This is an op-ed by Jesse Schrader, co-founder and CEO of Amboss, the Lightning Network explorer and analysis tool.
For years, you could only do two things on the Bitcoin network: save BTC or spend it. then, Privacy upgrade in late 2021 An unintended consequence was to allow data to be stored on the Bitcoin blockchain, which led to NFT-like patterns and BRC-20 tokens, both of which apply Ordinal theory to trace assets.
The popularity of NFT-like ordinal patterns and the BRC-20 beta token standard has led to higher transaction costs across the Bitcoin network. The frothing demand to “seal” the limited block space with new data has driven up transaction costs so much that in May 2023, Binance twice I had to pause bitcoin withdrawals, which is a risky and undesirable move for the global exchange. To help manage transaction costs, Binance announced that it will start using the Lightning Network – A decentralized layer two network designed for fast transactions that bypass the underlying Bitcoin blockchain – to process BTC withdrawals.
While some argue that Bitcoin should stick to being digital gold, I don’t see it that way.
As a store of value, bitcoin will continue to provide an unreliable alternative to central banking; Other uses of an immutable blockchain do not detract from this functionality. On the contrary, the emerging uses of the Bitcoin blockchain will lead to a more efficient use of limited block space, leading to the widespread adoption of the Lightning Network as a solution for scaling bitcoins as a global currency. The growth of the Lightning Network will provide an unreliable alternative to centralized payment processors, expanding the usefulness of Bitcoin.
Challenges faced by the BRC-20 tokens
The BRC-20 symbol standard is very new – Created in March 2023. If his name sounds familiar, that’s because he looks a bit like him ERC-20 tokens Such as Shiba Inu and MakerDAO that run on top of the Ethereum network. Whereas Bitcoin has traditionally been about the storage and transfer of value, BRC-20s allow other assets to be “minted” in an ordinal pattern. Now, a large number of BRC-20 for trading and speculation, many in the form of meme tokens, have appeared from Pizza to meme. As of June 26, 2023, the market capitalization of BRC-20 tokens was over $260 million, According to CoinGecko.
But all this minting leads to higher bitcoin transaction costs. This isn’t necessarily bad for bitcoin miners, who earn BTC by processing transactions. CoinDesk mentioned In early May 2023, some BTC miners were earning more by charging transaction fees than they were by creating new BTC. This is quite a lot, considering that each block reward currently amounts to 6.25 BTC (worth about $188,000 at the time of writing).
As for whether this is beneficial to users, that is debatable. Average bitcoin transaction fees recently hit a two-year high, It peaked at $30.91 On May 8, 2023, despite the bear market; Those who abstain from BRC-20s will likely grumble about the fee increase. On the other hand, the introduction of the BRC-20 token standard has inspired deeper conversations about expanding the Bitcoin network.
already an effect
For now, BRC-20 lacks some of the usefulness of their ERC-20 cousins. They don’t use, for example, smart contracts, and their usefulness is mostly the same PFP NFTsleading many to say that they are not worth the cost.
It remains to be seen if the demand for Bitcoin-based tokens is sustainable or if this activity will be redirected to other, more permissive or centralized networks.
In one scenario, higher fees could drive traditional bitcoin users away from the network. This is not likely. Bitcoin’s conservative and unchanging monetary policy remains the main attraction; There is no real network competition in this regard as a hedge against monetary decline.
But assuming ordinal patterns and BRC-20 tokens show the same staying power as memecoins and NFTs on other networks – remember, Shiba Inu, they have Market value of $5 billion And Bored Apes is almost a household name — it will continue to pay transaction fees above its historical average.
This could have long-term effects for bitcoin users.
In particular, higher transaction costs increase the demand for more efficient transactions. While some of this can be done at the protocol level (for example, SegWit, the controversial 2017 upgrade to Bitcoin that enabled smaller transaction sizes by separating signature data from transaction data), much of it could come from scaling technologies in second layer.
Enter: the Lightning Network, which aggregates transactions via long-term smart contracts and uses the underlying security of Bitcoin to allow fast and cheap payments.
future solutions
The Lightning Network charges very modest compared to its on-chain counterparts. While fees fluctuate, overall network fees have not increased as a result of BRC-20s or engravings. The network currently charges a fee to reward operators of network nodes. According to data available via Amboss’s Bitcoin Lightning Network analytics platform, the Average fee is still 0.002%. Compare that to traditional payment networks that charge a fee 2% to 3% of the payment amount each time you swipe your credit card.
The Bitcoin community is currently supporting the creation of the payment network, resulting in extremely low Lightning fees. Even as demand increases over time, sustainable fee rates for Lightning should grow to around 0.03%, based on less generous operator behavior.
Poised to become the default processor for global payments
The combination of Bitcoin monetary policy and the Lightning transaction network is a powerful combination. Bitcoin has long presented itself as an alternative to a broken central banking system. But with the competitive uses of a narrow and unforgiving blockchain, the efficiencies gained through Lightning transactions are more visible than ever.
Although the Lightning Network has been years in the making, it is maturing at the right time – ready to enable billions of transactions across the network – and becoming the de facto global payment processor.
This is a guest post by Jesse Schrader. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.