Impact of ordinals and inscriptions on the fee and the earnings

 

What are the consequences of the ordinals & inscriptions on the fee and the earnings?

While the blocksize of the bitcoin is limited, the users compete with one another to have their transactions included in the limited block space available. This market-driven approach ensures that transaction processing is efficient and fair while incentivizing the miners. The fees for transactions can jump instantly, driving revenues for miners, sometimes doubling in a few days.

What is mempool and how does fees work?

The mempool is a temporary storage area where unconfirmed transactions wait to be included in a block. Miners select transactions from the mempool based on transaction size and the fees. Transactions with higher fees are typically prioritized for faster confirmation, included in the block, removed from the mempool, and considered confirmed. Technically, everyone in the Bitcoin network maintains their node’s mempool (if they run a node). When the transaction is initiated, it is gossiped to peers until it reaches every node in the network, ensuring that all the participants have heard of the transaction and update their mempool.

As we all know that due to the scarcity of block size (1 MB) and time (10 minutes), Bitcoin creates a competitive environment where transactions compete for limited block space. As the transaction demand increases, the fee market intensifies. Users seeking faster confirmation may attach higher fees to their transactions called Replace by Fee (RBF), or new transactions raise fee rates to incentivize miners to prioritize them. This heightened competition in the fee market reflects the increased demand for scarce block space. Thus, the interaction between transaction demand, limited block space and the fee market showcases scarcity’s essential role in shaping the transaction system within Bitcoin.

Note: Due to the debate/dispute over block size and bitcoin scalability as early as 2014, a hard fork in 2017 was born, resulting in Bitcoin Cash – the period known as ‘The blocksize war’. Read about forks at https://immtalimm.blogspot.com/2023/07/what-are-blockchain-forks-and-its.html. Thus, the segregated witness (SegWit) was introduced as a backward-compatible upgrade to address these concerns. Read about Segwit at https://immtalimm.blogspot.com/2023/07/what-is-segwit-in-blockchain.html.

Note: The record for the largest transaction in Bitcoin history was set in February, 2023, with a block and witness data totaling approximately 3.96MB.

In 2023, inscriptions increased fees and congestion in the Bitcoin mempool. Users attached higher fees to their transactions to reach confirmations sooner, leading to intensified competition for limited block space and longer confirmation times. This resulted in an overall increase in fees and a more congested mempool. The increased fee market started partially in Feb 2023 and significantly increased in late April, when fees spiked due to the emergence of BRC-20 meme tokens created through inscriptions within Bitcoin blocks.

Inscriptions can be categorized into two major types: NFT inscriptions and BRC20 inscriptions. NFT inscriptions (Blue in the chart below) are associated with Non-Fungible Tokens and typically require more block space due to the complexity and size of NFT transactions.

On the other hand, BRC20 inscriptions (Pink) are linked to BRC20 tokens, which generally have smaller transaction sizes and consume less block space. This distinction in transaction size between NFT and BRC20 inscriptions highlights the varying space requirements and impact on the mempool congestion for different tokens within the Bitcoin network.

The two significant types of ordinal transactions can be categorized as "Boulders" (NFTs) and "Grains of Sand" (BRC-20). NFT transactions, represented by the Boulders, are larger transactions that put a significant load on the network but still leave room for regular transactions. Despite the relatively lower frequency of NFT transactions, they still compete for fees, contributing to the overall fee market dynamics. Alternatively, the “Grains of Sand” represent smaller transactions, often associated with BRC20 tokens. These transactions can generate a significant volume simultaneously, effectively "clogging" the mempool and driving up fees. The influx of BRC-20 transactions led to a substantial spike in transaction fees. The combination of both types of transactions, characterized by their different sizes and transaction volumes, increased congestion and significantly higher fees on the Bitcoin network.

The introduction of BRC-20 tokens significantly increased the number of transactions waiting in the Bitcoin mempool. This influx of transactions put substantial pressure on the network, driving prices upwards and causing a fee surge. The increased competition for block space resulted in users increasing their fees to ensure their transactions were prioritized for inclusion in a block. This fee spike persisted for approximately ten days in May 2023, during which users had to adjust to the heightened fee market conditions, and miners were getting paid more through fees than the actual block reward. However, as the initial surge of BRC-20 transactions subsided, the mempool congestion gradually diminished, leading to a fee decline. The market eventually normalized, bringing fees back to more manageable levels.

With the competition for transactions increased, in addition to SegWit, Lightning Network was introduced in 2017. What is Lightning Network?