This is an opinion piece by Jesse Shrader, co-founder and CEO of Amboss, a Lightning Network exploration and analytics tool.
For years, you could only do two things on the Bitcoin network: you could save BTC or you could spend it. SO, a privacy update at the end of 2021 had the unintended consequence of allowing data to be stored on the Bitcoin blockchain, resulting in NFT-like registrations and BRC-20 tokens, both applying ordinal theory for asset tracking.
The popularity of NFT-like ordinal inscriptions and the experimental BRC-20 token standard have driven up transaction costs on the Bitcoin network. Frothing demand to ‘buffer’ limited block space with new data has pushed transaction costs so high that in May 2023, Binance twice had to suspend BTC withdrawals, a risky and undesirable step for a global exchange. To help manage transaction costs, Binance announced that it would start using the Lightning Network – a decentralized layer 2 network designed for fast transactions by bypassing 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 a trustless alternative to the central bank; other uses of its immutable blockchain do not diminish this function. On the contrary, emerging uses of the Bitcoin blockchain will result in more efficient use of limited block space, leading to widespread adoption of Lightning Network as a scaling solution for bitcoin as a global currency. The growth of the Lightning Network will provide a trustless alternative to centralized payment processors, expanding Bitcoin’s usefulness.
Challenges faced by BRC-20 tokens
The BRC-20 token standard is extremely new – created in March 2023. If his name sounds familiar to you, it’s a bit like ERC-20 tokens such as Shiba Inu and MakerDAO which operate on the Ethereum network. While Bitcoin has traditionally been about storing and transmitting value, BRC-20s allow other assets to be “minted” in an ordinal listing. Now a slew of BRC-20s have emerged for trading and speculation, many in the form of meme tokens, PIZA For EVEN. As of June 26, 2023, the market capitalization of BRC-20 tokens was over $260 million, according to CoinGecko.
But all that minting drives up bitcoin’s transaction costs. This is not necessarily bad for bitcoin miners, who earn BTC by processing transactions. CoinDesk reported in early May 2023 that some BTC miners were earning more by collecting transaction fees than by creating new BTC. That’s a lot, considering that each block reward currently earns miners 6.25 BTC (worth around $188,000 at the time of writing).
Whether it’s good for users is debatable. Average bitcoin transaction fees recently hit a two-year high, peaking at $30.91 on May 8, 2023, despite a bear market; those who abstain from BRC-20 are likely complaining about the increased fees. On the other hand, the introduction of the BRC-20 token standard has inspired deeper conversations about network scaling for Bitcoin.
Already an impact
At the moment, the BRC-20s lack some of the utility of their ERC-20 cousins. They do not use, for example, smart contracts, and their utility is generally the same as that NFT PFPleading many to say 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 force traditional Bitcoin users away from the network. It’s unlikely. Bitcoin’s immutable and conservative monetary policy remains the main attraction; the network has no real competition in this regard as a hedge against monetary debasement.
But assuming ordinal listings and BRC-20 tokens show the same endurance as memecoins and NFTs on other networks – Shiba Inu, remember, has a $5 billion market cap and Bored Apes are practically a household name – they will continue to drive transaction fees above their historical average.
This could have long term impacts on Bitcoin users.
In particular, higher transaction costs create demand for more efficient transactions. While some of this can be done at the protocol level (e.g. SegWit, the controversial 2017 upgrade to Bitcoin that reduced transaction sizes by separating signature data from transaction data), much of it can come from scaling technologies on a second layer.
Enter: the Lightning Network, which aggregates transactions through long-term smart contracts and uses Bitcoin’s underlying security to enable fast and cheap payments.
Lightning Network fees are extremely modest compared to their on-chain counterparts. Although fees fluctuate, overall network fees have not increased due to BRC-20s or sign-ups. The network currently charges fees to reward network node operators. According to data available through Amboss’ Bitcoin Lightning Network analytics platform, the median fee remains at 0.002%. Compare that to traditional payment networks, which charge 2% to 3% payment amount each time you swipe your credit card.
The Bitcoin community is currently subsidizing the creation of the payment network, resulting in extremely low Lightning fees. Even with increased demand over time, sustainable royalty rates for Lightning are expected to reach around 0.03%, based on less generous carrier behavior.
Ready to become the default global payments processor
The combination of Bitcoin monetary policy and Lightning’s transaction network is powerful. Bitcoin has long touted itself as an alternative to a failing central banking system. But thanks to competitive uses of its ruthlessly tight blockchain, the efficiencies gained through Lightning transactions are more prescient than ever.
Although the Lightning Network has taken years to develop, it is maturing at the perfect time – ready to enable billions of transactions on the network – and to become the de facto global payment processor.
This is a guest post by Jesse Shrader. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.