May 2023 was unexpectedly marked by impressive transaction fees on the Bitcoin network, thanks to which miners’ income almost doubled.
It is well known that in addition to the rewards for each mined block (6.25 BTC or approximately $170,000), miners receive commissions for each transaction included in the block. The size of these commissions is typically insignificant. However, when the interest in the Bitcoin network surges, the number of transactions grows rapidly, and since transactions, so to speak, compete with each other for the attention of miners in order to be registered in the blockchain as quickly as possible - commissions increase accordingly.
So, the excitement of early May gave us seemingly surprising moments when in some blocks total commissions exceeded the actual block reward!
Here are just a couple of vivid examples from May 8. For instance, in block #788792, a miner earned 6,914 BTC or $193,497 on record commissions alone over the past 5 years (plus 6.25 BTC for the mined block, i.e. more than $360,000 in total!):
Or block #788763 with commissions of 7.016 BTC ($196,104):
If we look at the situation more broadly, these blocks are not unique at all, but are aligned with the general May trend. The Mempool.space allows to evaluate the dynamics of transaction fee fluctuations in the Bitcoin network, e.g., over a week:
May 4-11, 2023:
If you look even more broadly, e.g., over a month, it becomes obvious that something special is happening on the Bitcoin network, because commissions have increased approximately 10-fold:
April 11 - May 11, 2023:
Notably, this phenomenon is not unique either - commissions in the Bitcoin network periodically grow. This was the case in 2017 amid the retail investor hype, as well as earlier, when very few people knew about Bitcoin:
One way or another, as soon as the Bitcoin network experiences a relative influx of users, commissions grow, and miners’ income follows.
How to estimate the income of miners?
Each miner uses the available mining power (hashrate).
Using the Hashrate Index, we can estimate the so-called Hashprice parameter, which indicates how much a miner can earn from a conditional TH/s (or PH/s equal to 1,000 TH/s) of mining power. This is a very convenient parameter, because it allows you to estimate the specific income of each miner, regardless of its total hashrate.
The graph below clearly shows the qualitative growth of miners’ daily income in May per unit of hashrate:
Bitcoin Hashprice Index:
At the same time, while in “normal times” the share of commissions in income is under 5%, in May, as illustrated by the graph below, it has reached 86.5%!
Bitcoin Transaction Fees as % of Block Reward:
So, May turned out to be a very successful month for miners in general, and for Minto in particular.
What is Ordinal, and why did the miners' income grow in May?
Now let's try to understand the reason for what is happening. Its origins can be traced back to August 2017, when the update of the Bitcoin Segregate Witness (SegWit) protocol was implemented, allowing, among other things, to increase the Bitcoin block size from 1 to 4 MB.
In addition, in November 2021, the Taproot update was activated in the Bitcoin network. It was designed to reduce the amount of data in the blockchain and reduce fees. The introduction of Taproot allowed miners, firstly, to include a larger number of transactions in the block, i.e., the Bitcoin network has become more productive, and secondly, for various technical reasons, it removed the restriction on adding up to 400 kb of arbitrary data to the block. Programmer Casey Rodarmor decided to use the resulting maneuver space that emerged for storing text or graphic information, or, simply put, files.
The originality of the idea was that these files can be linked to unique ordinal numbers of specific Satoshi coins (1 BTC = 100,000,000 sat), which makes them “digital artifacts”, i.e., unique digital objects stored directly in the Bitcoin blockchain.
On December 14, 2022, Rodarmor implemented a protocol called Ordinal, which quickly gained popularity and led to an explosive increase in the number of transactions on the Bitcoin network. The information recorded in the blocks was referred to as “inscriptions."
According to Glassnode, most of the inscriptions are text, followed by pictures (what we are already used to in NFT form), and then - audio, video and other types of files that programmers like to operate with:
The opportunity to place some unique artifact in the oldest and most decentralized network certainly looks very attractive, given that almost no one has done it before, so the emergence of hype around Ordinals was only a matter of time - we observed it in early May like a bright comet flying by Earth.
If you go directly to the Ordinals service, you can get an idea of the new Bitcoin blockchain content. Here are the inscriptions in block #774424 dated January 31, 2023:
As it often happens, the idea was picked up by other enthusiasts, and while the Ordinals website cannot boast of high information content, the Hiro Explorer service already allows you to view inscriptions by block number:
Changes similar to those implemented in Ordinals always serve as a source of ideological disputes, especially since decentralized communities have maximum freedom, on the one hand, but are in dire need of consensus, on the other.
Against the background of discontented Bitcoin traditionalists who consider it immoral to “clog” the Bitcoin blockchain with garbage unrelated to its mission, a more practical discussion ensued about whether inscriptions are NFTs, and if so, what their advantage is. Or, from another angle - are NFT “digital artifacts," like inscriptions?
The difference between the regular NFT and inscriptions really does exist. In other words, an NFT on the Ethereum blockchain and an inscription in the Bitcoin blockchain are not the same thing at all.
The fact is that in the case of Bitcoin, all metadata embodying a digital artifact is stored directly in the Bitcoin blockchain, whereas the metadata of an NFT created in Ethereum or even in Polygon (Ethereum's 2-level protocol) is stored off-chain. For this reason, the inscription on the Bitcoin network cannot be altered, it remains there forever unchanged, despite the fact that in Ethereum, in the vast majority of cases, metadata can be changed or even deleted.
In the Bitcoin network, an inscription is tied to specific Satoshi coins, i.e., to specific pieces of Bitcoins (BRC-20 standard). In Ethereum, everything is different - a smart contract creates a separate unique token of the ERC-20 standard, which is the NFT. An unlimited number of such NFTs can be issued, whereas in the Bitcoin network this number is limited by both the block size and the finite number of Satoshi.
Thus, an inscription on the Bitcoin network can be called an NFT, if desired, but essentially it is not. It is still something greater in terms of uniqueness, storage reliability and inflationary value, that’s why the name “digital artifact” is a much better fit.
What will happen to Bitcoin after all the halvings?
An example of the use of inscriptions shows that the Bitcoin blockchain can become both the foundation of a payment system, and a repository of important events - a repository with perhaps one of the highest levels of trust and reliability. Today these are just useless texts and pictures, but this doesn’t mean that it will always be this way. Obviously, the most decentralized network in the world with such a high level of trust is worthy of better and meaningful use WHEN more important, and maybe even critical information of a global nature is recorded there. What kind of information? Well, that may just be the most interesting open question for now.
We can assume that, just like with Ordinals, bursts of interest in the Bitcoin network will continue, and sooner or later there will be a new need to increase the block size, which is implemented with the next update. In addition, the example of Ordinals clearly shows how naive it is to assume a decrease in miners' interest in Bitcoin as the rewards for mined blocks decrease as a result of halving, or even after the last Bitcoin in the world is issued (approximately in 2140).
Transaction fees can easily replace the rewards for the mined blocks and even exceed them!
Further evolution of digital technologies in general and the Bitcoin network in particular will inevitably lead to transaction fees becoming the main source of income for miners (and they, as it turned out, can be quite commensurate with the current reward for a block). Moreover, the Bitcoin network itself, if it is not destined to become a global payment system, will handle not so much payment information as information of some other, critically important nature. The Bitcoin network may well serve not only as a payment service, but also as a global decentralized data repository, and mining is a tool to ensure its reliability and security. In this sense, the limitation of the Bitcoin issue does not play any role at all, since block mining can continue after its completion.
Interestingly, the development of digital (and any other) technologies is replete with cases where the by-product turns out more important than the main one, but its potential is ignored by those who should’ve been the first to seize the new opportunities. For instance, that’s what happened to the Internet in the 1970s, when a group of enthusiastic researchers from Xerox created a solution linking Ethernet and ARPAnet for the convenience of their work, which allowed data to be transferred between different computer networks. This event can actually be considered the germination of the modern Internet.
Meanwhile, Xerox itself was so focused on its core business that it missed what it was holding in its hands, and it is unlikely that even the fact that the word Xerox has become synonymous with a copier can be considered a worthwhile reward. The copier and the Internet are incomparable concepts in their influence on the world, just as in the end it may turn out that the Bitcoin blockchain will turn the world around to a much greater extent than Bitcoin itself as the first cryptocurrency, leaving us only the names of those who pioneered it.
How much did the miners earn?
However, no matter how fascinating it is to reflect on the vicissitudes of fate, technological progress and the future, let's get back to today.
So, thanks to commissions, miners are earning much more in May than in April.
Minto’s net income for 10 days from 100 TH/s:
Thus, in the first decade of May, Minto's clients earned twice as much as in the same period of April, and thrice as much as in the same period of March, receiving a yield (APY) of over 60%!
The table above shows the results based on 100 TH/s of mining power for the first decade of each month in 2023. Thus, May has become the most successful month for miners this year, which is doubly valuable because it is practically unrelated to the growth of the Bitcoin’s exchange rate.
So, the emergence of Ordinals has affected the crypto industry twice - in the short and long term. Not only did it allow miners to do better, it also showed the groundlessness of fears for the Bitcoin network both in the near and in the rather distant, but still foreseeable future!