The recent rise in on-chain Bitcoin fees has reignited a familiar debate within our community, generating diverse viewpoints on the implications and root causes of this trend. A faction within the community views these high fees as a strategic solution to Bitcoin's security budget concerns. In contrast, others see it as a huge barrier, which could hinder global adoption of Bitcoin. This issue is particularly relevant to new entrants to Western markets and societies in the Global South, where relatively high transaction costs can be a particularly heavy burden.
The significant increase in fees, denominated in Bitcoin, is primarily driven by the growing popularity of ordinals, BRC-20 tokens, and similar methods on the Bitcoin network. Etchings, which involve including data in the witness portion of a transaction, have become increasingly popular for creating digital collectibles and unique assets on the Bitcoin blockchain. While this practice is fairly new, it requires additional block space, thus increasing overall demand, and thus increasing transaction fees.
Furthermore, the emergence and growing popularity of BRC-20 tokens – a standard closer to Ethereum's ERC-20, but for the Bitcoin network – has further contributed to network congestion. These tokens, which are often created for speculation and distribution of memcoins, require complex and often large transactions. The overall effect of these transactions intensifies the network load, further amplifying the issue of rising fees in terms of BTC.
Fundamental shift in network usage
It is essential to realize that these technologies, and others that are likely to emerge, indicate a paradigm shift in the use of the Bitcoin network. The resulting rise in transaction fees, when measured in Bitcoin, reflects these evolving use cases and underscores the necessity of continued progress in network scalability and efficiency. Others have discussed some responses to these issues, and I will not comment on specific responses other than those below.
Re-Litigation of the Blocksize War
It is important to acknowledge the issue of block size, albeit cautiously. The idea of reopening the block war, often proposed by some non-Bitcoin factions, is not only counterproductive, but also ignores the nuanced understanding required to address the current fee environment. Network security and efficiency do not necessitate increasing the block size, especially not in response to translational pressures caused by specific uses such as JPEG or BRC-20 files.
Mining sector perspective
As for the mining sector, the growing interest in Bitcoin has led to new approaches to mining pool operations, as seen with Ocean and Braidpool. These entities enable miners to create their own transaction templates and effectively manage network congestion, with Ocean in particular filtering out what it considers to be unwanted transactions. This evolution in mining strategies represents a balance between profit motives and the responsibility of maintaining an efficient network.
Understanding the dual nature of “high fees”
High fees in real terms versus BTC terms
When analyzing the nature of high fees in Bitcoin, it is necessary to distinguish between fees in real terms (USD) and those in Bitcoin. The increase in fees in real terms is a reflection of Bitcoin's maturity and increasing importance in the global economy, and is a testament to its success. Conversely, high fees in terms of Bitcoin highlight a temporary bottleneck in the network, underscoring the need for technological and societal innovations to enhance network efficiency and scalability.
Common themes of high fees
- Self-Regulating Economy: The Bitcoin fee market embodies a self-regulating economy. Users who value fast and secure transactions are willing to pay more, which enhances the security and sophistication of the network. This self-regulation is pivotal to Bitcoin's resilience, adapting organically to market dynamics.
- Efficient use of block space: High fees encourage wise use of block space, promoting innovative applications for the Bitcoin network. Developments in layer-2 solutions such as Lightning, Fedimint, and Liquid are particularly noteworthy, as they promise faster transactions at lower costs, albeit with some trade-offs.
Celebrating high first-tier fees in real terms
As Bitcoin progresses on its journey to global currency status, the inevitability of high tier-one fees, in real terms, is not a cause for concern but a milestone to be celebrated. The era in which transactions of even 1 sat/vB become prohibitively expensive represents an important chapter in Bitcoin's success and global influence. Resisting this trend is not only futile, but also contradicts the spirit of Bitcoin's growth and stability.
- Reflects the value and demand of Bitcoin: The relationship between higher transaction fees in real terms and the increase in the value and demand of Bitcoin is unambiguous. As Bitcoin establishes itself as a viable investment and transaction asset, the willingness to incur higher fees reflects its utility and perceived value. This is a bullish sign for Bitcoin's long-term sustainability and success.
- From block rewards to transaction fees: The shift from miner revenues based on block rewards to transaction fees is a fundamental evolution of Bitcoin's economic model. As we approach the maximum supply of Bitcoin, high transaction fees in real terms are becoming crucial to compensating miners and ensuring the security and longevity of the network.
- Indicating asset maturity: High transaction fees in real terms also indicate the maturity of Bitcoin as an asset class. Similar to traditional financial systems, the presence of transaction fees in the Bitcoin network underscores its evolution from a niche technological experiment into a globally recognized financial asset.
- Reflects deflationary nature: Unlike fiat currencies, Bitcoin's deflationary design is expected to increase its value over time. High tariffs in real terms confirm this deflationary nature; As Bitcoin becomes more valuable, the cost of transacting Bitcoin naturally rises. This phenomenon is expected and indicates the success of the deflationary model.
Challenges posed by high fees in BTC terms
While listing high Tier 1 fees in real terms underscores Bitcoin's burgeoning role and value, high fees in Bitcoin terms present unique challenges that require careful consideration. This distinction is vital to understanding the current state and future scalability of the network.
- Barrier to widespread adoption: High fees in terms of BTC pose a significant hurdle, especially for those living in developing regions or engaging in smaller transactions. Bitcoin's global appeal as a global currency is closely linked to its accessibility and affordability. If high bitcoin-denominated fees continue, they risk undermining bitcoin's promise as a tool for financial inclusion and empowerment.
- Network congestion and user experience: High fees in Bitcoin terminology often indicate network congestion, which lengthens transaction times and reduces user experience. For Bitcoin to thrive as a practical means of daily transactions, it must provide consistent reliability and efficiency. The current high fees in Bitcoin terms indicate a bottleneck in transaction processing, which may deter potential and existing users.
- Centralization Concerns: While all high fees tend to encourage centralization, those fees in terms of BTC have a clear impact, potentially shifting transaction processing towards larger entities able to bear such fees. This shift challenges Bitcoin's decentralized ethos, with potential implications for its overall security, integrity, and credibility.
The myth of the “security budget issue” and the “mining death spiral”
One common misconception in Bitcoin discussions is the fear of a “security budget problem” or a “mining death spiral.” These concerns often stem from misunderstandings around halvings and diminishing overall subsidies, leading to concerns about insufficient incentives for miners.
However, these concerns do not take into account the crucial factor of purchasing power. Consider this: If Bitcoin reaches $550K, even a fixed block fee of ~25M a day would exceed the current purchasing power of block support of 6.25 BTC at $40K/BTC today. What matters most is not the amount of Bitcoin given away, but the purchasing power it represents. As long as this continues to increase, miner wages remain sustainable and secure.
The focus should not be on increasing fees in terms of Bitcoin or considering alternatives such as back-end emissions, but rather on ensuring that the purchasing power derived from transaction fees continues to grow. This is the cornerstone of Bitcoin's economic model, underscoring the importance of a single currency system.
Layer 2 techniques and graphic dynamics
The emergence and integration of layer 2 technologies represents a critical development in the Bitcoin ecosystem. While these technologies may reduce fees in terms of BTC, they are essential for the scalability and viability of the network in the future. Efficient Layer 2 solutions can compress transactions more effectively than is currently possible at Layer 1.
High fees in terms of BTC indicate the need for more comprehensive and innovative Layer 2 solutions, to ensure scalability and network efficiency. Clearly, the Bitcoin blockchain, in its current state, cannot handle a significant portion of the world's daily transaction volume — nor should it aim to. The real solution lies in a combination of improved second-tier creativity, renegotiating agreements, and perhaps revising consensus mechanisms.
Conclusion
In summarizing the discourse around Bitcoin transaction fees, it becomes clear that the dual perspective of high fees – in real terms versus Bitcoin terms – symbolizes a currency that is in the throes of development and maturity. * There is no need to increase fees in terms of Bitcoin, or anything like back-emission, as long as purchasing power continues to increase. *Which, as you will notice, is the whole point of a depreciation or single currency.
High fees in real terms should not be viewed as a deterrent, but rather as a hallmark of Bitcoin's increasing value and mainstream adoption. This trend, although challenging, is a testament to the growing acceptance of Bitcoin as an important financial asset on the global stage. It highlights Bitcoin's journey from a new digital experience to a powerful decentralized financial system.
On the contrary, the challenges posed by high fees in terms of BTC underscore a critical juncture in the evolution of Bitcoin. They emphasize the need for innovative solutions to enhance network efficiency and scalability, ensuring that Bitcoin remains available and viable for a diverse global user base, and an escape hatch from the ever-encroaching fiat currencies. As the Bitcoin community navigates these complexities, the focus must remain on advanced technologies and strategies that support the core principles of decentralization, security, and inclusivity.
While navigating the future, the Bitcoin ecosystem must balance its growing value with a pragmatic approach to meeting its technical and economic challenges. The development of second-layer technologies, along with community initiatives, will play a pivotal role in addressing these challenges. As Bitcoin continues to evolve, it stands not only as a testament to the ingenuity of its design but also as a beacon of the potential of decentralized digital currencies to revolutionize the financial landscape.
The author would like to thank @theemikehobart, @cryptoquick, @GrassfedBitcoin, and @barackomaba, who contributed ideas and comments while drafting this article.
This is a guest post by Colin Crossman. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
