Our experts tell us how BRC-20 tokens emerged on top of Bitcoin. And why trading in new memcoins led to a record increase in commissions
A new kind of token has appeared in the Bitcoin blockchain, around which there has been a serious speculative frenzy. Most of these tokens are so-called memcoins. Which are named after famous memes and carry no utility or functionality. In spite of this, they have cumulatively risen by tens of thousands of percent in a few weeks. And provoked a record increase in commissions for transfers within the BTC network.
A new mania around memcoins began with the PEPE coin. Anonymous developers launched it in April, and speculators inflated its capitalization to a billion dollars in just three weeks of its existence.
The interest in memcoins created in the Bitcoin blockchain comes from more familiar token-creating networks such as Ethereum or Solana. The excitement swelled to the point that the volume of trading in Bitcoin Frogs collection tokens (the equivalent of Bitcoin token format NFTs) from May 17 to 18 exceeded that of the NFT market’s main “blue chip” – the Bored Ape Yacht Club (BAYC) collection.
New BRC-20 standard
Tokens of the standard named BRC-20 (similar to ERC-20 in Ethereum). They are digital assets that can be created and transferred on the Bitcoin blockchain using the Ordinals protocol. This standard allows data to be written into satoshi and turned into tokens.
The Ordinals protocol has enabled the growth of memcoins placed on the Bitcoin blockchain. But they have no utility whatsoever. Instead, traders are buying them solely for speculative purposes. Tens of thousands of BRC-20 tokens have been issued since the protocol went live in March. And their combined market capitalization has exceeded $1 billion. The ORDI memcoin, which refers to the name of the Ordinal protocol. But probably not related to its developers, is the largest at the time of publication with a capitalization of about $300 million.
Amid high demand, cryptocurrency exchange OKX announced the launch of its own marketplace for trading BRC-20 tokens. And Binance previously announced plans to add support for them on its NFT platform.
The entire current capitalization of new tokens in the Bitcoin network is essentially taken up by memcoins alone. And the Ordinals protocol itself has severely limited functionality compared to Ethereum’s ERC-20 capabilities.
But BRC-20 could be a long-shot story. If the teams that focus on building infrastructure solutions on Bitcoin (wallets, bridges, credit protocols, etc.) now have money flowing in from major venture capital funds. Also, don’t forget that it adds to the attractiveness of Bitcoin itself, says our expert.
High commissions in BTC network
The result of the growing demand for memcoins was a surge in Bitcoin transaction fees. And a queue of unconfirmed transactions formed. Transactions related to BRC-20 filled the network. And led to a high load on it, causing the commissions paid to miners to reach the highest level since April 2021. Since the beginning of May, the average fees have risen about 1,500%, to $31 per simple coin transfer.
When Bitcoin’s transaction blocks are full, the transactions with the highest fees are confirmed first. The pending transactions are in a so-called mempool, waiting for confirmation. If under an adequate load on the network, transfers are confirmed in no more than 10 minutes on average. In this abnormal scenario it is possible to wait up to several hours for transfer confirmation. If not to send it with overestimated commission.
Bitcoin’s pool of unconfirmed transactions has skyrocketed from about 10,000 transactions to more than 350,000 transactions. And that triggered an increase in fees globally. But it turned out to be a lucky scenario for miners, whose income increased visibly.
In total, there were more than 4 million BRC-20 transactions in May. And that represents 60% of all Bitcoin transactions. For the first time in many years, a block of BTC transactions exceeded the fixed fee of the miner (6.25 BTC) who mined that block. This was due to the high demand for space in the blockchain, which was triggered by transactions involving the transfer or issuance of BRC-20 tokens.
Such a situation is abnormal according to our experts. Some Bitcoin developers have expressed dissatisfaction with high commissions. And declared about the fight against such tokens. Miners, on the contrary, benefit from the development of this standard. Which brings them more income from commissions. But on the other hand, blockchain congestion will reduce the popularity of Bitcoin. We need to look for a solution that will satisfy investors and miners, says our expert.
Effects and solutions to problems with high commissions
BRC-20 tokens reflect the process of possible future experimentation in the Bitcoin ecosystem. Even if memcoins end up being a passing fad of the cryptocurrency community. They are already having a tangible effect. It may turn out that memcoins will spur developers to further experiment at the base level of Bitcoin. And that will lead to new scenarios for its use. And new sources of demand for space within transaction blocks. This, in turn, could lead to more sustainable commission growth.
The commission market is critical to the existence and security of the Bitcoin network. Because in the future they will have to compensate miners for the diminishing reward per block during subsequent halving cycles.
Rising transaction fees could also force leading cryptoservices to use “second-tier” technology to cut costs. When a sharp rise in fees forced the Binance exchange to temporarily suspend Bitcoin withdrawals. And its head Changpeng Zhao wrote on social media that he was considering adding Lightning Network support to the exchange. This is a fairly well-known, but not yet widespread second-tier payment protocol. Which is built on top of Bitcoin and designed for much faster and cheaper transfers.
Estimates of the implications of the popularity of BRC-20 tokens vary depending on who is making them. Miners, for example, are happy, of course, as their profitability has increased because of the load on the network. But ordinary users are definitely not used to paying a commission and still getting in a huge queue. That is why major market players are thinking about integrating Lighting Network, but it also takes time.
BRC-20 standard cannot compete with ERC-20
Importantly, BRC-20 tokens prevent Bitcoin from competing with Ethereum as a platform for smart contracts, especially at the basic level. A dynamic ecosystem of decentralized applications is deployed on the Ethereum blockchain. This includes credit protocols, NFT, games, social networks and other Web3 applications. Developers can create them using the Solidity programming language. Which allows a wide range of functions and program logic to be implemented. Bitcoin’s base code doesn’t come close to having those capabilities.
Some traders have managed to make high profits by trading memcoins. However, average market participants should be cautious. Historically, memcoins exhibit high volatility and low liquidity. And their prices often only show a decline after a collapse from their peak values during hype.
Perhaps in the future Bitcoin blockchain infrastructure projects will open up investment opportunities. But high fees will certainly remain a stumbling block, especially when the crypto market is bullish.
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