Memecoin Mania Propels Bitcoin Transaction Fees To Highest Level In Two Years

What Happened

A new token standard, BRC-20, has emerged on the Bitcoin blockchain, driving a speculative frenzy. Tokens built on the standard that emulate internet memes–known as memecoins and bearing names such as Ordi, Pepe, Piza and Meme–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 inscribe data on satoshis, the smallest unit of Bitcoin, and turn them into tokens.

Ordinals has enabled the rise of memecoins deploying on the Bitcoin blockchain but not possessing any inherent utility or programmability. Instead, traders have been piling into these coins purely for 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 markedly appreciated, investors are urged to exercise caution, as most traders are hoping to offload their coins to higher bidders. Upon 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 utility; its value may be derived only from the continued willingness of market participants to demand and trade the token, which may result in the potential for permanent and total loss of value should participants choose to no longer demand or trade $pepe. The token may also be subject to extreme price volatility, in particular if large, 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 merge mined with Litecoin, meaning miners of the latter could use the same hashing algorithm and hardware to simultaneously generate both tokens.

Dogecoin gained widespread 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 acquired the social media platform last year. The success of Doge inspired other speculative doggy coins such as Shiba Inu, Akita Inu, and Kishu Inu.

BRC-20 tokens revived interest in memecoins, making it trivially simple 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 first launched on Ethereum in April with a 420.69 trillion supply and reached a market capitalization over $1.8 billion days after its launch. The BRC-20 version launched soon after and reached its peak market capitalization of over $100 million.

The market capitalization of the Ethereum Pepe is down 69% from its peak, at $560 million.

BRC-20 tokens are inspired by Ethereum’s ERC-20 standard, but a key distinction 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 possess the expressive programmability of those built on Ethereum.

As a result of the rising interest in memecoins, Bitcoin transaction fees and unconfirmed transactions have skyrocketed. As BRC-20 related transactions congested the network, fees paid to miners reached their highest level since April 2021. Average fees increased about 1,500% to $31 for a simple Bitcoin transfer.

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

Key Quote

“BRC-20s expand 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 are still in their infancy, infrastructure is rapidly emerging to improve the user experience and functionality, which will likely result in increased interest and adoption for Bitcoin.”

• Andre Serrano, sBTC Product Lead at the Stacks Foundation

Key Stats

Cumulatively, over 4 million BRC-20 transactions have been executed, comprising 60% of all Bitcoin transactions. For the first time in years, a Bitcoin block contained transaction fees greater than the block subsidy. 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.

Outlook and Implications

BRC-20 tokens represent further experimentation within the Bitcoin ecosystem, building upon the Ordinals protocol. Even if memecoins prove to be an ephemeral fad, they are having the tangible effect of increasing Bitcoin transaction fees. Memecoins may 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 may drive a more sustainable increase in Bitcoin transaction fees.

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

Over the last week, BRC-20 transaction fees have comprised an average of 32% of all Bitcoin transaction fees. This has overtaken Ordinal NFT transaction fees, averaging only 1.6% over the last week.

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

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

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Developers are able to build these applications using Solidity, which is a Turing complete programming language that allows for a wide variety of functions and computer logic. Bitcoin’s base layer script does not possess these features, however, layer-two technologies and sidechains enabling greater flexibility could 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, whereas product experimentation will be relegated to layers building on top.

Decision Points

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

The bigger investment opportunity may be the infrastructure play that will lead to new uses of the Bitcoin blockchain. High transaction fees are clearly a pain point with which the network will continue to struggle, especially in bull markets.