Veterans of Bitcoin’s blocksize wars from 2015 to 2017 witnessed a strange scene this week. Bitcoiners were complaining about high transaction fees. For those of you who don’t know what the mystery is, let’s take a quick look back at history.
Block size and transaction fee
The “small block size faction” that won the blocksize wars has championed the existence of congestion transaction fees as a necessary price to pay for maintaining decentralization. On the other hand, the “big blockers”, which split into Bitcoin Cash (BCH) and Bitcoin SV (BSV), aimed to keep transaction fees low. However, this trend has recently reversed among some Bitcoiners.
Five years ago, big block (and low fee) proponent Roger Ver described Bitcoin core developers’ refusal to raise the block size cap (and reduce fees) as “catastrophic. There has been serious damage,” he lamented.
Central to Big Blocker’s argument is the idea that more block space is needed to process more transactions. In theory, transaction fees will drop, making it easier to scale blockchain to the point where it can be used for all micropayments in the world.
Small blockers, on the other hand, preached the importance of limits and tried to keep the Bitcoin blockchain as compact as possible to ensure maximum decentralization and censorship resistance.
Large-scale blockchains were thought to be easily absorbed by nations, corporations, etc., as only large-scale organizations could operate nodes. Bitcoiner has taken a tiered approach rather than expanding blockspace to ease transaction fees in the short term in the scaling war.
In fact, deferring (tiering) payments is a way of scaling for any payment system. I don’t use bank transfers to pay for cigarettes. Networks like Visa — batched, deferred payments, and finally settled with partner banks through ACH. Bank transfers are used for high-value transactions where finality of settlement is important (for example, a down payment for a house).
I sympathize with the small blockers mindset and have been a proponent of Bitcoin over Bitcoin Cash. And I’m skeptical of approaches like EOS and Solana. Accepting smaller blocks means allowing transaction fees to skyrocket when the blockchain is congested.
Big blockers have so far used blockchain congestion as evidence of the superiority of their claims. So bitcoiner (smove blocker) has had to hide its frustration and resort to the more philosophical argument that convenience isn’t worth it in exchange for decentralization.
In 2017, Smoveblocker and perhaps the most influential developer, Gregory Maxwell, was said to have “raised a toast” when Bitcoin transaction fees exceeded block rewards for the first time. there is
Now what happened in 2017 is happening again. But this time around, many hardcore bitcoiners have changed their stance, embracing the idea that transaction fees should be low, which they argued against during the scaling wars.
Ironically, the cause of the recent surge in transaction fees is the Bitcoin blockchain upgrade “Taproot” itself. It (possibly unintentionally) allowed users to record arbitrary content on the blockchain.
Bitcoin NFT (Ordinals) is attracting attention, but the direct cause of the recent surge in transaction fees is the emergence of the “BRC-20” standard. BRC-20 will be issued with a mechanism called “proof of burnt fees”, where users must sacrifice transaction fees in order to issue new tokens.
As a result, transaction fees have risen to alarmingly high levels in a short period of time, leaving traditional users out of reach. Some bitcoiners are calling this (new) blockchain use a deliberate “denial of service” (DoS) attack.
Thankfully, transaction fee spikes generally don’t last long. If history is any guide, the current BRC-20 token boom will subside relatively quickly. It seems more like a transitory event than a permanent one.
But even if it settles down in a matter of days, there is no doubt that Bitcoin NFTs have unearthed a huge potential demand for blockspace and entered a new era of structurally higher transaction fees.
I definitely think it’s a good thing. Bitcoin blockspace was a barren land from summer 2021 to early 2023.
Miners need to be rewarded in some way, and if block rewards drop further (with the halving next year), they will need transaction fees to make up for the lost income.
The lack of a sufficient source of income for miners from transaction fees has been a top concern for many Bitcoiners, myself included, recognizing the long-term risks of the protocol.
So I welcome Bitcoin NFTs as a trigger for new demand for blockspace. We believe that these ideas for creative use of neglected block space have the potential to make block rewards sustainable.
Trading fees are determined by the market
I agree with the argument that high transaction fees will exclude those who used Bitcoin for micropayments, especially those in the Global South such as El Salvador and Africa. But it would be a mistake to think that Bitcoin has to offer forever low transaction fees for everyone.
Bitcoiner has made the deliberate decision to cap the block space in order to make validation cheaper (in fact, to allow people in the global South in particular to validate as much as possible). ). Mechanistically, transaction fees will rise when congestion occurs. But it’s an unavoidable consequence of Bitcoin’s design.
For those who advocate a liberal economy, valuing blockspace as “too expensive” is a contradiction. Trading fees are market-determined, and to think they are too high supports interventionism and centralized schemes. It imposes a judgmental way of thinking about what types of transactions Bitcoin should be used for, and is incompatible with permissionless systems.
Market prices for commodities cannot be “wrong”. Prices simply reflect the stance of all market participants. The “too expensive” logic is the same as saying that oil should be $20 a barrel so even the poorest people can afford gasoline.
Such a stance may have public appeal, but someone has to bear the cost. In the case of Bitcoin, the price of low fees would be unlimited block space (disadvantageous from a decentralization perspective) and permanent block rewards. Bitcoiners who say transaction fees are “too high” are effectively arguing that low fees should be backed by node operators and, in the long run, perpetual inflation of the Bitcoin protocol.
Those who are discouraged that transaction fees are too high to attract new entrants simply misunderstand the nature of the network. Payments using Bitcoin are a finite commodity and cannot be expected to be cheap forever. The required certainty of settlement should be commensurate with the nature of the transaction. You don’t need bank transfer-level certainty to buy coffee, and you don’t need a Bitcoin transaction to send $5 to a friend.
If bitcoiners were to complain, they should be complaining about the slowness of Bitcoin’s Layer 2 development. Data shows transaction fees were briefly above $50 in 2017 and 2021.
This shouldn’t surprise anyone. Transaction fees always reflect demand for blockspace, and if transaction fees don’t fit your desired use, Bitcoin just isn’t the right network for you.
Wrath of the Maximalists
Even more puzzling is that small blockers and self-proclaimed leaders like Giacomo Zucco and Francis Pouliot are complaining about high transaction fees.
For them, it seems that there are two types of uses for Bitcoin. Ordinals and Inscriptions are backed by “outside groups” different from themselves and used to issue and trade NFTs and speculate on new tokens.
For hardcore fundamentalists who would never approve of holding anything other than Bitcoin, this is an unforgivable act. Current Bitcoin maximalist thinking is that Bitcoin should only be used for trading as a currency and not for trading assets other than Bitcoin.
In their obstinate way of thinking, it is morally okay for North Korea to use bitcoin to evade sanctions, but it is not permissible for artists to issue bitcoin NFTs. If you find this way of thinking strange and inconsistent, it’s because the Bitcoin maximalist ideology is extremely passive, technically regressive, and values ideological purity over intellectual coherence. is.
Towards a multi-chain future
For the few smooveblockers who have remained intellectually consistent since 2017, the current surge in transaction fees is a welcome one. It will trigger the proliferation of established Layer 2 networks such as Lightning and other Layer 2 systems that complement Lightning.
As with all commodities, high prices are their own solution. As a venture capitalist, I’ve been encouraged by the entrepreneurs I’ve met recently who are starting to develop novel Layer 2 technologies. We hope that Rollups, which have a clear product-market fit on the Ethereum blockchain in particular, can be added to the Bitcoin blockchain as well.
Lightning isn’t a panacea, it’s good for high-frequency small-value transactions.
There is more than one way to move dollars. Bank transfers, ACH, credit cards, debit cards, FedNow from the US Federal Reserve, cash, informal financial network Hawara, postal money orders, fintech apps and more. These can be further classified into ‘push/pull’ approaches, immediate and deferred settlement, and gross and net settlement. Each has advantages and disadvantages, and transaction speed and settlement certainty also differ.
It is naive to think that only one scaling network can meet Bitcoiner’s diverse trading needs. Bitcoin’s long-term future requires multiple scaling approaches.
And the important point is the shift from “one base layer payment, one payment model” to a more economical “one base layer payment, many payment model”. This is the correct way to scale. This is the only way a system like blockchain, where every node operator must know every transaction, can scale to global use.
The surge in transactions around Bitcoin NFTs and the resulting spike in transaction fees should be welcomed as it accelerates the transition to such an efficient future. The BRC-20 boom has puzzled many, but it’s one of the best things that’s happened to Bitcoin in a while.
Mr. Nic Carter: Partner of “Castle Island Ventures”, a venture fund specializing in public blockchain, and co-founder of “Coin Metrics”, a blockchain analysis company.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Original: There’s No Such Thing as High Fees on Bitcoin