The Bitcoin blockchain is currently bloated with useless data and memecoins, which makes transactions slow and expensive. Luckily, there are ways to fix this.

Bitcoin transactions have become very expensive recently and the backlog of unconfirmed transactions (the so-called Mempool) has become bigger than ever. This is caused by a loophole in a recent update of the Bitcoin protocol called Taproot, which was introduced in 2021. This bug allows data such as JPEG images to be stored directly in the Bitcoin blockchain, which is not useful. This consumes the blockchain’s rare space and hinders the actual use of Bitcoin.

A few years ago there was a big discussion about how Bitcoin can scale, when transaction fees were also high and the Mempool full. The “Big Block” party argued that the limit of one megabyte per block should be raised to allow for more transactions per second. The Bitcoin core developers, on the other hand, wanted to keep the blockchain as small and efficient as possible in order to preserve Bitcoin’s decentralised character.

In the end, the core developers won the “scaling war”. They introduced a method called SegWit, which reduces the space required for each transaction on the blockchain. At the same time, SegWit enabled the introduction of a second layer on top of Bitcoin that makes transactions much faster and cheaper, called the Lightning Network.

The “Big Blockers” created several competing versions of Bitcoin such as Bitcoin Cash, Bitcoin Gold or Bitcoin SV, which are hardly relevant today. The decision by Bitcoin’s core developers to keep the Bitcoin blockchain small and efficient has proven to be the right one. SegWit solved the problem of expensive Bitcoin transactions in 2017/2018.

It is a bit absurd that after all these discussions and successful efforts to reduce the amount of data per transaction, the blockchain is now being clogged up again. The reason for this is a new protocol called Ordinals which enables two things:

• One can store larger amounts of data directly in the blockchain instead of using a file store like the Interplanetary File System (IPFS), which is much better suited for this task.
  
  
• Through a new standard called BRC-20, tokens can be created directly on the Bitcoin blockchain instead of using smart contracts on a second layer, which is a more sophisticated way to do that.

One may wonder if the developers of Ordinals and BRC-20 are really so ignorant that they don’t see the damage they are doing to Bitcoin, or if they are doing it on purpose.

Recently, a large proportion of Bitcoin transactions has been used to launch NFTs and Memecoins such as PepeCoin, whose price rose meteorically, only to quickly fall again. Although one might question the need for another coin with a funny animal on it, there is nothing wrong with NFTs and Memecoins in general. If people want to spend their money on this stuff, let them do it. However, there are better ways to create tokens than bloating the blockchain with a lot of data, namely through smart contracts. Bitcoin cannot handle smart contracts directly, but there are second layer solutions like Rootstock, Liquid or Stacks that can.

There is a lively discussion about how to deal with this situation. Should the core developers close the loopholes that have made this possible? Some argue that this would be “censorship”. I don’t think so. Fixing an obvious problem that makes Bitcoin slow, expensive and hard to use has nothing to do with censorship, it is just necessary maintenance. Freedom of expression is not at risk here. It is still possible to create all kinds of tokens on Bitcoin, but it should be done by smart contracts.

Some people believe that high transaction fees have a good side, as they are a source of revenue for Bitcoin miners. The block reward paid for each new block will decrease over time, so miners will need new ways to get paid for their services, otherwise Bitcoin cannot operate economically. This is correct, but the solution cannot be bloating the blockchain and rendering it useless.

In my opinion, the creation of NFTs and other tokens should be completely separated from the base layer of Bitcoin, the blockchain. All of this can be handled more efficiently through sidechains. The Bitcoin blockchain must remain lean and clean. Cheap transactions are important for the everyday usability and wide acceptance of Bitcoin.

But what about the reasoning that miners need high transaction fees to keep the Bitcoin network alive? Of the three smart contract solutions mentioned above, Rootstock is the one that can solve this problem, too. Its sidechain, which enables smart contracts, is pegged to the Bitcoin blockchain through a method called Merged Mining. This means that the same miners who run the Bitcoin network also mine Rootstock’s native token, the Smart Bitcoin (RBTC). Its value is pegged 1:1 to Bitcoin.

This gives them an additional revenue stream that can be scaled without clogging up the basic Bitcoin blockchain. I can imagine that people are willing to pay much higher fees for sophisticated decentralised financial services than for sending Bitcoins. If DeFi on Bitcoin grows, the revenue for miners will increase, too.

The current situation is a bit annoying indeed. It keeps Bitcoin from expanding and depresses its price. However, it may have a positive effect. I suppose that more and more people will realise that a second layer pegged to the Bitcoin blockchain through Merged Mining is exactly what we need for Bitcoin to flourish.

By Aaron Koenig