As BTC transaction fees rise, Bitcoin’s Lightning network needs better custodian solutions

Crypto unintelligentsia discourse has been set ablaze by this week’s Big Crisis in Bitcoin.

Until recently, you could send a bitcoin transaction quite cheaply, probably at a fee rate of 1 satoshi per vByte (equivalent to a fraction of a cent). Now, with the rise of the use of non-fungible token-like “inscriptions” and the BRC-20 token standard on Bitcoin, normal fee rates are relatively absurd. At the time of writing, getting a bitcoin transaction sent within a reasonable amount of time would cost something like 100 satoshis per vByte.

All things considered, it’s actually still pretty cheap – but it’s a lot more expensive than bitcoiners are used to. And then people are upset. The thing is, they are upset not because the fee rates are high, but because of why the fee rates are high.

See, the Bitcoin blockchain has always had little block space. “When billions and billions of people want to use bitcoin, will it be too expensive to use?” has always been an open question about Bitcoin. It was even a key point of contention during the Blocksize Wars of 2015 to 2017 that led to the introduction of Segregated Witness (SegWit) to Bitcoin and the Bitcoin Cash hard fork.

(Please note: SegWit solved transaction malleability and opened the door to our last reason for fees going up; funny how that works).

This time, bitcoin fees have skyrocketed because many more people want to use bitcoin. And not to send unauthorized, sound money to others or because they want to store wealth, but instead to put monkey pictures on the Bitcoin blockchain and speculate in tokens.

Blasphemous. Bitcoin should be used for financial transactions, hence the rant.

Putting aside the moralistic argument about what Bitcoin should be used for, bitcoiners have never really had a good response to how the network should handle periods when transaction fees increase. Canned responses that “people will just pay for the block space” or “the free market will figure it out” set up a world where the only people who can afford to trade on the network are the Bitcoin Rich.

Yuck. So much for letting go of the rent-seekers.

Of course, high bitcoin fees have some potential solutions. The most cited solution is Bitcoin’s Lightning Network, which has been touted as a viable means of sending bitcoin quickly and cheaply. Once you’re already on board and using the Lightning Network (and you know what you’re doing), it’s absolutely fantastic. Transactions feel like magic. They are fast and cheap (when they don’t fail).

But the problem is that you can’t get to layer 2 without sending initial transactions on layer 1, in this case the currently relatively expensive Bitcoin blockchain. It’s just like you can’t get to the second story of most buildings without first going into the first story. In either case, you can just wait until the fees go down or until the elevator banks clear (or take the stairs, I guess?). But what if the fees don’t go down? What if people keep piling into the building you’re in?

One way to solve this could be through third-party custody. It’s like your friend setting up a zipline from another building to the second floor through a window they opened for you so you can get to the second floor without touching the first floor.

Doesn’t it feel dirty?

Unfortunately, the current design of Bitcoin probably doesn’t allow the entire world to effectively get on board through Layer 1. Perhaps the great philosophical discussion around being financially self-sufficient will end for most people because it’s really hard to be completely self-sufficient, even with bitcoin.

Our future conversations around bitcoin should probably focus on one thing: trade-offs.

Maybe it’s okay that I use my bitcoin in a custodial way, because it’s easier for me, and you use it non-custodial. Fine. Maybe I’m wrong and you’re right. Maybe it’s none of your business how I spend my own (or rather, the manager’s) money.

The point is: we should be more open to discussing custodial solutions to our problems no matter how dirty it might make us feel. And to that end, using any custodial products in your financial or bitcoin life doesn’t have to prevent you from using non-custodial products.

You can use both. We just deserve more clarity and choice when it comes to these particular trade-offs.