BIP 110 and the Cost of Policing Bitcoin's Block Space

BIP 110, a proposed Bitcoin Improvement Proposal, aims to address the issue of miners collecting fees for including arbitrary data in transaction outputs, while nodes are responsible for the cost of downloading, validating, and storing that data. The authors argue that this creates a subsidy for data storage and threatens Bitcoin's use as a currency.

To tackle this problem, BIP 110 proposes a temporary soft fork that would limit OP_RETURN outputs to 83 bytes, restrict data pushes and witness items to 256 bytes, and impose other restrictions on large output scripts and Taproot features.

Adam Back, a Bitcoin developer, acknowledges the problem but opposes the proposed solution. He believes that Bitcoin is fundamentally about money and that spam should have no place in its timechain. Back argues that an annoyance fitting within Bitcoin's block size limit should not justify a contentious consensus change, especially one that can be bypassed, interferes with legitimate scripts, and lacks technical or economic agreement.

The proposal identifies a real externality but introduces an asymmetric bargain: reducing data filtering in exchange for a new consensus precedent, a more complicated upgrade path, and a risk of a minority chain. BIP 110 is a policy dispute that has become a consensus proposal, crossing the boundary between node policy and Bitcoin consensus. It would make several currently valid transaction structures invalid for one year, after which the restrictions would disappear.

While BIP 110 offers thoughtful safeguards and acknowledges certain constraints, its strongest case lies in addressing the issue of block space competition and the unequal costs imposed on nodes. The proposal provides a more nuanced approach than simply labeling steganography as costless. However, the deployment requires 55% miner support, with the current rate at 2.14%, leaving the proposal's fate uncertain.