As BTC transaction fees increase, Bitcoin’s Lightning network needs better custody solutions

The discourse of crypto unintelligence has been thrown into turmoil by this week’s major Bitcoin crisis.

Until recently, you could have sent a bitcoin transaction quite cheaply, likely at a rate of 1 satoshi per vbyte (equivalent to a fraction of a cent). With the increasing use of non-fungible token-like “inscriptions” and the BRC-20 token standard on Bitcoin, normal fee rates are comparatively absurd. At the time of writing, sending a bitcoin transaction would cost around 100 satoshis per vbyte in a reasonable amount of time.

All in all, it’s actually still pretty cheap – but it’s a lot more expensive than bitcoiners are used to. And so people are upset. The thing is, they’re not upset about it because the fees are high, but because the fees are so high.

You see, the Bitcoin blockchain has always had tight block space. “If 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 2015-2017 that led to the introduction of Segregated Witness (SegWit) to Bitcoin and the Bitcoin Cash hard fork.

(Notable: SegWit solved the transaction malleability problem and opened the door to our recent reason for the fee increase; funny how that works).

This time bitcoin fees have skyrocketed because many more people want to use bitcoin. And not to send illicitly good money to others or because they want to store wealth, but to place monkey images on the Bitcoin blockchain and speculate on tokens.

Blasphemous. Bitcoin was supposed to be used for financial transactions, hence the commotion.

Aside from the moral argument of what bitcoin should be used for, bitcoiners have never really gotten a good response on how the network should deal with periods when transaction fees rise. Canned responses that “people will just pay for blockspace” or “the free market will take care of it” are creating a world where the only people who can afford to transact on the network are the bitcoin rich are.

ugh So much for the disempowerment of rent seekers.

Of course, high bitcoin fees offer some potential solutions. The most cited solution is Bitcoin’s Lightning Network, which has proven to be a viable means of sending Bitcoin quickly and cheaply. If you’re already on board and using the Lightning Network (and know what you’re doing), that’s absolutely awesome. Transactions feel magical. They’re fast and cheap (when they don’t fail).

The problem, however, is that one cannot get to layer 2 without first sending transactions on layer 1, in this case the currently comparatively expensive bitcoin blockchain. It’s like most buildings can’t get to the second floor without going to the first floor first. Either way, you can just wait for the fees to go down or for the elevators to clear (or take the stairs, I guess?). But what if the fees don’t go down? What happens when people keep pouring into the building you’re in?

One way to solve this problem could be third-party custody. That’s like your friend setting up a zipline from another building to the second floor through a window he opened for you, allowing you to get to the second floor without ever touching the first floor.

But doesn’t it feel dirty?

Unfortunately, Bitcoin’s current design probably doesn’t allow for the entire world to efficiently integrate above Layer 1. Perhaps the great philosophical discussion of financial self-sovereignty ends for most because being fully self-sovereign is really difficult, even with bitcoin.

Our future conversations around Bitcoin, then, should probably focus on one thing: compromise.

Maybe it’s okay for me to use my bitcoin under custody because it’s easier for me and you’re not using it under custody. Fine. Maybe I’m wrong and you’re right. Perhaps it’s none of your business how I use my own money (or rather, my custodian’s money).

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

You can use both. We just deserve more clarity and options when it comes to these particular tradeoffs.

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