Author:
CoinShares
Translator:
Golem
This article, written by CoinShares researcher Matthew Kimmell before the Bitcoin halving, argues that Bitcoin transaction fees can offset the impact of the halving on miners. The first half of the article predicts that when Runes launches, miner fee income will reach at least 150 BTC per day (actually 1070 BTC per day on the first day of launch, and it has not been lower than 150 BTC every day so far). The second half of the article mainly explains three other Bitcoin transaction demands that can increase miner income, apart from Runes.
Due to the time sensitivity of the first half of the original article, which mainly makes predictions after the halving, it will not be translated in this article. This article mainly extracts the second half of the original article, where Matthew Kimmell believes that apart from Runes, there are three other Bitcoin transaction demands that can increase miner income, for readers’ reference.
On-Chain Collectibles and Rare Sats
The release of the Ordinals protocol revealed a system for tracking the smallest unit of Bitcoin, called a satoshi (equivalent to 0.00000001 or 10^-8 BTC), through voluntary user agreement. According to the Ordinals protocol, each satoshi is assigned an ordinal number. By adopting this standard, from the first minted satoshi to the last released satoshi, they will be marked and identified along a sequential numbering system. In other words, when viewing the smallest unit of Bitcoin in this way, each satoshi becomes an independent and non-fungible unit.
Users can also choose to attach arbitrary data files, called inscriptions, to the sats they own to add additional uniqueness. These files can be mixed with any sats they own and retain the ability to transmit and store these modified sats on the Bitcoin network, just like regular Bitcoin.
As a result, many sats are now marked with images, texts, or even complete video game files, giving them unique distinguishability from each other and providing investors with different reasons to evaluate the value of these sats.
The collectible value of certain sats has already been proven in the market due to the unique numerical significance of their ordinal numbers or the inscriptions associated with them.
One example is a sat with the image of a “Genesis Cat” inscribed, which was auctioned for $240,000. It is hailed as a unique 1/1 artwork with cultural and political significance, and it is also part of the Quantum Cat series, which aims to symbolize and support the restoration of previously deleted features in the Bitcoin protocol. Another example is a sat sold for $165,100 even without any inscriptions, as it was promoted as a scarce sat with a traceable origin back to the first difficulty adjustment period of Bitcoin.
These high-priced sales events provide motivation for those seeking valuable sats on-chain. The purpose of selling sats at prices much higher than the normal market on the secondary market is changing the tendency of certain users to pay higher transaction fees. It can be certain that collecting a sat with special significance and selling it in the market for profits of hundreds of thousands of dollars will lead competitors to offer much higher fees than regular transactions.
Given that the halving is a completely predictable and scarce event in Bitcoin history, it is inevitable that there will be competition in collecting rare sats and inscribing the first block. It is expected that the sats mined immediately after the halving will be very valuable, to the point where Foundry USA mining pool plans to share its earnings with miners to win the right to mine blocks. This may be temporary, but this intense competition will certainly lead to a surge in fees.
Private Transaction Demand
Another atypical demand could be transaction accelerators. Marathon launched a product called Slipstream in late February, which provides users with a way to bypass the Bitcoin mempool (the area where transactions wait to be included in blocks) and directly communicate and pay transactions to the MARA mining pool. Although this product does not offer significant advantages in earning fees compared to other mining pools, there have been several successful cases.
Although not widespread, accelerators like Slipstream have the potential to indirectly increase fees if there is sufficient demand. If transactions are submitted directly to the mining pool, those transactions will not be known to any other Bitcoin users in advance. Therefore, other users may find that their transactions within the block fee range actually need to continue waiting because low fee transactions submitted directly to the mining pool are secretly included in the block, but this does not reflect the true fee situation. This can confuse consumers who do not know how much fee to attach to speed up their transactions. As more and more transactions flow to these accelerators, multiple fee markets may emerge, some of which are publicly known as part of the Bitcoin protocol, while others are private.
In a state where transactions need quick confirmation, the chaos of this private fee market may result in users overpaying compared to the actual fee expectation in the public market. However, it is worth noting that we have not seen this situation occur on a large scale at the moment.
Miner Extractable Value (MEV)
MEV is another emerging dimension of Bitcoin’s block space demand. MEV refers to the opportunity for miners (or mining pools) to earn extra profits by manipulating the order of transactions within a block. Previously, MEV was a potential feature of Bitcoin that was limited due to Bitcoin’s strict functionality and simple transaction model. However, as Bitcoin software and the nature of Bitcoin transactions change, MEV has become more apparent. Here are three possible sources of MEV income:
1. On-chain collectibles: Because certain inscriptions and sats have high value, and the market infrastructure is still relatively inefficient, it becomes possible for miners to buy, snipe, and resell mispriced assets, or even sacrifice fee income to snatch higher-value sats for additional profits.
2. Tokenized assets: Runes, BRC-20, RBG, Taproot assets, and other potential token assets open the door for miners to participate in front-running and arbitrage trading for additional rewards.
3. Bitcoin plugins: As more external platforms or Bitcoin Layer 2 solutions use Bitcoin as settlement, miners may be able to leverage vulnerabilities in early designs and additional incentives, such as merged mining, to earn higher income.
This halving means further reduction of block rewards and the relative increase in transaction fees is important for miners. This may provide additional motivation for miners to seek interests related to transactions and explore diversified sources of income. Therefore, we believe that MEV will be at least attempted.
Conclusion
The diversification of Bitcoin transaction demands may become a lifeline for the mining economy. With the reduction of block rewards after the halving, these new uses of Bitcoin block space may significantly increase transaction fees. This is crucial for miners because these fees can offset the loss of block rewards and maintain their profitability.
As mentioned earlier, recent transaction fees will be significantly increased by the influence of new market areas, including asset issuance and the search for unique collectibles. These applications not only bring additional transaction fees but may also encourage the emergence of more strategic transaction processing methods.
Ultimately, the transformation of miners into a more complex and transaction fee-dependent economic model highlights the importance of their understanding and utilization of new Bitcoin transactions to remain competitive.
Looking ahead, I expect that transaction fees in certain blocks will far exceed 50% of mining income. Looking back at a two-month period at the end of 2023, during this period, the average transaction fees accounted for 30% of mining income after the halving, with an average value of 193 BTC per day. If this average is maintained, it will offset 43% of the impact of the halving on miner income.
However, the sustainability of these transactions driven by non-Bitcoin demands remains a mystery—whether they are leading to long-term changes in the Bitcoin transaction market or just symptoms of a bull market.
