Bitcoin blockspace experienced a historically significant inflow of demand last week as speculators rushed to mint BRC-20 tokens via text inscription. This resulted in significant fee pressure, pushing K-worker fee revenue towards an ATH and exceeding the block subsidy of 6.25 BTC for the fifth time.

Demand for bitcoin block space surged this week as speculative interest in minted tokens issued via inscriptions in text files pushed fees higher.

Bitcoin transaction volume hit an all-time high, and the average fees paid to K-workers per block exceeded the block subsidy of 6.25 BTC. While it remains to be seen whether these BRC-20 tokens will gain long-term attention, the short-lived increase in K-industry revenue is undoubtedly a welcome respite for K-workers after the bear market in 2022.

New Demand for Bitcoin Blockspace?

This week, the Bitcoin network experienced a historic influx of demand for block space with the advent of the BRC-20 token. The shorthand summary of BRC-20 is that it is a proposed mechanism for issuing tokens on the Bitcoin ledger. The system utilizes ordinal number theory and is implemented by writing JSON text files to the blockchain.

Given the smaller data footprint of text inscriptions and the higher fees that BRC-20 users are willing to pay, K-workers are able to fill blocks with record-breaking numbers of transactions. This week’s new ATH of 682k daily transactions was reached, an incredible 39% higher than the 2017 peak.

The average number of transactions per block has more than doubled, from a typical baseline of around 2k transactions per block to over 4.3k per block. Since Bitcoin has a block size limit, this significant increase in the number of transactions is a direct result of inscriptions taking advantage of a 75% discount on witness data, allowing for a more intensive consumption of available block capacity.

Interestingly, while transaction activity has boomed, the number of active addresses has dropped to a period low of 566,000 addresses per day. This is a strange scenario where many BRC-20 users appear to have reused their Bitcoin addresses, perhaps because they are more familiar with how account-based chains like Ethereum or Solana operate, rather than the Bitcoin UTXO system.

Tsypruyan first spotted this behavior, noting that 71% of transaction outputs were reused addresses, up from a baseline of ~50% (which was mostly related to exchange wallet management).

Text Takeover

Since BRC-20 inscriptions are just small JSON text files, and take advantage of the 75% SegWit discount for witness data, their on-chain data footprint is relatively small. As a result, the average transaction size (in bytes) dropped to 405 bytes, which is almost an all-time low.

This is in stark contrast to the first wave of mostly image-based inscriptions seen in the first quarter, which reached an all-time high of around 1.5 KB per transaction.

The explosion of text-based inscriptions eclipsed the first wave of images and documents. In several instances throughout May, more than 350,000 text inscriptions were encoded onto the chain in a single day, and has remained above 250,000 per day for the past week.

Text-based inscriptions account for more than 50% of total confirmed transactions. This is significantly higher than the 5% to 20% dominance of image inscriptions in the first wave, showing the scale of this wave of demand.

As a result, the total number of text inscriptions has surpassed the total number of image inscriptions to date, exceeding 5 million. Text-based inscriptions now outnumber image-based inscriptions by almost an order of magnitude, with the total number of text files written to the Bitcoin blockchain reaching 5.69 million (89% of the total to date).

Note that the y-axis in the following chart is on a logarithmic scale.

K workers get a brief bonus

The extreme urgency felt by BRC-20 traders is reflected in the excessive fees they pay for the experience. As our Bitcoin mempool congestion reaches white-hot levels, fee pressure is rising dramatically.

For the fifth time in history, the average fees paid per block exceeded the block subsidy, the last time being during the market peak in 2017. For all five events, the period of high fee pressure was short-lived and subsided after a few days.

At the height of the BRC-20 frenzy, the average fee paid per mined block was 6.66 BTC, with a total reward of 12.9 BTC (about $348,000) per block.

In the second wave, text documents accounted for 30% to 60% of total payments, which is significantly higher than the 5% to 20% of image inscriptions that typically occurred in the first wave.

Inscription paid a total of 1,262 BTC in fees to K-workers, of which 1,090 BTC (86%) occurred in the last week. The following chart shows how much fee pressure is associated with text files.

As demand for Bitcoin block space rapidly grows, the total amount of USD-denominated fees paid per day has nearly hit an all-time high, peaking at $17.8 million per day. A challenging side effect of this is that the cost of sending regular Bitcoin transactions has also reached extremely high levels, with the median and average fees required to include a transaction in a block reaching $20.17 and $30.80, respectively.

Last month, the spot price of BTC fluctuated between $26,000 and $30,000. During the same period, K-worker earned $773 million in revenue from a block subsidy of 6.25 BTC. Due to the recent increase in fee pressure, K-worker's total revenue increased by $100 million.

As a result, the proportion of K-worker 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 has also been historically significant. The chart below shows a series of Z-scores for K-worker fee income, with training windows ranging from 1 to 4 years. The goal is to identify periods when fee pressure rose in a statistically significant manner under various market conditions.

In the shorter 1-2 year window, the acceleration of fee pressure is arguably the fastest in history, comparable only to the era of 2011 when Bitcoin had barely a year of price history. In the longer term 3-4 year window, fee pressure has risen faster and more than the 2021 bull run, and is best compared to the 2013 and 2017 bull runs.

The USD earner per Exahash, commonly referred to as the hash price, is an ideal tool to assess the impact on K-worker income. It takes into account not only the BTC spot price and fee pressure, but also the estimated hash rate competing for rewards.

The hash price briefly rose to $172,200/EH this week, but has since plummeted 55% to $76,300/EH as fee pressure recedes. While this burst in block space demand has provided a positive boost to K-worker revenue, it has so far been short-lived and pales in comparison to the relentless downward trend in hash price (on a logarithmic scale).

Of the total 3,275 BTC paid to K-workers in the past two weeks, K-workers’ total balance has only increased by 655 BTC, or about 20% of the fees paid. The blue track below shows the proportion of newly mined BTC spent by K-workers, and it continues to oscillate around 100%.

Overall, while K-Workers has undoubtedly enjoyed a revenue boost, it appears that much of that revenue has been distributed, which could provide relief after the brutal downtrend of the 2022 bear market.

Summary and Conclusion

The advent of serial numbers, inscriptions, and now BRC-20 tokens remains one of the more unexpected developments in Bitcoin, sparking a healthy debate about the technical, practical, and philosophical merits. As is well known, these technologies have so far brought new buyers to Bitcoin blockspace, both at the upper and lower limits of fee rates paid.

Total fees paid this week exceeded block rewards for only the fifth time in history. The event pushed USD-denominated fee revenue to nearly a new ATH of $17.8 million per day and provided a much-needed revenue boost for K-workers beyond 2022.

Whether Inscriptions and BRC-20 tokens have long-term staying power remains to be seen, but it does provide us with a new lens through which to view the demand for Bitcoin settlement guarantees.