Issue 15: The best use of Bitcoin's block space
This issue of the newsletter is a roundup of posts featuring the launch of Runes and what it means for Bitcoin's limited block space.
If you are short on time, here are the takeaways:
Runes dropped last week on the Bitcoin blockchain. The new token standard launched on the same day as the halving and immediately transaction costs on the network skyrocketed. Check out the post about Runes and why this is happening.
The underlying big deal is that Bitcoin’s block space is a scarce resource. This is by design. The scarcity can lead to complications (there have been block space battles in the past) and as we saw this week, limited block space can result in high transaction costs when there demand is popping. Check out this post about block space issues.
*I’m trying something new this week by adding the TLDR links at the top of the email. Let me know what you think.
Market news
A decision about the Ethereum ETF from the SEC in May seems unlikely.
A recent piece in Reuters reported little headway in the lead-up to key decision dates at the end of May on the first handful of ETH ETFs.
Here’s a quote from that story, which sums up the current situation, "It seems more likely that approval will be delayed until later in 2024, or longer," said Todd Rosenbluth, head of ETF analysis at data firm VettaFi, who is tracking the issue closely. "The regulatory picture still seems cloudy.”
To make matters even more interesting, Consensys a company that has developed and incubated numerous Ethereum-based apps and services, sued the SEC on Thursday to legally compel government agencies to clearly define what Ethereum is and how it should be regulated.
More context about Runes and the block space debate
There’s a smoldering issue within the Bitcoin community and it focuses on the best way to use Bitcoin’s increasingly scarce block space.
This week we unpacked what the great block space debate is about and took a look at a new Bitcoin innovation at the heart of the debate: Runes
Runes create a new kind of token standard or a new way to add information to an individual satoshi during a transaction. Remember a satoshi is the smallest fraction of a bitcoin — there are 100 million satoshis or “sats” are in on BTC.
Runes might sound familiar because they are very much like Ordinals, which launched in early 2023, and serve a similar function. Both Ordinals and Runes make it possible to give satoshis non-fungible token-like capability.
A big difference between Ordinals and Runes is that the new standards introduced with Runes makes it easier for developers to create NFTs on Bitcoin.
The ease of creation might help explain the sudden popularity of Runes, there are already dedicated marketplaces and an entire series of Bitcoin-based NFTs.
Read more about Runes
So far, none of this might matter to you. Maybe you aren’t an NFT collector, and you're not following the meme-like craze of collectibles on Bitcoin.
Fair enough.
But the introduction of Runes is triggering larger conversations and ishaving greater impacts beyond NFT collectors.
The creation of new token standards on Bitcoin (like Runes and Ordinals) is driving up network transaction fees. The uptick in fees will affect everyone transacting in Bitcoin.
Transaction fees spike because Bitcoin’s block space is a finite commodity. Each Bitcoin block is only designed to hold so much data — and in part, the block size constraints are there to ensure overall network efficiency and security.
But, like all else, when demand for block space exceeds demand, the price goes up.
The overall transaction cost climbed dramatically following the launch of Runes. It has since stabilized, but the transaction fee spike did resurface an old debate about the best way to use block space.
This is not the first time this debate has come to a head. The last time the Bitcoin block space wars escalated, the result was two major forks.
In 2017 Bitcoin Cash launched as an alternative to Bitcoin, but with larger block sizes to make it more friendly for daily transactions.
Also that year, the main Bitcoin network adopted Segregated Witness, which essentially split transaction data so that it didn’t need to be included in final block confirmations (meaning more transactions could be included in each block).
We’ll see where the block size debate leads this time.
Read more about Bitcoin's block space issues
If nothing else, this whole situation has got to make you appreciate the governance and adaptability of open, permissionless networks.