Enhancing Custodial Solutions: A Vital Step towards Bitcoin's Continued Scaling

The world of cryptocurrency has been set ablaze by the recent crisis in Bitcoin, igniting a flurry of discussions and debates among those who are not well-versed in this complex and ever-evolving field.

The main offender: exorbitant, bulky, and cumbersome fee rates.

George Kaloudis holds the position of senior researcher and serves as the host of 'All About Bitcoin' a program on CoinDesk TV.

Previously, sending a bitcoin transaction was quite affordable, with fee rates as low as 1 satoshi per vByte, which amounted to only a fraction of a cent. However, the recent surge in the popularity of non-fungible token-like "inscriptions" and the use of the BRC-20 token standard on Bitcoin has led to a significant increase in the standard fee rates for transactions. Currently, sending a bitcoin transaction within a reasonable timeframe would require a fee of approximately 100 satoshis per vByte.

Taking everything into account, the current transaction fees are still relatively inexpensive, but compared to what bitcoiners have been accustomed to, the fees are significantly higher. As a result, many people are dissatisfied. However, it's not necessarily the high fees that are causing frustration, but rather the reason behind the fee hikes.

The Bitcoin blockchain has always had a limited amount of blockspace available, which has led to various concerns about its scalability. The question of whether Bitcoin would become too expensive to use if it were to be adopted by billions of people has been a topic of debate for some time. This issue was particularly contentious during the Blocksize Wars from 2015 to 2017, which resulted in the introduction of Segregated Witness (SegWit) to Bitcoin and the subsequent hard fork that created Bitcoin Cash.

(It's worth mentioning that SegWit addressed the issue of transaction malleability and paved the way for the recent increase in transaction fees; it's ironic how things can turn out.)

The recent surge in bitcoin fees can be attributed to the increased demand for bitcoin usage, not necessarily for sending permissionless, secure transactions or for storing wealth, but rather for activities such as placing monkey pictures on the Bitcoin blockchain and speculating on tokens.

It's sacrilegious to use Bitcoin for anything other than financial transactions, which explains all the commotion surrounding it.

Setting aside the moral debate about the appropriate use of Bitcoin, the community has yet to come up with a satisfactory solution for dealing with spikes in transaction fees. Responses such as "people will pay for block space" or "the free market will sort it out" create a situation where only the wealthy can afford to use the network.

Disgusting. Looks like we're not really displacing the rent-seekers after all.

Naturally, there are several potential solutions to the issue of high Bitcoin fees. One frequently cited option is the Lightning Network, which has been identified as a viable method for sending Bitcoin quickly and affordably. Once you're familiar with the Lightning Network and have successfully onboarded, it can be an incredibly satisfying experience. Transactions occur almost instantly and are significantly less expensive (when they don’t fail).

The issue with accessing layer 2 is that it requires sending initial transactions on layer 1, which is currently the comparatively expensive Bitcoin blockchain. This is similar to how you cannot reach the second floor of most buildings without first entering the first floor. In either scenario, you could simply wait for fees to decrease or for the elevator banks to clear (or take the stairs, if available). However, what if the fees do not decrease? What if more and more people continue to enter the building you are in?

A potential solution to this problem could involve third-party custody. This can be likened to a friend who sets up a zipline from another building to the second floor, through a window that they opened for you, allowing you to reach the second floor without ever having to touch the first floor.

All that is required is a certain level of trust. It's worth noting, however, that this goes against the very principles that Bitcoin was founded on - namely, being a purely peer-to-peer form of electronic cash that can be sent directly from one party to another without the involvement of any financial intermediaries. Nonetheless, it is true that custodial solutions may in fact be the most straightforward method of using the Lightning Network.

Doesn't it give you a sense of unease or discomfort?

Regrettably, the present design of Bitcoin may not facilitate the efficient onboarding of the entire world through layer 1. It's possible that the broader philosophical debate around financial self-sovereignty may come to an end for most individuals, as it proves to be challenging to achieve complete self-sovereignty even with the use of Bitcoin.

In our future discussions on Bitcoin, it would be wise to concentrate on one central theme: trade-offs.

Perhaps it is acceptable for me to utilize my Bitcoin in a custodial manner because it's more convenient for me, while you prefer a non-custodial approach. It's a matter of personal preference. It's possible that I am mistaken and you are correct. Additionally, it may not be your concern how I choose to use my own (or rather, my custodian's) funds.

The crucial aspect to consider is that we should be willing to explore custodial solutions to address our issues, even if it causes some discomfort. It's essential to recognize that incorporating certain custodial products into your financial or Bitcoin life does not preclude you from utilizing non-custodial products.

We have the ability to use both options. However, we need greater transparency and choices when it comes to these specific trade-offs.

Source Coindesk