May 12, 2023

Exploring transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

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The shine appears to be wearing off the crypto market recovery that began the year. Bitcoin is now below $27,000. One factor could be the angst caused by rising Bitcoin fees and a raging debate over how to address them, which is the topic of this week's column.

In this week's podcast, my co-host Sheila Warren and I talk to Troy Cross, a fellow at the Bitcoin Policy Institute, who brings a philosopher's and environmentalist's mindset to the argument that Bitcoin, far from being a threat to the environment, can be a driver of carbon reduction.

Have a listen after reading the newsletter.

Frogs, Fevers and Fees: Bitcoin's New Governance Challenge

(CSA Images/GettyImages)

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.

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.

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. 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.

Not surprisingly, this is causing a stink within the Bitcoin community. 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.

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?

In any case, 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. 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.

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Off the Charts: The Million-Wallet Moment Looms

Rising transaction fees and congestion pose a challenge to any blockchain's decentralization, as they limit access to a narrower range of high-value transactions and empower miners to act as gatekeepers. So, it's pleasing to note that in other ways, there are signs of more decentralization in Bitcoin.

Dan Ashmore at Coin Journal notes that the number of wallets holding more than one bitcoin is closing in on one million. Here's the chart that went with his piece, which noted that as of Monday, the tally stood at 997,919.

Ashmore argues this is a direct outcome of Crypto Winter. As the price of bitcoin fell, it became more accessible to more people.

Silver lining.

The Conversation: A Taunting Wizard

If the anti-Ordinals position in Bitcoin's internecine warfare is personified in Luke Dashjr, the opposite position is occupied by Udi Wertheimer, the founder of the Taproot Wizards NFT project and a big booster of the Ordinals Protocol.

Here's Wertheimer calling for a showdown at next week's Bitcoin 2023 conference in Miami.

Relevant Reads: CoinDesk at Ten

As I mentioned last week, CoinDesk is this month celebrating its tenth anniversary. To mark that, the Consensus Magazine team is running a series of ten articles over the course of the month, each one looking into the legacy of a particular seminal event in crypto history. So far, this what's on offer:

Chief insights columnist David Z. Morris looks into the DAO Hack of 2016, when an attacker figured out how to drain as much as $60 million worth of ether out of the novel decentralized autonomous organization project.
In a piece that seems especially timely, CoinDesk contributor Jeff Wilser explores the rise of the "meme economy" in 2020, which he says attracted a new breed of younger, retail investor into crypto.
Also from Jeff Wilser, a review of the notorious Mt. Gox hack of 2014 and the legacy it left in sharpening people's focus on the problem of centralized exchanges.
And from yours truly, a sweep of the ten years that CoinDesk has been around, emphasizing the importance of having a media organization cover this industry's wild ups and downs.

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