Why will the sharp increase in transaction fees accelerate the implementation of Bitcoin’s second-layer solution?

How Will the Steep Surge in Transaction Fees Hasten the Adoption of Bitcoin's Second-Layer Solution?

In normal market conditions, the high price of BTC itself contributes to high Gas fees, while the popularity of Ordinals and other NFTs impacts multiple aspects of the Bitcoin network. Recently, there has been a noticeable surge in transaction fees on the network, setting a new record for Bitcoin fees.

So, how did this trend come about? In this article, we will delve into what Bitcoin transaction fees are, their role in the Bitcoin ecosystem, and their impact on second-layer development.

Basic Understanding of Transaction Fees

Transaction fees are a fundamental component of most blockchain networks, including Bitcoin, generally referring to the fees users pay when initiating transactions on the network. In the Bitcoin ecosystem, these fees are collected by miners as an incentive for maintaining and preserving the integrity and functionality of the network.

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Miners earn transaction fees not only through their mining efforts but also from the predefined block rewards. This model established in BTC creates a symbiotic relationship between users and miners. Users rely on miners to ensure the smooth operation and security of the network, while miners, especially as block rewards decrease over time, increasingly rely on transaction fees as a source of mining income, making mining a consistently profitable venture.

The structure of these transaction fees is dynamic and subject to change, primarily influenced by network usage. As network usage increases, transaction fees tend to rise. This is because users are willing to pay higher fees to ensure their transactions are processed quickly and included in a block.

Recently, a significant increase in transaction fees on the Bitcoin network can be partially attributed to innovations such as engravings, or more precisely, the explosion of ecological applications. This trend highlights the evolutionary nature of blockchain networks and exposes the dilemma of continuous innovation and user growth, emphasizing the importance of adjustment and optimization to balance user experience and network sustainability.

Transaction Fees and Bitcoin Halving

Bitcoin undergoes a halving event every four years, aimed at slowing down the inflation rate of the Bitcoin ecosystem. For example, currently, miners receive a reward of 6.25 BTC per block, but after the next halving event scheduled for 2024, this reward will decrease to 3.125 BTC per block. This halving mechanism ensures a gradual reduction in the rate of newly introduced Bitcoins into circulation, mimicking the scarcity-driven appreciation model of precious metals like gold, which is a unique feature of Bitcoin that attracts many users and investors.

Given the decrease in block rewards, the growth and robustness of the Bitcoin network become increasingly critical. As block rewards decrease, the dependence of miners on transaction fees as a source of income becomes more evident. This transition from block rewards to transaction fees as the primary economic incentive for miners aligns with the vision of Bitcoin’s creator, Satoshi Nakamoto.

In the Bitcoin whitepaper, Satoshi Nakamoto envisioned a future where the creation of new Bitcoins would eventually stop, preventing further inflation. In this envisioned future, miners would primarily sustain their operations through transaction fees, ensuring the long-term viability and security of the Bitcoin network. This foresight emphasizes the complexity of finding a balance between reducing inflation and maintaining miner incentives to ensure the robustness and stability of Bitcoin as a decentralized digital currency.

What has led to the recent significant increase in fees?

In November, there was a significant increase in activity on the Bitcoin network, primarily driven by a surge in Ordinals, which in turn caused a significant rise in Bitcoin transaction fees. This increase in network activity is related to the demand for block space, a fundamental aspect of the Bitcoin economic model.

An example of this occurred on November 18, 2023, when a record-breaking $4.92 million in fees was accumulated in a single day, primarily attributed to these Ordinals. The total cost of all Ordinal fees amounted to $98 million. This fee surge not only reflects the growing interest and activity in Bitcoin Ordinals but also highlights the innovation, interactivity, and money-making effect of the network.

The chart below from @data_always on Dune highlights the sharp increase in fees in November. For example, the fee peak on November 16 increased by over 1,500% compared to November 1.

Meanwhile, BRC-20 tokens, especially tokens like ORDI, are also gaining popularity. These tokens are listed on major cryptocurrency exchanges like Binance, attracting further attention to these new digital assets. The sustained interest in BRC-20 tokens further drives the network’s activity, as visualized in the chart below. At its peak, over 97% of Ordinals were attributed to BRC-20 minting.

Prior to this November surge, Bitcoin miners were earning an average of 21.48 BTC per day from transaction fees. However, during this peak period, daily income from transaction fees surged to 314 BTC, indicating significant growth. Although these numbers have moderated, they still remain significantly higher than pre-November levels, averaging around 81 BTC per day currently. This significant increase in transaction fees highlights the impact of new applications and tokens on the Bitcoin network, underscoring the evolutionary nature of its economic and operational landscape.

The growing importance of Bitcoin Layer 2 (L2)

With the skyrocketing Bitcoin transaction fees, it has become almost impractical for regular users to utilize the Bitcoin main chain. Expecting users to pay $50 to use BTC in the future is unrealistic. Therefore, Bitcoin Layer 2 solutions are becoming increasingly crucial and have the potential to handle a significant portion of Bitcoin transactions in the coming years, ideally surpassing the transaction volume of Bitcoin’s first layer.

After BTC transaction fees became a miner’s income, there must be enough transaction volume to maintain network security. So, only by meeting the needs of commercial and incremental users can the normal operation of the network be guaranteed. Currently, the promotion method seems to be Layer2, which is a product under established rules.

However, compared to their growing importance, the funding for Bitcoin’s second layer solutions is still inadequate, especially compared to the funding and market value of Ethereum’s second layer. This disparity highlights the need for increased investment and development in Bitcoin’s second layer solutions.

Bitcoin’s Second Layer Solutions:

Currently, Bitcoin’s second layer solutions are designed to address the scalability limitations of the mainnet and can be categorized into non-compatible EVM and compatible EVM. Non-compatible solutions include technologies like the Lightning Network and Lsk, which focus on specific purposes such as payments, but their development in recent years has not shown significant breakthroughs, and technical and usability barriers remain major issues.

Additionally, there are compatible EVM solutions. The industry eagerly awaits new solutions that reduce the trust assumption between Bitcoin in the first and second layers, such as BEVM.

Given the current state of various solutions, the BEVM solution can be said to have the greatest growth potential.

1. Sufficient decentralization: BEVM adopts Taproot to enable 1000 validating nodes to host, ensuring that the assets hosted are less than the pledged assets, thereby guaranteeing network security and achieving decentralization.

2. Commercial development: Supports the most convenient ecosystem migration. Currently, ETH has many successful cases, such as DeFi and Gamefi. If these projects can seamlessly migrate to BTC’s second layer, it will unleash the potential for basic applications. Currently, the BEVM ecosystem is already equipped with a DeFi suite, preparing for this explosion.

3. Low user threshold: Although the total value of the ETH ecosystem is only one-third of BTC, it already has millions of holding addresses. Compatibility with EVM also means user migration, which will bring a large number of basic users to BTC.

In fact, the growing interest of developers in the BTC ecosystem is a positive indicator of this demand. Now is the time to innovate more in this field, and the community is confident in the future of Bitcoin’s second layer, believing they will continue to develop to meet the challenges and demands of the Bitcoin network.

Lessons from Bitcoin’s Soaring Transaction Fees

The surge in Bitcoin transaction fees is a reflection of the growth of network users, which not only demonstrates the expansion of Bitcoin’s functionality but also reveals the challenges of network congestion and rising transaction costs. As the block reward in Bitcoin halves, the increasing reliance on transaction fees highlights the need for a sustainable economic model while maintaining network integrity and accessibility.

This situation puts the second-layer solution of Bitcoin in the spotlight, seeing it as an important tool to alleviate the restrictions of the main network, especially in high-value, high-volume small transactions. For example, the BEVM platform is expected to handle a significant portion of Bitcoin transactions in the future, ensuring the feasibility of the network when it expands.

However, compared to similar products on Ethereum, the feasibility of Bitcoin’s second-layer solution is currently a challenge, but also an opportunity. It is crucial to bridge this gap in order to foster innovation and scalability in the Bitcoin ecosystem.

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