Bitcoin is seeing a lot of traffic these days. Block sizes, mempool transactions, hash rates and fees — they’re all trending up.
A recent fee spike on the Bitcoin network was — fortunately for users — a brief outlier, apparently caused by a BRC-20 NFT craze that subsided within the span of a few days. Still, transactions and fees continue climbing on the network with increased activity that now extends beyond purely trading and storing value.
Increasing block sizes and jumps in transaction fees appear to be the result of activities that are usually more at home on rival network, Ethereum. Due to its baked-in virtual machine design, utilities like NFT minting and DeFi trading are commonplace on Ethereum. The Bitcoin network, on the other hand, only enabled similar capabilities as a sort of add-on through the Taproot upgrade in 2021.
Avi Felman, head of digital asset trading at GoldenTree Asset Management, and Jonah Van Bourg, Cumberland’s global head of trading, spoke to Blockworks on the 1000x podcast about the pressures of new activities and the potential growth of a development community for the Bitcoin network.
Differing economic architectures
Felman notes that Bitcoin’s economic architecture is very different from Ethereum’s. Despite activity “going through the roof,” holders of bitcoin see little to no direct benefit, with fees going exclusively to miners. On Ethereum, anyone holding ETH can choose to stake it and participate in the benefits of increased traffic.
When Ethereum experiences an increase in usage, fees are burned, reducing token circulation. The opposite is true with Bitcoin, Felman argues. “You just get a worse dynamic because the more activity that exists on Bitcoin, actually, the more supply of bitcoin is probably gonna hit the market.”
“And it also deteriorates the user experience,” Van Bourg adds, referring to the recent withdrawal suspension of bitcoin on Binance. The largest crypto exchange was forced to pause BTC withdrawals and hike fees to allow the Bitcoin network to catch up on pending transactions.
“Stakeholders of ETH are aligned because they literally are staking it and earning the rewards and processing the blocks, constructing them.”
“The beauty of proof-of-stake,” Felman says, “is that all of those fees that are burned and all the fees that are generated are now paid back to owners of the asset.”
Should we be worried?
While the security of the Bitcoin network is “possibly more robust,” Van Bourg says, its capacity to host more applications exhibits flaws.
Van Bourg asks, “Should we be worried about Bitcoin dominance as a result of the fact that transactions have exploded on Bitcoin, an L1 that isn’t necessarily built to work like Ethereum and is deteriorating its UX?”
Felman expects a “tech solution” to the problem, with the potential growth of a community of developers on the network. Van Bourg promptly disagrees, noting that “there’s no community of developers that’s all in agreement working on Bitcoin the way that there is on ETH.”
“There are Bitcoin core devs, but they’re split into factions.”
Felman counters, “Ordinals were developed. These BRC-20s were developed.”
“I think what’s happening right now is you’re seeing the origin sparks of an organic development community for Bitcoin.”
Felman agrees that such a community does not yet exist. He expects that the number of people that are “trying to figure out how to build on Bitcoin,” will double over the next few months “based on this activity,” however.
“People flock to where you can make money at the end of the day. And the reality is that you can now make money building on Bitcoin.”
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