Crypto Is a Circus Right Now
And it's not helping solve the problems that distributed ledger tech can easily solve.
Over the course of the last two weeks or so, the two leading crypto market blockchains have experienced a massive explosion in cost to transact on the networks. On April 30th, the average cost to transact on Bitcoin was $2.48. On May 8th, the average price spiked all the way to $30.36.
Things were not much better on Ethereum where average transaction fees spiked from $5.66 on April 15th up to $27.61 on May 5th. The catalyst driving these enormous spikes in fees are very similar. For Bitcoin, it’s a drastic increase in the number of Ordinals NFTs that are being inscribed on the network blockspace. For Ethereum, it’s the alt coin trading from memecoins like PEPE that have been driving fees much higher. The value of these activities are very much up for debate but the impact is the same - it’s a circus, and an expensive one.
Interestingly, a byproduct of the high fee environment currently being experienced on Bitcoin is for the first time in nearly 12 years, daily active users on Litecoin surpassed that of Bitcoin on Monday according to data from CoinMetrics. That preference for LTC over BTC by active addresses continued on Tuesday with 810 thousand wallet addresses engaging with the Litecoin network compared to 772 thousand for Bitcoin. BTC was again the favorite on Wednesday.
Lightning The Silver Bullet?
When average transaction fees are this high, it makes networks like Bitcoin largely unusable. And Lightning unfortunately isn’t really the answer here because base layer network fees still have to be paid when opening a new channel.
Furthermore, growth on Lightining appears to be starting to slow down at least for the time being. With 5,355 BTC in Lightning capacity as of Wednesday, that’s the lowest level of spending capacity on Lightning since the banks started melting down in mid-March. Frankly, it’s almost comical that the chain’s main scaling network is so small:
Adjusting the BTC to USD spending capacity, Lightning has less than $150 million in TVL and it’s still the largest “DeFi” protocol built on the Bitcoin network by far according to DeFi Llama.
For some possibly depressing context if you’re in the Bitcoin-only camp (I’m clearly not), Tornado Cash has more value locked than Lightning and that protocol has been sanctioned by OFAC for 9 months.
But this is diverting from the larger issue. Which is simply that I can’t convince a non-crypto normie that crypto is a better alternative to traditional financial rails if the cost to transact is cheaper the old way. That seems like a pretty straightforward complaint.
Disruption is Inevitable. I Think…
I shared a new idea with members of BlockChain Reaction Thursday evening. This idea speaks directly to the issue that I’ve just laid out above. It’s a higher risk idea but I think it’s one that addresses a lot of the problems I currently see in the market. It’s not a memecoin. It’s proof of work. It’s actually scalable. And it’s not a coin I’ve ever mentioned before.
I wrote it earlier in the day and scheduled it to publish shortly after dinner time. As fate would have it, I was buying honey at a farmers market right around the time that note went live. This is the second season I’ve been buying honey from this particular merchant but it’s the first time I’ve been charged a fee for using a credit card. This is what crypto is supposed to fix.
An extra dollar on $20 doesn’t seem like much in aggregate, but it amounts to a 5% vig just to process a transaction that costs a fraction of a penny on other networks. When I asked him why, he said his processor fees were going up. So this is where we are.
We have regional banks falling apart, small businesses squeezing customers for payment network access, the case for true peer to peer, self-custodial crypto has never been so obvious and yet Bitcoin’s block space is being used to store images like the one above. Sure, the numbers on the casino screen are moving around. But I still can’t tell if we’re winning or losing.
Disclaimer: I’m not an investment advisor.