key takeaways
- BRC-20 Token Launched on Bitcoin in March 2023
- Transaction fees hit an all-time high in May 2023 as network activity picks up
- Bringing Memes and NFTs to Bitcoin Has Caused Controversy
- Some argue that rising fees are vital to the security of the network, while others scoff at the activity as being far from the “vision” of bitcoin.
We live in an inflationary world. Food prices, rent, energy – everything seems more expensive. However, it is not limited to the legal world. Bitcoin users have recently seen a hike in fees. So why is this happening and what does it mean for bitcoin? And what does this strange concept of NFTs have to do with anything on bitcoin?
Bitcoin Fees Rocket Up in May
First, let’s look at a chart presenting bitcoin fees over the past three years to show the spike in fees. Obviously, the vertical bounce is lit in the first week of May.
While bitcoin fees may increase regardless in the future (and we’ll get to that in a moment), this wild spike in May 2023 is something I never thought I’d say in relation to bitcoin: Meem.
Specifically, the BRC-20 protocol, which is a token standard inspired by ERC-20 tokens on Ethereum. To explain this, we first need to look at the bitcoin ordinals, as they are what made all of this possible. And yes, it’s all on the bitcoin blockchain.
What are bitcoin ordinals?
Bitcoin was always seen as a “pure” blockchain. There was no room for immutability, meaning that every bitcoin is identical to every other bitcoin. No NFT nonsense here, thank you very much.
This changed in January 2023 when the Ordinal Protocol was invented. In simple terms, the Ordinals Protocol is a system for marking each satoshi, the smallest denomination of bitcoin (each bitcoin is divided into 10 million satoshis). These marked satoshis can then be tracked and separated from other satoshis, meaning they are technically “untraceable”. And so, against all odds, we (sort of) have bitcoin NFTs.
The markings on satoshis are known as “inscriptions”. These inscriptions were made possible by the November 2021 taproot upgrade to the bitcoin network. The protocol is known as Ordinals, so named due to the fact that the transfer scheme for satoshis depends on the order of transactions.
While this all sounds a bit complicated, compared to NFTs on other blockchains, it is very primitive and basic. There are no smart contracts here. Sidechains are not necessary. Everything is inscribed directly on the bitcoin blockchain.
What are BRC-20 tokens?
Two months after Ordinals came into the world, an experimental token standard for ERC-20 tokens on Ethereum, named BRC-20, was launched in March 2023. This makes the token standard Redeemable token within a simple protocol. You may be suspicious of where this is going. Ability to trade alternative tokens within this protocol of bitcoin? Yes ma’am
In the chart below, I have presented the top 10 BRC-20 tokens by market cap. As anyone would be able to guess pretty quickly by looking at the names, a lot of these are memes.
(Sidenote – eagle-eyed readers may also be able to deduce from the supply of some of these tokens that they are memes. Personally, I enjoy approving Satoshi Nakamoto with the 21 million supply of so many tokens on board.) I take).
What does all this have to do with fees?
So, back to fees. The rise of the bitcoin ordinals has created an interesting dilemma. These engraved satoshis are now competing for block space with traditional bitcoin transactions. On the bitcoin network, more activity leads to more fees, and this is why we are seeing fees increase. We’ve seen bitcoin’s network shut down and fees skyrocket as the BRC-20 token has taken off.
This has sparked debate. Some argue against these high fees, lamenting the waste of time NFTs and memes are getting in the way of what bitcoin is “meant” to do. On the other hand, fees are important for the security of the bitcoin network. Additionally, once the final supply of 21 million bitcoins is hit in 2140, miners will need to survive on fees only. Indeed, as block rewards decrease with each halving, mining fees become a larger portion of miners’ income, and so these fees are an important incentive for miners and a driver of hash power for bitcoin.
Personally, my views on this lie somewhat between the two extremes. I’m pretty sure these memes and NFTs and whatever trades on the bitcoin network are inherently worthless. Then again, I generally don’t care much for NFTs. However, I don’t see the rising fees as an issue.
The key here is that the hash rate is still rising. This is in contrast to April 2021, which was another time period when bitcoin fees soared violently, with the average transaction cost on the network at $70. This was due to a drop in hash rate, which is of great concern for the security and stability of bitcoin as a network.
This is different. The rising fees are precisely because of the increased activity. This is true regardless of the transaction: regular, meme, nft or other. It doesn’t really matter. Furthermore, the scalability issue with bitcoin is well known, and fee spikes are encouraging people to look to solutions like sidechains, such as the popular Lightning Network, which bundle together off-chain transactions. But there are other Layer-2s besides Lightning, like Liquid and Rootstock, to name a couple.
Predictions that the bitcoin blockchain will become the base settlement layer have been around for some time. Is likely to be a fad, ie the existence of these tokens and ordinals is relatively harmless and shouldn’t change much in the overall scheme of things. The issue of fees and scalability will always be there, regardless of who is running it. And that’s why we have the Lightning Network, and why people keep innovating to come up with layer-2 or other solutions.