In recent years, the Bitcoin network has expanded beyond its traditional functions of storing and transmitting value. The introduction of a privacy upgrade in late 2021 unintentionally enabled data storage on the Bitcoin blockchain, leading to NFT-like inscriptions and BRC-20 tokens that utilize Ordinal Theory for asset tracking.
The popularity of these new features, particularly the BRC-20 token standard, has resulted in increased transaction costs across the Bitcoin network. The demand for “stamping” limited block space with new data has driven transaction fees so high that Binance, a global exchange, had to pause BTC withdrawals twice in May 2023. To mitigate these costs, Binance announced its decision to leverage the Lightning Network, a decentralized Layer 2 network designed for fast transactions bypassing the Bitcoin blockchain, for processing BTC withdrawals.
While some argue that Bitcoin should remain solely a digital gold and store of value, it has the potential for much more.
Bitcoin’s role as a trustless alternative to centralized banking is well-established. Introducing new use cases for its immutable blockchain, such as BRC-20 tokens, will lead to more efficient utilization of limited block space. This, in turn, will drive the widespread adoption of the Lightning Network as a scaling solution, expanding Bitcoin’s utility as a global currency. The growth of the Lightning Network will offer a trustless alternative to centralized payment processors, further enhancing Bitcoin’s versatility.
Challenges Faced by BRC-20 Tokens
The BRC-20 token standard, created in March 2023, is still in its early stages. Like ERC-20 tokens on the Ethereum network, BRC-20 tokens allow for minting other assets through Ordinal inscriptions. However, they currently need more of the utility provided by their ERC-20 counterparts, such as smart contracts. Despite this, many BRC-20 tokens, including meme tokens like PIZA and MEME, have emerged for trading and speculation. As of June 26, 2023, the market cap for BRC-20 tokens surpassed $260 million, according to CoinGecko.
However, the minting of these tokens has driven up Bitcoin’s transaction costs. While this benefits Bitcoin miners who earn BTC through transaction fees, it has increased prices for average users. On May 8, 2023, the average Bitcoin transaction fee reached a two-year high of $30.91, despite the ongoing bear market. Those abstaining from BRC-20 tokens may find themselves frustrated with the rising costs.
Nonetheless, introducing BRC-20 tokens has sparked discussions about network scaling for Bitcoin.
Already Making an Impact
BRC-20 tokens need to include some of the utility and features offered by their ERC-20 counterparts. However, if they have similar staying power as meme-coins and NFTs on other networks, their presence will continue to drive transaction fees above historical averages.
This could have long-term implications for Bitcoin users.
Higher transaction costs create a demand for more efficient transactions. While some improvements can be made at the protocol level, scaling technologies on a second layer will play a significant role. The Lightning Network, for instance, enables fast and cost-effective payments by batching transactions through long-term smart contracts while leveraging Bitcoin’s underlying security.
Future Solutions:
Lightning Network as the Global Payments Processor
Compared to on-chain transactions, Lightning Network fees are incredibly modest. Currently, the network charges fees to reward network node operators, with the median cost remaining at 0.002%, according to Amboss’ Bitcoin Lightning Network analytics platform. This starkly contrasts traditional payment networks that charge 2% to 3% of the payment amount for each transaction.
The Bitcoin community is currently subsidizing the creation of the Lightning Network, resulting in low fees. Even with increased demand over time, sustainable fee rates for Lightning are projected to reach around 0.03%, assuming less generous operator behavior.
The combination of Bitcoin’s robust monetary policy and Lightning’s efficient transaction network holds immense potential. Bitcoin has long positioned itself as an alternative to a flawed central banking system. By leveraging the Lightning Network’s capabilities and efficiently utilizing Bitcoin’s blockchain, the vision of Bitcoin as a global currency becomes increasingly tangible.