Reigniting Bitcoin’s Utility: Fees, Governance, and Competitive Layer-2s

Briefing Notes contain: (1) a summary of podcast content; (2) potential information gaps; and (3) some speculative views on wider implications for Bitcoin. Most summaries are for Bitcoin-centered YouTube episodes but I also do some on AI and technological advance that spill over to affect Bitcoin.

Summary

The October 21, 2025 episode of Supply Shock features Paul Sztorc arguing that durable security requires fee-backed usage, not custodial abstractions or marketing narratives. He contends that relay policies and a narrow dependence on Lightning have suppressed market signals, while competition across Layer-2s and client implementations can restore utility. The discussion emphasizes opt-in governance, backward-compatibility “ratchets,” and sidechains such as BIP300 to expand functionality without fragmenting Bitcoin.

Take-Home Messages

1. Security Budget Reality: Long-term security must be funded by fee-paying activity as the subsidy declines.
2. Policy–Incentive Alignment: Relay policies should reflect miner incentives so profitable transactions propagate and clear.
3. Competition as Engine: Diverse Layer-2s, sidechains, and client implementations can surface real demand and guide priorities.
4. Voluntary Upgrades: Backward-compatibility “ratchets” reduce coercion and keep upgrade paths predictable for users.
5. Avoid Custodial Drift: Overreliance on custodial “digital credit” risks sidelining proof-of-work’s settlement guarantees.

Overview

The conversation frames recent years as a stagnation period driven by an overreliance on Lightning and relay policies that do not reflect how miners actually earn revenue. Sztorc argues that fee-paying usage should be the primary signal of value, because miners ultimately select transactions based on revenue. He links a healthy fee market to network security as block subsidies wane and warns against narratives that substitute for genuine utility.

Governance is presented as an interplay among users, miners, and developers rather than a single locus of control. The exchange notes tensions between Bitcoin Core and Bitcoin Knots, posing a wider question of legitimacy and decision rights. He stresses that process design should surface market feedback and avoid social pressure that mutes dissenting yet useful ideas.

Competition is advanced as the corrective mechanism to revive practical features and adoption. Sztorc promotes sidechains via BIP300 to add capabilities without fragmenting the asset or exporting innovation to external systems. He favors compatibility “ratchets” so improvements accrue without forced client expirations or upgrade coercion.

The interview cautions that a “digital credit” endgame would re-centralize control and erode proof-of-work if custodial rails dominate everyday payments. He argues that privacy and usability gaps must close—such as address schemes that better fit routine payments—to keep activity on trust-minimized rails. The through-line is that measurable, fee-backed demand should determine what belongs on the base layer versus adjacent layers.

Stakeholder Perspectives

1. Miners: Prefer policies that maximize fee revenue and clear profitable transactions rather than filters that suppress demand.
2. Core and Client Maintainers: Emphasize safety and backward compatibility while seeking legitimate, opt-in governance for contentious upgrades.
3. Wallets and Exchanges: Need stable policies, better privacy, and smoother UX to support non-custodial growth at scale.
4. Developers and Entrepreneurs: Want open competition among Layer-2s and sidechains so new products can prove value without fragmenting liquidity.
5. Regulators and Policymakers: Track security-budget adequacy and custody concentration risks as payments migrate across layers.

Implications and Future Outlook

If client culture and relay policy shift toward letting fee discovery operate, usage that people will pay for can harden security as subsidies decline. Competing Layer-2s and sidechains will need to demonstrate concrete contributions to fee markets, usability, and safety rather than rely on rhetoric. A clearer scoreboard—fees, reliability, and observed user behavior—will help allocate attention and engineering effort.

Governance norms around dissent, compatibility, and software expiration will shape upgrade legitimacy and adoption speed. Where proposals like BIP300 can be evaluated on observable risk controls and incentive alignment, stakeholders can make decisions without coercion. If social signaling overwhelms evidence, coordination frictions will persist and slow utility growth.

Closing privacy and usability gaps is pivotal to preventing custodial drift and sustaining self-custody at scale. Wallet flows that deliver everyday convenience while preserving trust minimization can keep economic activity anchored to Bitcoin’s settlement assurances. Clear priorities around address design, propagation reliability, and user-visible performance will determine whether value accrues on trust-minimized rails or migrates to intermediaries.

Some Key Information Gaps

1. What fee-level thresholds are required to sustain hash rate as the subsidy declines toward zero? Establishing realistic thresholds is central to economic security planning and informs energy and market oversight.
2. What market structures would foster genuine competition among Layer-2s and client implementations? Identifying conditions that reward working solutions can reduce stagnation and guide resource allocation.
3. How would BIP300 sidechains affect miner incentives, withdrawal safety, and systemic risk? Assessing incentive alignment and failure modes can determine whether sidechains expand utility without new attack surfaces.
4. Which client-compatibility guarantees minimize coercion while permitting safe feature rollout? Clarifying compatibility norms enables opt-in upgrades and preserves user autonomy while advancing functionality.
5. Under what conditions does a “digital credit” path undermine Bitcoin’s trust-minimized properties? Understanding custody tipping points can inform safeguards that maintain proof-of-work settlement value.

Broader Implications for Bitcoin

Security Budgets in a Post-Subsidy World

As issuance declines, sustainable security turns on persistent demand for scarce block space rather than cyclical narratives. Jurisdictions that understand fee dynamics will design clearer market rules around mining, energy integration, and settlement usage. Over a 3–5+ year horizon, transparent fee metrics can become a policy reference point for evaluating network health and investment risk.

Market-Tested Layering as Policy Variable

Layer competition that demonstrates measurable contributions to fees and reliability can reduce regulatory uncertainty by clarifying who bears risk. Policymakers will be better able to distinguish custodial credit systems from trust-minimized settlement and tailor oversight accordingly. This differentiation should lower the cost of compliance for non-custodial services while tightening standards for intermediaries.

Governance Legibility and Institutional Adoption

Repeatable, opt-in upgrade practices with strong compatibility norms can lower governance risk perceived by institutions. As processes mature, larger capital allocators can model change risk and participate without fearing protocol instability. Clearer governance lowers the discount rate applied to Bitcoin-centric infrastructure and long-lived applications.

Privacy-Usability Convergence and Self-Custody Scale

If privacy features integrate cleanly into familiar user flows, self-custody can scale without relying on custodians for convenience. This convergence would support payments, identity-adjacent use cases, and enterprise workflows on trust-minimized rails. Over time, consumer protection policy can shift from gatekeeping to outcome metrics like loss rates and recovery tooling.

Resilience Against Financial Re-Intermediation

By prioritizing features that users will pay to use directly, Bitcoin can resist a drift back to centralized “digital credit.” Fee-backed settlement demand anchors value in the base system and reduces systemic single-point-of-failure risks. Over multiple cycles, this alignment supports a more diverse ecosystem of non-custodial services and regionally resilient payment networks.