A Plague of Frogs: An argument for high fees

…I will plague your whole country with frogs. The Nile will teem with frogs. They will come up into your palace and your bedroom and onto your bed, into the houses of your officials and on your people, and into your ovens and kneading troughs. The frogs will go up on you and your people and all your officials.

— Exodus 8:1–4

For the token savvy among you you may realize that the above biblical quote is not some sort of sanctimonious preaching but a reference to the popular bitcoin based token community RAREPEPE.

RAREPEPE is basically a bunch of tokens and cards registered on the bitcoin blockchain, users trade/collect these cards and also play games with them etc It’s easy to write PEPECASH off as some sort of adolescent immature troll token, and you’d be right, but the fact is that the little green frog hits right at the heart of the scaling debate.

To get biblical again I recently watched a podcast with Bitcoin Jesus. I agreed with a lot of what he said however he made the point that Bitcoin Core supporters intentionally want high fees and that whilst they are talented engineers they are economically ignorant. This is based on the concept that by increasing bitcoin fees people will use bitcoin less.

I would argue that most Core supporters understand this concept well and agree with it, however they are taking into account a couple of other economic principles as well.

“The tragedy of the commons” i.e. if you make a public service free to use it will be abused. In respect to bitcoin scaling you can interpret this as if you keep fees low on chain then the capacity will be taken up not just by bitcoin transactions but by RAREPEPE tokens, ICOs, app coins, micro payments, experiments, tests etc.

“Gresham’s law” i.e. bad money drives out good, or i’ll spend fiat and save bitcoin.
Whilst bitcoin price is rising and fiat is falling there is no incentive to use bitcoin for payments just yet, we need to focus on the store of value first and payments later when the time is ready.

Implications of Gresham’s law and The Tragedy of the Commons

I want to argue that by decreasing the fees you wouldn’t necessarily see a rise in consumer focused transactions (due to Gresham’s law) but rather you may see an increase of tokens and applications using the bitcoin blockchain (due to the Tradgedy of the Commons)

A while back I was attending a bitcoin meetup at a restaurant that accepted bitcoin, when I tried to pay for my meal I realised I didn't have enough bitcoin on me at the time. I did have enough cash, any sane person would just pay with cash however I quickly pulled out my coinbase app and bought $20 of bitcoin via credit card to pay for the meal via bitcoin. This made no sense but I justified it at the time as some how “supporting the cause”. I am sure many users have had a similar experience but if we are honest we can see that bitcoin is not ideal for day to day commerce at the moment. There are use cases such as cross border payments or illegal goods etc but apart from supporting an anti fiat political position it isn’t very useful to pay with bitcoin at this moment in time.

Further more if I had kept the bitcoin it would be with 40x at time of writing. With out a clear economic incentive to using bitcoin for everyday payments it is unlikely it will compete with existing payment options. Even if bitcoin were to become more usable than say Apple Pay you would still have to take Gresham’s law into account and it’s likely users would Hord or HODL bitcoin and spend fiat until fiat stops being an option.

Another common argument I hear is that people have stopped using bitcoin and have moved to Alt-coins due to the high fees. I don’t deny this is true for some people however I think this is better explained by Gresham’s law and the fact that Alt coins a.) do something different than bitcoin. b.) let’s be honest they think they can get richer quicker with a low price Alt-coin.

“Tokens on Bitcoin Cash”

I often use the Counterparty protocol, before Ethereum this was the main protocol used to register tokens and perform ICOs on the bitcoin blockchain. However due to high fees bitcoin stopped being useful for creating tokens and people started to move to Ethereum as it was cheaper. Now that we see Ethereum fees rising, a lot of groups I speak with are starting to look at other cheaper chains to create their tokens. Quite a few token based applications I have spoken with are now very interested in switching to bitcoin cash at the moment, mainly because they seem to be promising “always cheap” transaction fees and it has a large community and network effect with many existing bitcoin developer libraries that can be easily ported over.

In the next few months and years we may see a reemergence of tokens on bitcoin via bitcoin cash, and all it takes to fill up the blocks is one app to go viral.
One app that lets people create their own token, create their own RAREPEPE, that they can then buy and sell P2P all directly on the bitcoin cash chain.
This is not just a hypothetical argument, these apps are already built and are one of the reasons Ethereum transactions became expensive. The Ethereum community seems to understand this and are actively pushing layer 2 solutions whilst seeing the base chain as a settlement layer.

Conclusion

I like to see my self as an empiricist so rather than stating this theory as a definite conclusion I offer it as a possible outcome. Perhaps bitcoin can scale just fine on chain, perhaps we won’t see a mass immigration of tokens to bitcoin cash, perhaps we do see tokens move but bitcoin cash handles them gracefully. Having said that we all know that the effects of economic policy can be far removed from the initial intentions, by making bitcoin cheap and useable again you may not get a wave of commerce but a plague of frogs.