Brc-20 Brings Tokenomics To Bitcoin, Spiking Transaction Fees
A recent craze in tokens on Bitcoin using ordinal inscriptions has spiked fees to levels usually only seen during a bull market frenzy. Debate continues, but miners are profiting in the meantime.
Brc-20 Tokens
The ordinals and inscriptions craze that we covered a few months ago focused on the gaining popularity of non-fungible tokens (NFTs) on Bitcoin and their impact on transaction fees, which were around 5 sat/vByte on average in late February through March.
In our last article about ordinals, we observed that there wasn’t a major increase in transaction fees, beyond the time of the 100,000th inscription.
“As the inscription count approached 100,000, people rushed to get their inscriptions confirmed before or exactly at that number. We saw the largest increase in fees around this time, which is shown above in dark green. By quickly glancing at the fee rate chart, it’s clear when the 100,000th inscription was made because of the most amount of fees greater than 25 sat/vByte.” — All Eyes On Ordinals: Addressing Bitcoin Decentralization & Block Space Concerns
The inscription count reached 1 million on April 8, about a month and a half after the publication of that piece. Now, less than another month later, the total number of inscriptions has reached over 3.4 million, thanks to a new type of text-based inscription.
Brc-20 tokens are a kind of token that uses the same inscription model in the form of text to deploy and mint a token on top of bitcoin, and when following the ordinal protocol, can be transferred to other taproot addresses.
Brc-20 transactions have introduced a token standard for bitcoin which is similar in theory to that of the ERC-20 standard built on Ethereum, enabling the minting and transfer of tokens between peers. These transactions are made possible by ordinals technology and utilize the native scripting language of Bitcoin. The brc-20 token standard allows for tokens to be named, have a set supply, and be transferred between parties — all assuming you opt-into ordinal theory, as none of this changes Bitcoin’s base-layer consensus rules. Given the on-chain nature of these tokens, the use case for these tokens today is as follows: speculation and gambling.
In prior issues, we have explained about ordinals and inscriptions and enabled through both the SegWit and Taproot soft-fork. Readers can read more information on the topic here:
Much of the controversy around ordinal inscriptions is that they are an alternate use of bitcoin block space for something other than a purely financial transaction. This has led to a heated internal debate about whether or not inscriptions are a net good for the protocol, or whether this type of bitcoin transaction is an exploit of some sort, which damages the base layer’s efficiency as a settlement layer.
Our view is simply that inefficient uses of block space will be priced out as fees increase which will lead to efficient use of block space until fees go down, and the cycle starts again. In other words, the free market will work itself out in regards to bitcoin transaction fees.
That isn’t to say there aren’t benefits and drawbacks of inscriptions and brc-20 tokens for Bitcoin users. Let’s dig into their effects on Bitcoin’s base layer…
The Impact Of Brc-20 Transactions On The Bitcoin Network
With brc-20 inscriptions taking off in recent days, the daily transaction count across the Bitcoin network has smashed daily records as it rocketed to all-time highs.
Shown below is a histogram showing the distribution of daily transactions per day from 2012 through present day, with the three highest readings all happening in the last week. Historic, and it is a result of the brc-20 and inscription frenzy currently underway.
Editor’s Note: While the above chart may seem to read the opposite of the analysis, histograms display the density of data along the y-axis (vertical line) that occur along the x-axis (horizontal line). The three labeled data points on the bottom right of the chart show that the most number of transactions have only happened once, while the data to the left of those numbers shows that the number of transactions in that lesser range have happened on a more frequent basis.
When digging deeper into data from Dune Analytics, we can see that brc-20 inscriptions make up a majority proportion of the on-chain transactions, with 53.7% of transactions on May 1, a day that broke the all-time record for the most on-chain transactions made in the span of 24 hours.
The surge in transaction count tied to brc-20 tokens — which has entirely arisen from a desire to speculate on micro-cap “memecoins” — has brought about a massive spike in fees. Along with stunningly high fees, the mempool is the most backlogged it has been in years. As a refresher, the mempool is a queue (individualized to each node) where transactions wait to be included in a block and the order is chosen by profit-incentivized miners who select transactions with the highest fees first.
Fees have rocketed to highs not seen since the peak of the 2021 mania, forcing those who want immediate on-chain settlement for more economic and purely transactional uses of the network to pay far greater rates than in recent memory.
We can look at fees as a percentage of miner revenue to contextualize just how significant the current spike is for miners. Over the past 24 hours, more than 13% of revenue has come from fees, a notable increase and certainly a welcomed one for a mining industry embattled with a historically low hash price and tightening regulatory scrutiny. Another way we can visualize this relationship is the Fee Revenue Multiple (FRM), a calculation that measures a blockchain’s security by comparing the total revenue earned by miners (block subsidy plus transaction fees) to just the transaction fees alone. It tells us how secure a blockchain is when block rewards are no longer available. With the fee spike, the FRM is plunging to lows usually only seen during bull market frenzy levels.
The Debate Continues
Many in the bitcoin space are against the recent trend due to the costliness to make a simple bitcoin transaction on-chain, but others have raised the point that this development will further incentivize the development and usage of second-layer solutions like the Lightning Network, which will ultimately be necessary if Bitcoin is to reach global adoption status.
We mostly fall into the latter category, as we are indifferent to how people choose to utilize the network as long as they are following network consensus parameters. The current inscription craze led by brc-20 token minting and transfers, even if on a relative basis, is transitory in nature as a relative share of block space and will likely be a net positive, as miners are ultimately incentivized by a market-profit mechanism and detractors will work on building layered solutions on top of Bitcoin. If there is an increased demand from buyers willing to pay top-market rate for block space, you must be willing to either wait or simply pay more.
In the future, on-chain settlement is going to become less frequent in nature for the average user if bitcoin is to become the predominant monetary settlement network of the world, so the current environment on-chain is nothing to worry about. It’s a healthy development in an emergent and entropic system.
Final Note
Whether certain users like it or not, inscriptions are a Bitcoin phenomenon that are here to stay because they are a valid transaction by their very nature.
The net effect of this technology, aside from the different capabilities it enables — for speculative purposes or genuine usefulness — is that it is contributing to the net revenue of profit-incentivized miners, the very mechanism that never fails to keep Bitcoin’s timechain ticking.
As Bitcoin’s block subsidy trends asymptotically to 0, fee revenue as a percent of miner revenue is guaranteed to rise, and absolute fee revenue in bitcoin terms is likely to rise with it, regardless of the current dollar exchange rate. The inscription trend simply looks to be an accelerant and it’s up to users and developers to find scaling solutions — albeit on a sooner time frame than many expected.
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