This is why we can’t have nice things.
Just when we thought we'd learned our lessons from the blowups of FTX, Three Arrows Capital, Celsius et al., meme-coin fever strikes again.
Crazy crypto casinos are back! People are making ridiculous gobs of money from tokens based on a frog image, while others stand to lose massively as irrational bidding takes hold. And this time, the fever is not only infecting greedy human minds, but messing with the functioning of the most valuable blockchain in the world.
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The ability to create tokens based on the new BRC-20 standard, which was enabled by Bitcoin’s Taproot upgrade, has fostered a variety of new, Bitcoin-based meme-coins, many mimicking those released on other chains that have recently experienced wild price movements. (This past week, the Ethereum-based Pepecoin rose almost 5,000,000%, then lost 50% off its highs.) This follows the creation of the Ordinals Protocol, which gave rise to Bitcoin-based data inscriptions that function as non-fungible tokens (NFTs).
These use up a lot more data than a basic bitcoin transaction, which means they’re driving up Bitcoin fees. Bitcoin miners have lately been earning more from transaction fees than from their routine 6.25 bitcoin block reward. And that means if you want to send a small amount of bitcoin on-chain, it won’t be accepted or you’ll have to pay a prohibitively exorbitant price for doing so.
I can hear Elizabeth Warren’s “anti-crypto army” sniggering: "These crypto bros are so obsessed with mooning into lambos that they’re destroying what they claim to be this technology’s core purpose as a better form of money and value exchange.”
The fighting begins
Not surprisingly, this is causing a stink within the Bitcoin community. The fight over the scarce resource of blockspace has long stirred tensions – most memorably during the Block Size wars of 2016-2017 (a piece of crypto history to be featured in CoinDesk’s 10-year anniversary coverage). It motivated the founding of the Lightning Network, which allows for small transactions to be processed off-chain to save valuable blockspace for bigger ones.
The potential for tension is arguably even greater in this case. Purists who believe Bitcoin’s sole purpose is as an alternative currency are incensed to see it being used for frivolous frog JPGs. On the other hand, those building and using these new BRC-20 and Ordinals-based tokens counter that no one gets to say what Bitcoin is for. It’s an open protocol, after all.
We can all agree that rising transaction fees and blockchain congestion are a problem. It goes to the heart of Bitcoin’s resource efficiency and utility. But what can be done about it?
I’ll go out on a limb and say the answer does not lie in the suggestion offered by Luke Dashjr, a high-profile early Bitcoin developer, who essentially wants to stop BRC token and Ordinals projects by imposing a filter. That, Dashjr’s critics say, is censorship. No matter what you believe Bitcoin is for, surely its censorship-resistance must be preserved.
Echoing Bitcoin Policy Institute fellow Troy Cross’s view on taxation and energy policy – on our podcast this week he said the White House proposal to tax bitcoin mining discriminated one person’s energy choice over another’s – I’d say Bitcoin’s community cannot constrain what forms of value exchange Bitcoin’s blockchain is used for.
Limits on speculation?
What is fair game – in my humble opinion – are code upgrades that would take pressure off blockspace limits to improve the overall functioning of the system in a use case-agnostic way.
If Lightning is not sufficient to improve Bitcoin’s scalability, is there anything to learn from the various Layer 2 scaling projects of the Ethereum community, such as Zk-rollups or Optimistic rollups?
Or, might it be possible, or even appropriate, for the protocol to bake in time-lock constraints or costs on certain speculative activities that challenge the liquidity of the entire system? I’m specifically thinking of short-term asset flipping. (Note: this could only be relevant to non-fungible tokens. You can’t impose a limit on fungible BRC-20 tokens, precisely because the owner can just sell a different one. Money can’t be constrained in this way.)
Folks way smarter than I will, I’m sure, point out flaws in these suggestions. Indeed, if someone were to say that in singling out asset flipping – which, after all, brings liquidity to the market –
I’m no different from Luke Dashjr railing against meme-coins, they’d have a point. I’m judging one person’s activity over another’s.
Still, the core problem here is not that Bitcoin is being used to represent frog images per se, but that its value as an efficient, intermediary-free settlement system for transferring value of all kinds is undermined by blockspace congestion. (As CoinDesk columnist David Z. Morris wrote this week, Bitcoin would be experiencing the same problems if, as its advocates hope, millions more people were using Bitcoin for monetary purposes.) That’s where the governance conversation needs to be focused.
The question of how to balance the rights of the individual with the interests of the group is the core challenge of any blockchain community. Bitcoin is no different.