Memecoin craze drives Bitcoin transaction fees to highest level in two years

What happened

A new token standard, BRC-20, has appeared on the Bitcoin blockchain, driving a speculative frenzy. Tokens built on the standard that emulates internet memes – known as memecoins and bearing names like Ordi, Pepe, Piza and Meme – have appreciated as much as 28,000% in recent weeks.

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

Ordinals have enabled the rise of memecoins that are distributed on the Bitcoin blockchain but have no inherent utility or programmability. Instead, traders have collected these coins purely for speculative purposes. Since its introduction in March, 14,300 BRC-20 tokens have been launched, reaching a total market capitalization of over $1 billion. Ordi, a memecoin that celebrates the Ordinals protocol, is the largest, with a value of $400 million.

Although some memecoins have appreciated significantly, investors are encouraged to exercise caution as most traders hope to offload their coins to higher bidders. After listing the popular Pepecoin on the exchange, Gemini included the following disclaimer in the listing announcement:

“$pepe is a new meme token. $pepe has no defined tools; its value can only be derived from market participants’ continued willingness to claim and trade the token, which could result in the potential for 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, especially if large, concentrated holdings of $pepe are liquidated within 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 fashionable 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 embraced it in 2021. He has provided sporadic support since then, including a temporary replacement of the Twitter bird logo with the Doge icon in April after he bought the social media platform last year. The success of the Doge inspired other speculative doggy coins such as the Shiba Inu, Akita Inu and Kishu Inu.

The BRC-20 tokens revived interest in memecoins, making it trivially easy to spin up new ones. Pepecoin borrows its name from a cartoon frog that has been embraced by crypto enthusiasts who enjoy its irreverent nature. Pepecoin was first launched on Ethereum in April with a supply of 420.69 trillion and reached a market cap of over $1.8 billion days after launch. The BRC-20 version was launched soon after and reached its highest market value of over $100 million.

Ethereum Pepe’s market cap is down 69% from its peak, to $560 million.

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

As a result of the growing interest in memecoins, Bitcoin transaction fees and unverified transactions have skyrocketed. As BRC-20-related transactions overloaded the network, fees paid to miners reached their highest level since April 2021. Average fees increased by around 1,500% to $31 for a single Bitcoin transfer.

When Bitcoin blocks are full, the highest fee transactions are confirmed first. Pending transactions sit in node mempools waiting for confirmation. The Bitcoin mempool, which consists of the backlog of unconfirmed transactions, increased dramatically from around 10,000 transactions to over 350,000 transactions, putting upward pressure on fees. As a result of the increase in transaction fees, miners’ profitability has also increased, rising 50% to 12 cents from 8 cents per terahash per second.

Key quote

“BRC-20 expands the design space for tokenized assets on Bitcoin. They have revealed strong demand for Bitcoin block space, which will benefit Bitcoin’s security and fee market. While BRC-20s is still in its infancy, it is quickly emerging infrastructure to improve user experience and functionality, which is likely to result in increased interest and adoption of Bitcoin.

• Andre Serrano, sBTC Product Manager at Stacks Foundation

Key statistics

Cumulatively, over 4 million BRC-20 transactions have been carried out, accounting for 60% of all Bitcoin transactions. For the first time in years, a Bitcoin block contained transaction fees that were greater than the block grant. On May 7, block 788695 had transaction fees of 6.7 bitcoin, which is greater than the block reward of 6.25 bitcoin. This was due to the high demand for block space driven by BRC-20 transactions.

Prospects and implications

BRC-20 tokens represent further experimentation within the Bitcoin ecosystem, based on the Ordinals protocol. While memecoins prove to be a fleeting fad, they have the concrete effect of increasing Bitcoin transaction fees. Memecoins can encourage further experimentation on the Bitcoin foundation, leading to new use cases and new sources of demand for Bitcoin block space. This in turn could lead to a more sustainable increase in transaction fees for Bitcoin.

A robust fee market is essential to the health and safety of the Bitcoin network, as they must compensate for the diminishing block reward over successive halving cycles.

Over the past week, BRC-20 transaction fees have accounted for an average of 32% of all Bitcoin transaction fees. This has outpaced Ordinal NFT transaction fees, averaging just 1.6% over the past week.

The increase in transaction fees may also force centralized service providers to embrace layer-two technologies as a way to reduce their costs. In fact, the fee increase led Binance to temporarily halt Bitcoin withdrawals earlier this week and spurred it to consider adding support for the Lightning Network. Lightning is a payment-focused layer-two protocol built on top of Bitcoin designed for significantly faster and cheaper transactions.

It is important to note that BRC-20 tokens do not enable 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, gaming, identity, and other Web3 applications.

Developers are able to build these applications using Solidity, which is a Turing complete programming language that allows for a wide range of functions and computing logic. Bitcoin’s base-layer script does not have these features, but layer-two technologies and sidechains that enable greater flexibility can provide more expressive programming capabilities, directly competing with Ethereum as an open and permissionless platform for developers. Bitcoin’s base layer will remain optimized for simplicity and durability, while product experimentation will be relegated to layers that build on top.

Decision points

Although some traders have achieved astronomical returns by trading memecoins, investors should be cautious. Memecoins have historically been extremely volatile with little liquidity, meaning it can be difficult to scale in or out of a position without significantly moving the price. .

The bigger investment opportunity could be the infrastructure play 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.