Glassnode data research: Looking back at the "crazy week" of the Bitcoin Inscription outbreak

The advent of Ordinals, Inions, and BRC-20 tokens, certainly an unexpected part of Bitcoin’s evolution, has sparked a rich discussion of technical, practical, and philosophical value.

Written by: Glassnode

Reprinted with official authorization by Wu Shuo

Article published on May 15th, some data lagged

The week of May 8 saw a surge in demand for bitcoin block space, pushing transaction fees to all-time highs as investors developed speculative interest in coins issued via text file inscriptions.

Bitcoin transaction volume has hit a new all-time record, and the average fee paid to miners per block has surpassed the block reward of 6.25 BTC. While it remains to be seen whether these BRC-20 tokens will gain widespread adoption in the long-term, miners will undoubtedly embrace this short-lived boost in mining revenue after a severe bear market in 2022.

In this report, we dive into the impact of demand for BRC-20 tokens on Bitcoin on-chain activity, types of inscriptions, and miner revenue.

NEW NEED FOR BITCOIN BLOCK SPACE

The demand for block space on the Bitcoin network hit an all-time high last week, driven primarily by the emergence of new BRC-20 tokens. BRC-20 is a proposed mechanism for issuing tokens on the Bitcoin ledger that utilizes ordinal number theory (see report for details) and inscribes JSON text files into the blockchain to achieve its goals.

Given the small data footprint of text inscriptions and the high fees BRC-20 users are willing to pay, miners were able to fill blocks with a record number of transactions. Bitcoin’s transaction volume hit an all-time high last week, with 682,000 transactions per day, 39% higher than its 2017 peak, certainly an impressive achievement.

The average number of transactions per block more than doubled, from a typical baseline of around 2,000 transactions per block, to over 4,300 per block. Since Bitcoin has a block size limit, the significant increase in the number of transactions comes directly from the recording of the 75% discount applied to the witness data, which makes it possible to consume the available block capacity more intensively.

Despite the rapid growth in transaction activity, the number of active addresses fell to a cyclical low of just 566,000 addresses per day. In a somewhat unexpected situation, many BRC-20 users appear to be reusing their Bitcoin addresses, perhaps because they are more familiar with how account-based chains such as Ethereum or Solana work, and less familiar with Bitcoin's UTXO system The understanding is not deep.

Tsypruyan first spotted this phenomenon, noting that 71% of transaction outputs were reused addresses, which is up from a baseline of roughly 50% (mainly related to wallet management on exchanges).

text takeover

Since BRC-20 inscriptions consist of only small JSON text files and benefit from the 75% SegWit discount on witness data, their on-chain data footprint is relatively small. As a result, the average transaction size in bytes dropped to 405 bytes, an almost all-time low.

This is in stark contrast to primarily image-based inscription transactions in the first quarter of this year, where the average transaction size reached an all-time high of around 1,500 bytes per transaction.

The growth of text-based inscriptions has left behind the first wave of image and document inscriptions. Throughout May, there were several days when the number of single-day inscription codes exceeded 350,000, and it has stabilized at more than 250,000 per day in the past week.

Text-based inscriptions account for more than 50% of the total pool of confirmed transactions. This is significantly higher than the 5% to 20% share of image inscriptions in the first wave, further underscoring the size of this round of demand.

So far, the total number of text-based inscriptions has far exceeded that of image-based inscriptions, exceeding 5 million. There are now almost an order of magnitude more text-based inscriptions than image-based inscriptions, and the total number of text files written to the Bitcoin blockchain has reached 5.69 million, accounting for 89% of the total to date.

It should be noted that the Y-axis in the figure below uses logarithmic coordinates.

** Miners have reaped short-term generous rewards **

The extreme urgency of BRC-20 traders is reflected in the exorbitant fees they are willing to pay for this trade. As the network transaction congestion on Bitcoin's mempool reaches a fever pitch, the pressure on transaction fees has increased dramatically.

Only five times in history has the average fee paid per block exceeded the block reward, the last time being at the market peak in 2017. For all five of these incidents, periods of high fee pressure were short-lived, coming down after just a few days.

At the height of BRC-20 mania, the average fee per mined block was 6.66 BTC, which brought the total reward to 12.9 BTC per block (~$348,000).

In this second wave, text documents accounted for 30% to 60% of the total fees paid, which is much higher than the 5% to 20% image inscriptions in the first wave.

In total, traders have paid miners a cumulative 1,262 BTC, of which 1,090 BTC (86%) were paid out in the last week. The graph below shows how the cost pressure associated with text files has exploded.

As demand for Bitcoin block space rapidly increased, the total dollar fee payments per day hit a near-record high, topping out at $17.8 million per day. A vexing side effect is that the cost of sending regular Bitcoin transactions has also reached sky-high levels, with the median and average fees required for a block containing a transaction reaching $20.17 and $30.80, respectively.

Over the past month, the spot price of Bitcoin has fluctuated between $26,000 and $30,000. During the same period, miners earned $773 million from block rewards of 6.25 bitcoins. With the recent escalation of transaction fee pressure, miners have already captured an additional $100 million in total revenue.

As a result, the fee-related portion of miner revenue reached 11.5%, which is in line with the high levels seen during the bull market in 2017 and 2021.

The acceleration in fee pressure is also historic. The graph below shows Z-Scores for a range of miner fee income, with training windows ranging from 1 to 4 years. The purpose of this is to identify periods during which fee pressures have increased in a statistically significant manner under broad market conditions.

The acceleration in fee pressure over the shorter 1- to 2-year window is arguably the fastest in history, only comparable to the 2011 era when Bitcoin barely had a year of price history. Over the longer 3- to 4-year window, fee pressures have risen faster and on a larger scale than the 2021 bull market, best compared to the 2013 and 2017 bull markets.

Dollar revenue per unit of Exahash, commonly referred to as the hash price, is an ideal tool for assessing the impact on miner revenue. It takes into account not only the BTC spot price and fee pressure, but also the estimated hashrate competing for rewards.

The hash price briefly rose to $172,200/EH last week, however, as fee pressure subsided, the hash price collapsed by 55%, falling back to $76,300/EH. While this burst in demand for block space has provided a positive boost to miner revenues, the trend has so far been short-lived and looks pale compared to the relentless downward trend in hash prices (on logarithmic terms). negligible.

Of the 3,275 bitcoins paid to miners in total fees over the past two weeks, the miners' total balance has only increased by 655 bitcoins, or roughly 20 percent of the fees paid.

The blue trace below shows the percentage of newly mined bitcoin that miners are selling, which continues to swing around 100%.

Overall, while miners have undoubtedly enjoyed rising revenues, they appear to be mostly sold, likely providing relief after the brutal downtrend of the 2022 bear market.

Summary and Conclusion

The advent of Ordinals, Inions, and now BRC-20 tokens has certainly been an unexpected part of Bitcoin’s evolution, sparking a rich discussion of technical, practical, and philosophical value. We’ve made it clear that these technologies have so far brought new buyers to Bitcoin block space, both at the lower end of paying fees and now at the upper end.

Last week, total fees paid exceeded block rewards, which has only happened five times in history. The event pushed USD-denominated fee revenue to an all-time high of nearly $17.8 million/day and provided miners with a much-needed revenue boost beyond 2022.

Whether Inions and BRC-20 tokens will have long-term staying power remains to be seen, but they certainly give us new perspective on the need for settlement assurance in Bitcoin.

*Wu Said Note: The growth of activities on the Bitcoin chain and miners’ income brought by BRC-20 tokens has gradually shown a downward trend after reaching a historical high on May 8. *

The current transaction volume of Bitcoin Ordinals transactions is less than 2 million US dollars, and the number of transactions is less than 6,000 times, which is far lower than the 18.2 million US dollars and 17,000 transactions on May 8.

Data source: @DomoData Data Panel

The number of daily transactions dropped from 628,000 on May 1 to 423,000 on May 20; the proportion of transaction fees in the total income of miners also dropped from 42.5% on May 8 to 9.4% on May 20.