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This is why we can't enjoy anything good.
Just as we believed we had assimilated the lessons from the previous debacles involving FTX, Three Arrows Capital, Celsius, and others, the frenzy around meme coins has resurfaced once again.
The resurgence of wild and speculative cryptocurrency casinos is upon us once again! Some are reaping exorbitant profits by investing in tokens associated with a frog picture, while others risk catastrophic losses due to irrational bidding. What's different this time is that the craze isn't just impacting the minds of the avaricious, but also disrupting the operations of the world's most valuable blockchain.
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Bitcoin's Taproot upgrade has enabled the creation of tokens based on the new BRC-20 standard, leading to the emergence of various Bitcoin-based meme-coins that mimic those on other chains that have recently experienced dramatic price fluctuations. For instance, the Ethereum-based Pepecoin surged by almost 5,000,000% last week, only to plummet by 50% from its peak. In addition, the development of the Ordinals Protocol has resulted in the creation of data inscriptions on the Bitcoin network that function as non-fungible tokens (NFTs).
Compared to a basic Bitcoin transaction, these tokens utilize significantly more data, causing an increase in Bitcoin fees. As a result, Bitcoin miners are currently earning more from transaction fees than from their usual 6.25 bitcoin block reward. This situation makes it difficult for small bitcoin transactions to be accepted on the blockchain or for users to send them without paying a prohibitively expensive fee.
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
Unsurprisingly, this development is causing uproar within the Bitcoin community. The issue of blockspace scarcity has been a source of tension for some time, as seen in the Block Size wars of 2016-2017 (an event in cryptocurrency history that will be covered in CoinDesk's 10-year anniversary coverage). The conflict led to the creation of the Lightning Network, which facilitates off-chain processing of small transactions, thus preserving valuable blockspace for larger ones.
The potential for conflict is arguably higher in this situation. Some purists, who view Bitcoin as a currency alternative, are outraged to witness its use in the creation of frivolous frog JPEGs. Conversely, those who are developing and utilizing these new BRC-20 and Ordinals-based tokens argue that nobody has the authority to dictate the purpose of Bitcoin. After all, it is an open protocol.
We can all acknowledge that the issue of escalating transaction fees and blockchain congestion is a significant concern that strikes at the core of Bitcoin's resource efficiency and practicality. The question then becomes, what measures can be taken to address this problem?
I will venture to say that the solution does not reside in the proposal put forth by Luke Dashjr, a prominent early Bitcoin developer, who advocates for blocking BRC token and Ordinals projects by imposing a filter. Critics of Dashjr argue that such an action would be tantamount to censorship. Regardless of one's perspective on the purpose of Bitcoin, it is essential to preserve its censorship-resistance.
During our podcast this week, Troy Cross of the Bitcoin Policy Institute shared his views on taxation and energy policy, echoing my own sentiment that the White House's proposal to tax bitcoin mining discriminates against certain energy choices. It's not fair to favor one individual's preferences over others. As a community, we cannot limit the range of value exchange that can occur on the Bitcoin blockchain.
Limits on speculation?
In my humble opinion, it is reasonable to consider code upgrades that alleviate the blockspace limits and enhance the overall functionality of the system in a manner that is independent of specific use cases.
If Lightning Network fails to sufficiently enhance the scalability of Bitcoin, could there be valuable insights to be gained from the Ethereum community's diverse Layer 2 scaling initiatives, such as Zk-rollups or Optimistic rollups?
Could it be feasible or suitable for the protocol to incorporate time-lock restrictions or expenses on particular speculative activities that pose a threat to the liquidity of the whole system? I am particularly considering short-term asset flipping. Please note that this may only be applicable to non-fungible tokens, as it is impossible to impose a limit on fungible BRC-20 tokens since the owner can easily sell a different one. Money cannot be constrained in this manner.
Read more: Bitcoin Developers Divided: Should BRC-20 Ordinals be Censored or Not?
I'm sure there are people much smarter than me who will point out flaws in these suggestions. Indeed, if someone were to argue that singling out asset flipping - which, after all, provides liquidity to the market - is not justified.
If I were to criticize meme-coins like Luke Dashjr, I would be no different - someone could argue that I am unfairly judging one person's actions over another's.
The main issue at hand is not simply that Bitcoin is being used to depict images of frogs, but rather that its usefulness as a fast and secure means of transferring value without intermediaries is being compromised by the problem of blockspace congestion. As pointed out by CoinDesk columnist David Z. Morris, even if millions more people were using Bitcoin for monetary purposes, it would still encounter the same challenges. Therefore, the discussion surrounding governance needs to be centered around finding solutions to address this problem.
The central obstacle faced by every blockchain community is how to strike a balance between safeguarding the individual's rights and promoting the collective interests. This dilemma holds true for Bitcoin as well.
Source Coindesk
