What are your thoughts on VeriBlock being responsible for one quarter of bitcoin transactions in January by using the OP_RETURN script for proof-of-proof? Could this and other such uses of the Bitcoin blockchain have an impact on the fee market? Would it affect the use of bitcoin as money?

"What are your thoughts on VeriBlock being responsible for one quarter of bitcoin transactions in January..." "by using the OP_RETURN script for proof-of-proof?" This is a question from Jonathan. I am not familiar with the case of VeriBlock, but nevertheless... Let's assume that is an accurate representation and VeriBlock is using a quarter of bitcoin transactions... in January. Jonathan asks, "Could this and other such uses of the Bitcoin blockchain have an impact on the fee market?" "Would it affect the use of bitcoin as money?" This is a great question which comes up a lot. What is a valid transaction versus a spam transaction? The answer is really simple. We have two ways to determine whether a transaction... should be on the Bitcoin system.

One possible way is to set rules in the protocol that differentiate between what is spam and what is not

One possible way is to set rules in the protocol that differentiate between what is spam and what is not, by allowing the developers of the Bitcoin Core protocol to pick and choose which applications [are allowed]... based on a normative judgement about valid use cases of Bitcoin. You might think that is an easy answer: money is the [only use case], everything else is superfluous. Then again, which applications of money? Is multi-signature just fancy scripting? What about the Lightning Network? Should that be allowed? Maybe some Core developers are not so interested in it. What about time locks and other forms of smart contract script? This is a very slippery slope.

In Bitcoin today, we use a market-based mechanism

In Bitcoin today, we use a market-based mechanism. The fee market enables pricing of transactions... based on supply and demand, that allows the sender to signal to the network how important the transaction is, thereby pricing the cost of [block] space across the entire market... [in comparison with] other applications that might not be as important. Fees are not just pricing whether the transaction [should be] confirmed or not, but how [quickly] the transaction is confirmed. In this particular case, the market is pricing VeriBlock transactions, which are using the Bitcoin blockchain... for proof-of-proof. Apparently, that is the capacity the market has priced to allocate for that particular application. Does it affect the use of bitcoin as money? It certainly prices the scarce resource [of block space]. This fee market prevents denial-of-service attacks and spam attacks on the network. It creates a cost to post transactions that are not important to the sender. Spam is expensive on Bitcoin because of transaction fees, which prevents that attack against the network.

Is there a problem with the Bitcoin network?

I have not had any difficulty [sending] my transactions on the Bitcoin blockchain with SegWit [addresses]. I have not had any difficulty making them on Lightning, when opening and closing channels. I always use the minimum fee possible, which is one satoshi per byte. I [enable] replace-by-fee (RBF) in case I need to bump the fee later if the transaction is not being confirmed. But I haven't bumped a fee in six months or more. I send transactions regularly, on a weekly basis. They are confirmed within the first or second block. So is there a problem with the Bitcoin network? No. There is nothing wrong with using a quarter of all bitcoin transactions, as long as you pay for them.

In the absence of a fee market or market-based solution for prioritization and capacity management within the Bitcoin blockchain, we have two options

We need to understand that, in the absence of a fee market or market-based solution... for prioritisation and capacity management within the Bitcoin blockchain, we [have two options]. We could assume that resources are near infinite and [allow] everyone to send transactions for free. That will have economic impact and effectively subsidize those who are sending transactions. We will need to subsidize miners through other means, probably inflation, which will cause further centralization of nodes and mining into fewer hands. There is still a cost. Instead of paying that cost in fees to maintain decentralization, you pay the cost... by losing decentralization behind the scenes, in subtle and long-term ways. That is a very dangerous path. We have seen other blockchains try that [path]. If you want to try it, choose another blockchain. The other option, as a substitute for market forces, is centralized control and decision-making by committee. We would give developers the power to choose what a valid transaction is. Both of those choices are inferior to market forces. I don't think there is anything wrong with someone using the blockchain's capacity to do what they want, as long as they are willing to pay the fee and compete in the market.