Glassnode Data Research: A Review of the “Crazy Week” of Bitcoin Scripting Outbreak

Glassnode analyzed the recent "Crazy Week" of Bitcoin scripting.

Author | Glassnode

Authorized reprint by Wu Shuo

Note: The article was published on May 15th, and some data may be outdated

Original link:

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During the week of May 8th, investors’ strong speculative interest in coins issued through text file engraving has led to a surge in demand for block space in the Bitcoin network, pushing transaction fees to historic highs.

Bitcoin’s trading volume hit a historic high, with the average fee paid per block exceeding the 6.25 BTC block reward. Although it remains to be seen whether these BRC-20 tokens will gain widespread acceptance in the long term, miners will undoubtedly welcome this short-term increase in mining revenue after experiencing the severe bear market of 2022.

In this report, we will delve into the impact of demand for BRC-20 tokens on Bitcoin on-chain activity, engraving types, and miner revenue.

New demand for Bitcoin block space

During the week of May 8th, the demand for block space in the Bitcoin network hit a historic high, driven mainly by the emergence of BRC-20 tokens. BRC-20 is a proposed mechanism for issuing tokens on the Bitcoin ledger that utilizes ordinal theory (see report) and engraves a JSON text file onto the blockchain to achieve its goal.

Given the small data footprint of text engraving and the willingness of BRC-20 users to pay high fees, miners were able to fill blocks with record transaction volumes. Bitcoin’s trading volume hit a historic high last week, with daily trading volumes reaching 682,000 transactions, up 39% from the peak in 2017, which is undoubtedly a remarkable achievement.

The average number of transactions per block more than doubled, from a typical baseline of about 2,000 transactions per block to over 4,300 transactions per block. With a limit on block size, the significant increase in transaction volume directly resulted from records that apply a 75% discount to witness data, making it possible to consume available block capacity more densely.

Despite the rapid growth in transaction activity, the number of active addresses has fallen to a cyclical low of just 566,000 per day. This is somewhat surprising, as many BRC-20 users appear to be reusing their bitcoin addresses, possibly because they are more familiar with account-based chains such as Ethereum or Solana and have less understanding of the Bitcoin UTXO system.

This phenomenon was first noted by Tsypruyan, who pointed out that 71% of transaction outputs were reused addresses, up from around 50% of the baseline (mainly related to wallet management by exchanges).

Text takeover

As BRC-20 inscriptions consist only of small JSON text files and benefit from a 75% SegWit discount on witness data, their on-chain data usage is relatively small. As a result, the average transaction size in bytes fell to 405 bytes, almost reaching its historical low.

This is in stark contrast to the first quarter of this year, when primarily image-based inscriptions had an average transaction size of about 1,500 bytes, a historic high.

The growth of text-based inscriptions has left the first wave of image and file inscriptions far behind. Throughout May, there were several days when daily inscription encoding exceeded 350,000, and in the past week, it has remained stable at more than 250,000 per day.

In the confirmed total transaction pool, text-based inscriptions account for more than 50%. This is significantly higher than the 5% to 20% share of image inscriptions in the first wave, further highlighting the scale of this round of demand.

So far, the total number of text-based inscriptions has far exceeded that of image-based inscriptions, surpassing 5 million. Now, compared to image-based inscriptions, text-based inscriptions are almost an order of magnitude higher, with a total of 5.69 million text files written to the Bitcoin blockchain, accounting for 89% of the total so far.

It should be noted that the Y-axis in the following chart is using logarithmic coordinates.

Miners Reap Short-Term Rewards

The extreme urgency of BRC-20 traders is reflected in the high fees they are willing to pay for the transactions. As the network transaction congestion of Bitcoin’s mempool reaches a white-hot state, the pressure on transaction fees has increased sharply.

In history, there have only been five times when the average fee paid per block exceeded the block reward, with the last time being at the peak of the 2017 market. For all five events, the periods of high fee pressure were short-lived and came down in just a few days.

During the peak of BRC-20 frenzy, the average fee for each mined block was 6.66 bitcoins, which made the total reward for each block reach 12.9 bitcoins (about 348,000 US dollars).

In this second wave, text files account for 30% to 60% of the total fees paid, which is much higher than the 5% to 20% image captions in the first wave.

Overall, traders have paid a cumulative fee of 1262 bitcoins to miners, of which 1090 bitcoins (86%) were paid last week. The following chart shows how the fee pressure related to text files has exploded.

As the rapid increase in demand for Bitcoin block space, the total daily USD fee paid has almost hit a new all-time high, reaching as high as 17.8 million USD/day. An annoying side effect is that the cost of sending regular Bitcoin transactions has also reached a very high level, with the median and average values of the fees required to include a transaction in a block reaching 20.17 USD and 30.80 USD, respectively.

In the past month, the spot price of Bitcoin has fluctuated between $26,000 and $30,000. During the same period, miners earned $773 million from block rewards of 6.25 bitcoins. With the recent upgrade of transaction fee pressure, miners have earned an additional $100 million in total revenue.

Therefore, the portion of miner income related to fees reached 11.5%, which is consistent with the high levels during the bull markets of 2017 and 2021.

The acceleration of fee pressure is also historically significant. The following chart shows a range of Z-Scores for miner fee revenue, with training windows ranging from 1 year to 4 years. The purpose of doing this is to determine periods when fee pressure increases in a statistically significant manner under broad market conditions.

In the shorter 1 to 2 year windows, the acceleration of fee pressure can be said to be the fastest in history, comparable only to the era of 2011 when Bitcoin had almost no price history for a year. In the longer 3 to 4 year windows, the speed and magnitude of the increase in fee pressure was greater than that of the bull market of 2021 and was best compared to the bull markets of 2013 and 2017.

The per-unit Exahash income in dollars, typically called the hash price, is an ideal tool for evaluating the impact on miner income. It not only takes into account the BTC spot price and fee pressure, but also estimates the hash value for competition to receive rewards.

Last week, the hash price briefly rose to $172,200/EH, but with the easing of fee pressure, the hash price collapsed by 55% to $76,300/EH. Although the burst of block space demand provided a positive boost to miner income, so far this trend has been short-lived and pales in comparison to the ruthless downward trend of the hash price (calculated logarithmically).

Of the total fee paid to miners in the past two weeks, 3,275 bitcoins, the total balance of miners has only increased by 655 bitcoins, accounting for about 20% of the fees paid.

The blue curve below shows the proportion of newly mined bitcoins that miners are selling, which continues to oscillate around 100%.

Overall, although miners are undoubtedly enjoying the rise in income, it appears that most of it is being sold, which is likely providing relief after the brutal downturn of the 2022 bear market.

Summary and Conclusion

The emergence of Ordinals, Inscriptions, and the current BRC-20 tokens is undoubtedly an unexpected part of the development of Bitcoin, sparking rich discussions on technical, practical, and philosophical values. One thing has been made clear, these technologies have brought new buyers to the Bitcoin block space, both at the lower limit of payment fees and the current upper limit.

During the week of May 8th, the total transaction fees exceeded the block rewards, which has only happened five times in history. This event pushed fee income in USD terms to a historic high of nearly $17.8 million per day and provided much-needed revenue growth for miners after 2022.

Whether Inscriptions and BRC-20 tokens have long-term durability remains to be seen, but they undoubtedly offer us new perspectives and facilitate our observation of the demand for Bitcoin settlement guarantees.

Wu said that the increase in Bitcoin on-chain activity and miner income brought about by BRC-20 tokens has gradually declined after reaching a historical high on May 8th.

The current trading volume and number of transactions for Bitcoin Ordinals transactions is less than $2 million and less than 6,000 times, far lower than the $18.2 million and 17,000 times on May 8th.

Data source: @DomoData data panel

The daily number of transactions decreased from 628,000 on May 1st to 423,000 on May 20th; the proportion of transaction fees to total miner income also decreased from 42.5% on May 8th to 9.4% on May 20th.

Note: Blocking all articles only represents the author’s point of view and does not constitute investment advice

Original link: https://www.bitpush.news/articles/4457976

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