Over the years, the Bitcoin network functioned primarily as a platform for storing and expending BTC. A privacy upgrade in late 2021 introduced an unanticipated capability: data storage on the Bitcoin blockchain. This development facilitated the creation of NFT-like inscriptions and BRC-20 tokens, employing Ordinal Theory to track assets.
The interest surrounding NFT-like Ordinal inscriptions and BRC-20 tokens resulted in increased transaction expenses on the Bitcoin network. The surging desire for “stamping” limited block space with new data led to a rise in transaction costs so notable that Binance, in May 2023, had to pause BTC withdrawals twice, a precarious move for a global exchange. To counterbalance these costs, Binance started using the Lightning Network— a decentralized, Layer 2 network engineered for swift transactions circumventing the core Bitcoin blockchain.
While some may advocate for Bitcoin remaining digital gold, this is not the universal view. Bitcoin’s ability to serve as a trustless alternative to central banking remains undisputed, but its blockchain’s emerging use cases should not undermine this role. Rather, these novel applications could facilitate a more efficient utilization of the limited block space, prompting widespread adoption of the Lightning Network as a scalability solution for bitcoin. As a trustless alternative to centralized payment processors, the Lightning Network’s expansion could broaden Bitcoin’s utility.
BRC-20 Tokens: Rising to the Challenge
Launched in March 2023, the BRC-20 token standard is a newcomer to the scene. Its resemblance to ERC-20 tokens, such as Shiba Inu and MakerDAO on the Ethereum network, is undeniable. BRC-20 tokens differ from Bitcoin’s traditional role of storing and transmitting value, allowing additional assets to be “minted” in an Ordinal inscription. A surge of BRC-20s has emerged for trading and speculation, with numerous meme tokens ranging from PIZA to MEME. According to CoinGecko, the market cap for BRC-20 tokens exceeded $260 million as of June 26, 2023.
However, this minting craze has driven up Bitcoin transaction costs. While potentially beneficial for Bitcoin miners who earn BTC by processing transactions, the implications for users are debatable. With the introduction of the BRC-20 token standard, the conversation around network scaling for Bitcoin has deepened.
Impact and Future Directions
Presently, BRC-20 tokens lag behind their ERC-20 counterparts in terms of utility. Their primary function mirrors that of PFP NFTs, leading to debates regarding their worth. The sustainability of demand for Bitcoin-based tokens and whether such activity will shift towards more permissive or centralized networks remains to be seen.
Should Ordinal inscriptions and BRC-20 tokens demonstrate the same resilience as memecoins and NFTs on other networks, they will persistently push transaction fees above their historical average. This situation could lead to long-term effects on Bitcoin users, primarily creating a demand for more efficient transactions.
The solution? The Lightning Network, which bundles transactions via long-term smart contracts, leveraging Bitcoin’s underlying security to facilitate swift, inexpensive payments.
Looking Forward: The Lightning Network
Compared to on-chain alternatives, Lightning Network fees are significantly lower. As the Bitcoin community subsidizes the creation of the payment network, Lightning fees are impressively low. Even with increasing demand over time, sustainable fee rates for Lightning are expected to reach around 0.03%, based on less generous operator behavior.
With the combination of Bitcoin’s monetary policy and the Lightning Network’s transaction capabilities, an effective solution emerges. Bitcoin, a long-standing alternative to a flawed central banking system, can become more efficient through the Lightning Network’s transactions. As the Lightning Network continues to mature, it stands ready to enable billions of transactions across the network and possibly become the global standard for payment processing.
As we delve deeper into the era of digitization, user-friendly and efficient transaction methods are gaining prominence. Bitcoin’s evolution from a simple store of value to a platform facilitating diverse transactions represents a step in this direction. It’s crucial to highlight that while NFTs and tokens like BRC-20s diversify the landscape, their utility and value are still under exploration. Their success and acceptance, driving network scalability and adoption of solutions like the Lightning Network, may also have indirect implications for other cryptocurrencies. As such, it’s an exciting time to witness the shaping of our financial future.