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.
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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…