An eruption of memecoins and nonfungible tokens on the Bitcoin blockchain has reshaped the revenue profile of miners and stirred questions about how lasting the upheaval will prove to be.
New software known as Ordinals paved the way for the NFTs and meme tokens to come to the network this year. Galaxy Digital Holdings Ltd. says the Bitcoin NFT ecosystem could be worth $4.5 billion by 2025, while about 25,000 memecoins have been tallied on the blockchain since they first emerged in March.
The NFT and meme-token craze spurred record transactions and an ensuing fee windfall for miners, who run the computers underpinning Bitcoin. At one point in May, transaction fees made up over 40% of revenues, whereas miner income is usually dominated by the new Bitcoin they get for securing the blockchain.
“The Ordinals protocol has stimulated a seismic shift in the Bitcoin mining landscape,” said Jihan Wu, chairman of Singapore-based Bitdeer Technologies Group, one of the top crypto miners by computer power.
Ordinals and a crypto rebound have eased the pressure on mining margins caused by last year’s digital-asset rout and high energy costs. But Bitcoin purists argue the Ordinals phenomenon clogs the network and interferes with the largest cryptocurrency’s store-of-value and payments functions.
The mean fee per transaction on the Bitcoin blockchain began April at $2.80, reached $30 on May 8 and moderated to $6 on May 18, CryptoQuant data show. Total fee income attributable to Ordinals stands at about $37.4 million, according to data compiled by Dune Analytics AS.
Developer Casey Rodarmor created Ordinals, a software protocol that lets users inscribe digital content like videos, images and text on satoshis, the smallest unit of Bitcoin. There are 100 million satoshis in one Bitcoin.
Rodarmor’s innovation then allowed a pseudonymous blockchain analyst called Domo to develop the Bitcoin Request for Comment — or BRC-20 — standard, which led to the explosion of memecoins.
The durability of the sudden ardor for NFTs, or digital collectibles, and speculative tokens on the Bitcoin blockchain remains an open question. The market value of the memecoins was heading toward $1 billion earlier in May but has since declined to about $582 million, figures from BRC-20.io show.
The BRC-20 tokens have no utility, said Carlos Gonzalez Campo, a research analyst at crypto exchange-traded product provider 21Shares AG.
The fundamental takeaway may be that Ordinals has created a pathway to uses of the Bitcoin network that didn’t exist before.
“While the memecoin frenzy on Bitcoin will likely subside eventually, valuable use cases will emerge from the chaos, such as utilizing Bitcoin as a data availability layer and storing crucial documents that require permanent preservation,” said Sami Kassab, a research analyst at Messari.
Shares Rally
A sustained boost to transaction income could help sustain the Bitcoin network longer term by keeping miners engaged. Transactions will be the sole revenue source by about 2140, when Bitcoin is due to hit its cap of 21 million tokens and new coins will no longer be issued in return for securing the blockchain.
For now, Ordinals is helping to fuel renewed investor enthusiasm for Bitcoin miners. The 20-member MVIS Global Digital Assets Mining Index is up 110% so far in 2023, outstripping Bitcoin’s 74% advance.
The application of ordinals is “completely rewriting how people think about mining profitability,” said Colin Harper, head of content and research at crypto-mining services provider Luxor Technologies.