Key Takeaways
- BRC-20 tokens were launched on Bitcoin in March 2023
- Transaction fees spiked to all-time highs in May 2023 as network activity spiked
- Bringing memes and NFTs to Bitcoin has caused controversy
- Some argue the rising fees are vital to the security of the network, while others scoff at the activity for getting away from Bitcoin’s “vision”
We live in an inflationary world. Food prices, rent, energy – everything feels more expensive. That is not limited to the fiat world, however. Bitcoin users have noticed a hike in fees recently. So why is this happening, and what does it mean for Bitcoin? And what does this weird concept of NFTs on Bitcoin have to do with anything?
Bitcoin fees rocket upwards in May
Firstly, let us look at a chart presenting Bitcoin fees over the last three years to show the spike in fees. Clearly, the vertical jump in the first week of May is glaring.
While Bitcoin fees may rise in future regardless (and we will get to that in a moment), the outlier that is this wild spike in May 2023 is down to something I never thought I would say with regards to Bitcoin: memes.
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 Bitcoin Ordinals, because that is what has made this all possible. And yes, it is all on the Bitcoin blockchain.
What are Bitcoin Ordinals?
Bitcoin was always viewed as the “pure” blockchain. There was no room for non-fungibility, meaning each Bitcoin is the same as another 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 a Bitcoin (every Bitcoin is divided into 10 million satoshis). These marked satoshis can then be tracked and differentiated from other satoshis, meaning they are technically “non-fungible”. And so, against all odds, we (sort of) have Bitcoin NFTs.
The marks on satoshis have become known as “inscriptions”. These inscriptions were made possible by the Taproot upgrade to the Bitcoin network in November 2021. The protocol is known as Ordinals, named due to the fact the transfer scheme for satoshis relies on the order of transactions.
While this all sounds a little complex, in comparison 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 arrived in the world, an experimental token standard, named BRC-20 in a nod to ERC-20 tokens on Ethereum, were launched in March 2023. This token standard creates fungible tokens within the Ordinal protocol. You may suspect where this is going. The ability to trade fungible tokens within this protocol of Bitcoin? Yes, memes.
In the below chart, I have presented the top 10 BRC-20 tokens by market cap. As one will be able to deduce pretty swiftly when 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 the nod to Satoshi Nakamoto with the 21 million supply of so many on the board).
What has all this got to do with fees?
So, back to fees. The rise of Bitcoin Ordinals has thrown up an interesting dilemma. These inscribed satoshis are now competing for block space with conventional Bitcoin transactions. On the Bitcoin network, more activity leads to more fees, and this is why we have been seeing a spike in fees. As the BRC-20 tokens have taken off, we have seen Bitcoin’s network clog up and fees jump.
This has caused a debate. Some argue against these higher fees, lamenting the waste of time that NFTs and memes are, getting in the way of what Bitcoin is “meant” to be. On the other side, fees are vital 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 solely on fees. Indeed, as block rewards step down with each halving, mining fees become an ever larger portion of miners’ income, and hence these fees are a crucial incentive for miners and a driver of the hash power for Bitcoin.
Personally, my take on this is somewhat between the two extremes. I have every confidence that these memes and NFTs and whatever else trading on the Bitcoin network are inherently valueless. Then again, I don’t care much for NFTs in general. However, I don’t see the rising fees as an issue.
The key here is that the hash rate is still rising. This contrasts to April 2021, which was another time period when Bitcoin fees spiked violently, the average transaction on the network costing a staggering $70. This was due to a crash in the hash rate, which is very much a concern for Bitcoin’s security and stability as a network.
This is different. Rising fees due to increased activity is fine. That is true regardless of the transaction: regular, meme, NFT or other. It really doesn’t matter. Besides, the scalability issue with Bitcoin is well known, and fee spikes encourage people to look at solutions such as sidechains, like the popular Lightning network which bundles transactions together off-chain. But there are other Layer-2s besides Lightning, such as Liquid and Rootstock, to name a couple.
The prediction that the Bitcoin blockchain will become a base settlement layer has been around for some time. The existence of what is likely a fad, i.e. these tokens and Ordinals, is relatively harmless and shouldn’t change much in the overall scheme of things. The fee and scalability issue will always be here, regardless of what is driving it. And this is exactly why we have the Lightning network, and why people are continuing to innovate to come up with Layer-2 or other solutions.