors. While January’s trading volume has declined to $827 billion from last May’s peak of $2.23 trillion, we can attribute this to the leveling of Bitcoin price during 2021.
Of the top ten CEXes, Binance is still in the global lead by a significant margin. In North America, Coinbase is the largest but overshadowed by Binance’s trading volume by at least 4x. Although Mandala Exchange ranks second, it uses Binance Cloud so it shares its large liquidity with Binance.
In comparison, decentralized exchanges (DEXes) are almost all under $1 billion in volume. Only Uniswap (V3) and dYdX are above, at $1.7b and $1.4b respectively for daily transaction volume.
However, it appears that size can hinder adoption. We have seen this time and again in traditional markets from auto manufacturers to social media platforms. The same is happening with Binance’s adoption of the SegWit Bitcoin upgrade.
SegWit and Taproot: Bitcoin’s Biggest Network Upgrades
Ethereum’s transaction fees have shown to the whole world how important it is to have a high network throughput. If its capacity is low, it leads to congestion, which leads to enormous transaction fees to process blocks.
Presently, Ethereum’s throughput is between 13 – 30 tps, while Bitcoin is limited to 7 tps. This is a tradeoff for being highly decentralized networks. However, both have various tricks up their sleeves. While Ethereum relies on layer 2 solutions like Arbitrum, Bitcoin relies on Lightning Network.
Likewise, both are undergoing core upgrades to their main chain’s throughput. Bitcoin is far more conservative as it doesn’t have to deal with dApps and more consistent traffic like Ethereum.
For this reason, Bitcoin upgrades are few and far between but significant nonetheless. SegWit (Segregated Witness) was implemented in August 2017 to reduce Bitcoin congestion by fitting more transactions into a block space.
When SegWit was activated, it opened the dam for Bitcoin transactions to pass over the previous 1MB block size limit. Up until then, this was Bitcoin’s major bottleneck, represented by a flat line. However, because SegWit is backward compatible, allowing for transfers from SegWit to legacy addresses, its adoption has been spotty.
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Crypto Exchanges Consume 41% of Bitcoin’s Block Space
To properly measure SegWit adoption rate among exchanges, glassnode proposed a more precise metric called SegWit utilization. The previous adoption metric was prone to conflating SegWit inputs to legacy ones when analyzing on-chain data. When implemented, SegWit adoption vs. utilization shows a clearer picture.
With two exchanges juxtaposed, Luno vs. Binance, we see that Binance only recently took up the SegWit standard. This is significant because Binance is Bitcoin’s top block space consumer, right next to Coinbase. Together, they make up 25% of consumed block space, in contrast to the rest of exchanges combined at only 16%.
However, the majority of smaller exchanges were flexible enough to completely integrate SegWit. Of the top 18 analyzed, 6 have fully adopted it while 6 are just starting. Binance is at the bottom mid-range, which is not a favorable position to be in for the world’s largest crypto exchange.
With such a varied and lax upgrade intake, can we expect to see the same from Taproot? The second-largest upgrade was activated last November, prompting divided opinions on what it would mean for the end-user.
Alongside increased privacy by mixing single and multi-sig transactions, Taproot’s key feature is expanded smart contract hosting. However, it will be up to entrepreneurs to take advantage of it and build enterprise-grade dApps.
All smart contract platforms have already demonstrated how delicate it is to implement a robust dApp system resistant to exploits and hacks, so it will take some time before Bitcoin closes the smart contract gap without sacrificing its impeccable security record. Crypto exchanges would do well to use that time to fully implement Bitcoin’s first network upgrade.
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About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.