In the Bitcoin BRC-20 debate, there is no such thing as “high fees”

Veterans of the block size war that raged from 2015 to 2017 in Bitcoin were met with a strange sight this week: Bitcoiners complaining about high fees. If this does not seem strange to you, it is worth remembering a short story.

Historically, “small-blockers” – the faction that maintained the claim to Bitcoin in the block size wars – have supported the existence of fees in times of congestion as a necessary trade-off to achieve decentralization. Big blockers – the faction that split into BCH and BSV – were those who aimed to keep fees low. But this trend has reversed for some Bitcoiners recently.

CoinDesk columnist Nic Carter is a partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the co-founder of Coin Metrics, a blockchain analytics startup.

The famous big block (and low-cost enthusiast) Roger Ver sorry five years ago that “babies [were] die” because Bitcoin core developers refused to raise the block limit (and reduce fees). Central to the big talking point for blocking was that more block space was needed to accommodate more transactions. In theory, this would lower fees and make it easier to scale a blockchain for global use for all kinds of small payments.

The small blocks, on the other hand, preached the importance of restraint, trying to keep the blockchain as compact as possible so that it could remain maximally decentralized and censorship-resistant. A larger blockchain, the thinking went, would only be maintained by industrial node operators, and thus could be trivially coordinated by government or corporate actors. In the scaling wars, instead of naively increasing block space to ease fee pressure in the short term, Bitcoiners instead embraced a tiered philosophy.

This is actually how all payment systems scale: by delaying settlement. You don’t use wire transfers to pay for cigarettes – you use a network like Visa that uses batch, deferred settlement and ultimately settles with partner banks via ACH. You usually want to reserve bank payments for larger transactions like down payments on a house where finality is important.

In fact, I’ve been sympathetic to the small block philosophy, which is why I supported Bitcoin over Bitcoin Cash, and why I’m generally skeptical of the approach of blockchains like EOS or Solana. Accepting smaller blocks means tolerating larger fee spikes when the blockchain gets busy. Historically, major blockers used blockchain downtime as evidence in their favor, and Bitcoiners were forced to grit their teeth and resort to more philosophical arguments as to why the convenience wasn’t worth the trade-off for decentralization. In 2017, Gregory Maxwell, arguably the most influential developer on the small-block side of the conflict, “popped the champaign (sic)” when Bitcoin fees topped the block reward for the first time.

In 2023, it’s 2017 again, except this time many hardcore Bitcoiners have turned around and are now embracing the “fees should be low” perspective – one that they (or their predecessors) explicitly fought against during the scaling wars.

The culprit, ironically, is Bitcoin’s own Taproot upgrade, which (perhaps inadvertently) opened up a new design space that allowed users to write arbitrary content onto the blockchain. Image NFTs (“Ordinals”) have stolen most of the attention, but the immediate catalyst for this spike was actually the creation of the BRC-20 standard, which relies on an exotic distribution method. BRC-20s are issued with a “proof of burnt fee” mechanic, where users must sacrifice transaction fees to create new tokens. This has driven the fees in the short term to irrigation, and priced out other types of conventional use. Some Bitcoiners have even caught on calls the use of the blockchain a conscious “denial of service” attack or an attack on El Salvador’s Bitcoin mission.

The good news is that fee increases usually don’t last. If history is any guide, the current craze for minting BRC-20 tokens is likely to die out relatively quickly. It seems to me to be an event similar to the Otherside coin on Ethereum rather than something permanent. However, it is certainly the case that Ordinals and Inscriptions have unlocked a huge amount of latent demand for Bitcoin block space, leading us into a new, structurally higher fee regime, although this acute peak will dissipate within days.

This I consider to be an unequivocally good thing, as the Bitcoin blockspace was a virtual wasteland from the summer of 2021 to early 2023. Miners have to be paid somehow, and as the miner subsidy decays further, fees will have to compensate for lost revenue. The lack of sufficient miner income from fees has been the primary concern for myself and many other Bitcoiners who recognize the long-term risks of the protocol. So I’ve been heartened to see Ordinals and Inscriptions sparking a new form of demand for Bitcoin blockspace. I believe that this kind of more creative use of otherwise neglected block space could represent a path to sustainability for Bitcoin’s block reward.

Although I am sympathetic to the observation that high fees are pricing out individuals who are used to making smaller transactions on Bitcoin’s base layer, especially people in the Global South like El Salvador or Africa, it is simply wrong to think that Bitcoin owes some perpetually low fees. Bitcoiners made a very conscious decision to limit the block space to make validation cheap (and indeed – to make validation as inclusive as possible, especially for people in the Global South!). Mechanically, this means that charges must increase when congestion occurs. This is an inevitable consequence of Bitcoin’s design.

For a set of people who claim intellectual descent from the Austrian tradition, the characterization of the price of block space as “too high” is incoherent. Fees are set by the market, and to think they are too high is to support interventionism and central planning. To think that the price of block space is “high” is to impose a normative view of what types of transactions Bitcoin should be reserved for, which is incompatible with a permissionless system.

The market price of an item can never be “wrong”. Prices simply reflect the aggregate attitudes of all market participants. This logic is similar to saying that the price of oil should be $20/barrel so that even the poorest in society can afford gas. While that stance may have a populist appeal, someone always has to pay. In the case of Bitcoin, the price of low fees would be unlimited block space (a non-starter from a decentralization point of view), not to mention a permanent subsidy (as fees would be the only driver of miner income in the long term). So Bitcoiners who claim that fees are “too high” are in effect demanding that their low fees be subsidized by node operators and, in the long term, by perpetual inflation of the Bitcoin protocol.

Those who express dismay that they cannot bring newcomers to Bitcoin simply misunderstand the nature of the network. Basic casts are a limited commodity and cannot be expected to remain cheap forever. Instead, the settlement assurances sought should match the nature of the transaction. You don’t need a bank transfer security level to buy a coffee, and you don’t need a base transaction to make a $5 test payment to a friend.

If fee-hampered Bitcoiners have any quibble, it should be with the pace of development of L2s in the Bitcoin space. There is no real excuse for this misunderstanding either: a cursory look at the data shows that fees reached over $50 per transaction at certain points in both 2021 and 2017. This should not have surprised anyone. Fees will always reflect market demand for Bitcoin blockspace, and if your desired mode of use is priced out, it simply means that base layer Bitcoin is not the right network for you.

More confusing is why former small blockers and self-proclaimed high priests Giacomo Zucco or Francis Pouliot have taken to complaining about the fee pressure (even though they enlisted on the small block side of the scaling wars). The answer is that for them there are two types of Bitcoin use: sacred and profane. Ordinals and inscriptions are generally supported by the moderate “outgroup” and as of now have primarily been used to issue and trade NFTs, or to speculate on new tokens.

To the hardcore fundamentalist crowd who absolutely despise ownership of anything other than Bitcoin, this is profane. Current Bitcoin maximalist doctrine stipulates that Bitcoin should only be used for monetary transactions – but not those involving non-Bitcoin asset types. Their perverse framework is one where it is morally acceptable for North Korea to use Bitcoin for sanctions evasion, but unacceptable for an artist to issue their NFT on the Bitcoin block space. If this seems bizarre and inconsistent to you, it’s because the maximalist Bitcoin ideology has become highly reactive, technologically regressive, and more concerned with ideological purity than intellectual coherence.

For the few small blocks that have remained intellectually consistent from 2017 to the present, the new fee pressure should be welcomed. It is a catalyst for further use of established L2 networks such as Lightning, and where Lightning falls short, alternative L2 systems. As with all goods, high prices are the cure for high prices. As a venture capitalist, I am encouraged by the entrepreneurs I have met recently who have started to design new L2s that explore alternative design spaces. In particular, rollups have a clear product market fit on Ethereum and I hope they can be added to Bitcoin in time.

Lightning is not a panacea, and it is best suited for high-frequency, low-granularity payments – which certainly do not satisfy all types of Bitcoin transaction demand. There’s more than just one way to move dollars around – we’ve got wires, ACH, credit and debit networks, Fednow, physical cash, remittances, hawala networks, money orders and fintech apps, among others. More abstractly, these can be divided into “push” and “pull” approaches, real-time versus deferred settlement, and gross versus net settlement models. Each has its own set of trade-offs, offering different transaction speeds and settlement assurances.

It is naive to think that one scaling network alone can satisfy the various transactional needs of Bitcoiners. The long-term future of Bitcoin is a variety of scaling methods. The main issue, however, is a move away from the one-base settlement = one-payment model, towards a more economically tight, one-base settlement = many-payment model. This is the right way to scale. This is the only way a broadcast system like a blockchain, where every node operator must be aware of every transaction, can scale to global use.

The burst of activity around inscriptions and resulting high fees is an accelerant towards this more efficient future and should be celebrated. The BRC-20 mania, as confusing as it is to many, is one of the best things to happen to Bitcoin in some time.