Memecoin Mania propels Bitcoin transaction fees to highest level in two years

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The creation of a new token standard caused bitcoin fees to skyrocket

gettyWhat happened

A new token standard, BRC-20, has emerged on the Bitcoin blockchain, driving a speculative frenzy. Tokens built on the standard that mimic internet memes known as memecoins and with names such as Ordi, Pepe, Piza and Meme have been appreciated by up to 28,000% in recent weeks.

Tokens are fungible digital assets that can be created and transferred on the Bitcoin blockchain using the Ordinals protocol. The standard allows users to register data on satoshis, the smallest unit of bitcoin, and turn them into tokens.

Ordinals enabled the rise of memecoins deploying on the Bitcoin blockchain but possessing no inherent utility or programmability. Instead, traders have piled into these coins for purely speculative purposes. Since their introduction in March, 14,300 BRC-20 tokens have been launched, reaching a combined market capitalization of over $1 billion. Ordi, a memecoin paying homage to the Ordinals protocol, is the largest, with a value of $400 million.

Although some memecoins have appreciated significantly, investors are advised to exercise caution as most traders are hoping to sell their coins to higher bidders. When listing the popular Pepecoin on its exchange, Gemini included the following disclaimer in its listing announcement:

$pepe is a new meme token. $pepe has no defined purpose; its value can only come from the continued willingness of market participants to demand and trade the token, which can lead to permanent and total loss of value if participants choose to no longer demand or trade $pepe. The token may also be subject to extreme price volatility, particularly if large and concentrated holdings of $pepe are liquidated in a short period of time.

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Broader Context

Dogecoin was one of the first and most popular memecoins. Created in 2013 as a facetious and humorous cryptocurrency, Dogecoin was merged with Litecoin, meaning that miners of the latter could use the same hashing algorithm and hardware to generate both tokens simultaneously.

Dogecoin gained popularity when billionaire Elon Musk adopted it in 2021. It has provided sporadic support since then, including a temporary replacement of the Twitter bird logo with the Doge icon in April after acquiring the platform. -form of social media last year. Doge’s success inspired other speculative pieces such as Shiba Inu, Akita Inu and Kishu Inu.

BRC-20 tokens have revived interest in memecoins, simplifying the creation of new ones. Pepecoin takes its name from a cartoon frog that has been embraced by crypto enthusiasts who appreciate its irreverent nature. Pepecoin was first launched on Ethereum in April with a supply of 420.69 trillion and reached a market capitalization of over $1.8 billion within days of its launch. The BRC-20 version was launched soon after and reached its peak market capitalization of over $100 million.

Ethereum Pepe’s market capitalization is down 69% from its peak of $560 million.

Pepe’s market capitalization has been declining since hitting a high of $1.8 billion.

CoinGecko

BRC-20 tokens are inspired by the Ethereums ERC-20 standard, but a key distinction is that Bitcoin versions do not rely on smart contracts. Instead, they use JSON (JavaScript Object Notation) data to store rules and token attributes. Since the base layer of Bitcoins does not support smart contracts, BRC-20 tokens have limited functionality and lack the expressive programmability of those built on Ethereum.

Due to the growing interest in memecoins, Bitcoin transaction fees and unconfirmed transactions have skyrocketed. As BRC-20-related transactions clogged the network, fees paid to miners hit their highest level since April 2021. Average fees rose by around 1,500% to $31 for a simple Bitcoin transfer.

Bitcoin transaction fees have increased

bitinfocharts.com

When Bitcoin blocks are full, transactions with the highest fees are confirmed first. Pending transactions are stored in node mempools awaiting confirmation. The Bitcoin mempool, which consists of the backlog of unconfirmed transactions, has increased significantly from around 10,000 transactions to over 350,000 transactions, applying upward pressure on fees. Due to the increase in transaction fees, miner profitability also increased by 50% to 12 cents from 8 cents per terahash per second.

key quote

The BRC-20 expands the design space for tokenized assets on Bitcoin. They revealed high demand for bitcoin block space, which will benefit the security and fee market of bitcoins. While BRC-20 is still in its infancy, infrastructure is rapidly emerging to improve user experience and functionality, which will likely lead to increased interest and adoption in Bitcoin.

Andre Serrano, sBTC Product Manager at Stacks Foundation Key Stats

Cumulatively, over 4 million BRC-20 transactions have been executed, representing 60% of all Bitcoin transactions. For the first time in years, a Bitcoin block contained transaction fees above the block grant. On May 7, block 788695 had a transaction fee of 6.7 bitcoins, which is higher than the block reward of 6.25 bitcoins. This was due to the high demand for block space driven by BRC-20 transactions.

A bitcoin block generated more revenue from transaction fees than the block reward

TwitterPerspectives and Implications

BRC-20 tokens represent additional experimentation within the Bitcoin ecosystem, building on the Ordinals protocol. Even though memecoins turn out to be a passing fad, they have the tangible effect of increasing Bitcoin transaction fees. Memecoins can encourage further experimentation on the Bitcoin base layer, leading to new use cases and new sources of demand for Bitcoin block space. This, in turn, could lead to a longer-lasting increase in Bitcoin transaction fees.

A robust fee market is crucial to the health and safety of the Bitcoin network, as they will need to compensate for the diminishing block reward over subsequent halving cycles.

Over the past week, BRC-20 transaction fees have averaged 32% of all Bitcoin transaction fees. This topped Ordinal NFT transaction fees, which averaged just 1.6% over the past week.

Ordinals represent increasingly large percentages of total fees paid to bitcoin miners

Dune analysis

Rising transaction fees may also force centralized service providers to adopt layer two technologies to reduce their costs. In fact, the spike in fees caused Binance to temporarily suspend Bitcoin withdrawals earlier this week and prompted it to consider adding support for the Lightning Network. Lightning is a payments-focused layer two protocol, built on top of Bitcoin, designed for much faster and cheaper transactions.

It is important to note that BRC-20 tokens do not allow Bitcoin to be competitive with Ethereum as a smart contract platform, especially at the base layer. Ethereum has a vibrant ecosystem of composable decentralized applications, spanning decentralized finance, NFTs, DAOs, games, identity, and other Web3 applications.

Developers can build these applications using Solidity, which is a full-featured programming language from Turing that enables a wide variety of functions and computer logic. The Bitcoins base layer script lacks these features, however, layer two technologies and sidechains allowing greater flexibility could provide more expressive programming capabilities, in direct competition with Ethereum as an open platform. and without developer permission. The Bitcoin base layer will remain optimized for simplicity and durability, while product experimentation will be relegated to overlay layers.

Decision Points

Although some traders have made astronomical returns trading memecoins, investors should beware. Historically, Memecoins have been extremely volatile with little liquidity, which means it can be difficult to increase or decrease a position without significantly changing the price. .

The biggest investment opportunity could be the infrastructure game that will lead to new uses for the Bitcoin blockchain. High transaction fees are clearly a pain point that the network will continue to struggle with, especially in bull markets.

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