Bitcoin - Why Are Transaction Fees Skyrocketing?

Bitcoin transaction fees have skyrocketed in recent days due to what are known as “inscriptions” on the timechain.

When the timechain gets clogged

Inscriptions are the act of inserting arbitrary data (usually jpegs) into bitcoin transactions.

It was the Taproot update that made this possible by allowing up to 400,000 bytes to be entered into a single transaction. That’s 10% of the space of a single block.

The “inscriptions” exploit this vulnerability to spam the timechain (blockchain). It all started with collections of jpegs called “ordinals”.

Since then, an industry has built up in record time in an attempt to whip up a Ponzi-like frenzy. Everyone wants to create their on-chain jpeg collection that requires transactions.

Hence the recent bottleneck and increase in transaction fees. Indeed, let’s remember that bitcoin can only handle a handful of transactions per second.

So far, nearly $120 million has been paid in transaction fees for making inscriptions:

👀 #Bitcoin's transaction fees surge once again, due to new hype around #Ordinals, surpassing a cumulative total of 120 million #USD. pic.twitter.com/XVXR98OU2k

— Stefan Luebeck (@CryptoEva) December 2, 2023

These crazy sums are explained by the juicy bubbles attached to these inscriptions. The market capitalizations are indecent:

• Ordinals: $400 million
• Rare Sats: $800 million
• BRC-20: $2.4 billion

The BRC-20 ORDI token has just reached a market capitalization of $1 billion after a 850% increase in 30 days.

Of course, these valuations are built on thin air. The measly volumes are orchestrated by groups of shrewd individuals who buy the jpegs from themselves. As always, it’s about pumping up the hype until the gullible succumb to FOMO and bite the bait.

As a result, transaction fees have exploded. It now costs over 270 sat/vB to execute a bitcoin transaction. That’s about $35 for a 300 vB transaction.

The Bitcoin Knots Solution

The trend will pass, as the NFT scam did. BRC-20, ordinals, and other inscription substrates will return to dust, not without having enriched Bitcoin magazine and the anonymous folks pumping these scam collections…

A rug pull on the BRC-20 ORDI token is already underway as I write these lines:

$Ordi, an image of "Organic growth."
Running for the exits!#brc20shitcoins pic.twitter.com/53lRmivjAl

— Maple 🍁 (@GhostofMaplHodl) December 6, 2023

No node was expected to download and relay all this junk. Ordinals, BRC-20, and other rare sats exploit a vulnerability through social engineering that capitalizes on FOMO and pump & dumps.

But bitcoin is a payment network, not a jpeg parking lot. This unexpected bug is problematic and needs to be fixed. So what to do? After all, taproot is important for coinjoins, anonymity, and multisig transactions.

In the meantime, while waiting for a consensual update, we must filter these toxic transactions that also erode bitcoin’s decentralization. The accumulation of large transactions makes operating a node increasingly expensive.

In the short term, the solution lies with miners. They can filter transactions by going through a pool that has adopted the Stratum V2 protocol.

Or switch to the OCEAN pool, recently launched by Jack Dorsey and Luke Dashjr, which uses the bitcoin knots client to filter transactions.

Some cry censorship. But inserting mountains of data into a transaction was not possible before taproot (and segwit). It’s a return to basics!

Others will say that this “censorship” goes against the incentive system on which bitcoin is based. In other words, why would miners give up juicy transaction fees?

That’s quickly forgetting the ethics and the incentive not to transform bitcoin into an unreliable system plagued by pump & dumps of shitcoiners.