The rise in Bitcoin block space demand and its impact on mining revenue

The Bitcoin halving will reduce the main source of income for miners, leading them to invest in more efficient machines and prepare for production losses. However, transaction fees are expected to increase significantly due to the atypical use of Bitcoin block space, which may offset the reduction in income caused by the halving of block rewards.

Recently, the revival of projects based on the Bitcoin network (such as on-chain markets, collectibles, and multi-layer platforms) has led to a surge in trading demand. These projects have also paved the way for new revenue strategies like miner extractable value (MEV) and transaction accelerators, leveraging the significant changes in the Bitcoin trading market.

During the next halving period, transaction fees are likely to become the main source of miners' income. At the same time, the upcoming rise in transaction demand may offset nearly half (about 43%) of the impact of halving on fee revenue.

New Trends in Bitcoin Trading Demand

Homogeneous Token Standard

The new Bitcoin token projects have brought significant growth in trading demand. For example, BRC-20 assets have incurred over $180 million (4.8k btc) in fees for issuance and transfers since their launch in March 2023. These transactions account for nearly one-third of all Bitcoin transactions, generating fees that represent 17% of the total fees on the Bitcoin network.

A new standard called Runes is being launched, with significant initial demand and growing attention. The demand market capitalization for future Runes tokens exceeds $1.2 billion, already accounting for half of all BRC-20 assets. The issuance of Runes tokens must use Bitcoin transactions, which may cause fee levels to soar to over $16 per transaction, exceeding 300 BTC daily.

collectibles

The Ordinals protocol allows users to assign sequential numbers to the smallest unit of Bitcoin (satoshi) and attach additional unique data files (inscriptions). This gives certain satoshis collectible value due to their numerical significance or associated inscriptions.

So far, the highest auction price for a Satoshi has been $240,000, while another Satoshi without an additional inscription was sold for $165,100. This high-value Satoshi may lead users to be willing to pay higher transaction fees.

privacy transaction

The transaction accelerator product (such as Marathon's Slipstream) allows users to communicate directly with mining pools and pay for transactions, bypassing Bitcoin's mempool. This may lead to confusion in the fee market, and users may end up paying fees that far exceed the public market expectations.

Miner Extractable Value (MEV)

MEV has become more prominent in Bitcoin, mainly reflected in the following aspects:

1. Collectibles: Gain additional profits by purchasing or "sniping" mispriced market items.
2. Tokenized Assets: Opening up opportunities for miners to participate in pre-trade and arbitrage.
3. Bitcoin Plugin: With the rise of external platforms and "Layer 2", miners may exploit vulnerabilities in early designs to achieve higher income.

The Relationship Between Transaction Fee Market and Miners

The diversification of demand for Bitcoin transactions may play a redemptive role in the mining economy. New uses for block space could significantly increase transaction fees, offsetting the loss of block rewards and maintaining miner profitability.

The current level of transaction fees is expected to account for about 14% of the mining revenue after the halving, but this proportion could increase further. During the two months at the end of 2023, the average fee level accounted for 30% of the mining revenue after the halving. If this average value (193 BTC per day) is repeated, it would cover 43% of the impact caused by the halving.

During this halving period, transaction fees may become the main source of income for miners. However, the sustainability of these non-monetary demand drivers remains to be observed, whether they have led to a long-term transformation of the Bitcoin trading market or are merely a temporary phenomenon of the bull market, will take time to verify.