Bitcoin Block Space Demand Rise and Its Impact on Mining Revenue

As the Bitcoin halving approaches, miners are facing concerns about a significant reduction in income. However, a new trend in block space demand may significantly or even completely offset the effects of the halving. Transaction fees are expected to become an important component of miner income and may even exceed block rewards.

This rise in fees mainly stems from the unconventional use of the Bitcoin network. Emerging projects and applications are bringing greater differentiation to the fee market, transforming the simple peer-to-peer electronic cash system into a more complex settlement form.

Emerging Trends in Bitcoin Trading Demand

Homogeneous Token Standard

Although early asset issuance projects like Counterparty and Colored Coins did not gain widespread adoption in the Bitcoin community, the demand for external assets has risen again. New token projects, such as BRC-20 and the upcoming Runes, have already brought significant trading demand rise.

Since its launch in March 2023, the issuance and transfer of BRC-20 assets have generated over $180 million in fees, accounting for 17% of the total fees on the Bitcoin network. The potential market value of Runes has surpassed $1.2 billion, which may trigger a significant demand for transactions during the halving.

collectibles

The Ordinals protocol introduces a method for tracking the smallest unit of Bitcoin (Satoshi), making each Satoshi a unique non-fungible unit. Users can attach data files (called inscriptions) to Satoshis, creating unique assets with collectible value.

Some coins have gained high premiums due to their digital significance or related inscriptions. For example, a coin with the "Genesis Cat" inscription was sold for $240,000. This trend may affect users' fee payment behaviors, especially during the halving period.

Privacy Trading and Accelerator

Transaction accelerator services, such as Marathon's Slipstream, provide users with a way to bypass the Bitcoin memory pool. Although these services are not widely popular at the moment, they may indirectly increase transaction fees and create a multi-sided fee market.

Miner Extractable Value (MEV)

With the changes in Bitcoin software and the evolution of trading models, the importance of MEV in the Bitcoin network may increase. Emerging applications such as collectibles, tokenized assets, and Bitcoin plugins create additional income opportunities for miners.

Evolution of Transaction Fee Market

The diversification of demand for Bitcoin transactions may become a savior for the mining economy. The new uses of block space are expected to significantly increase transaction fees, thereby offsetting the decrease in block rewards.

Currently, transaction fees are expected to account for about 14% of mining revenue after the halving, but this ratio could rise significantly. In certain blocks, fee income may even exceed 50%. If fee levels reach the average level by the end of 2023 (193 BTC per day), it could offset 43% of the halving impact.

In the upcoming halving cycle, transaction fees are likely to become the main source of income for miners. However, the sustainability of these non-monetary demand drivers remains to be seen, whether they represent a long-term shift in the Bitcoin trading market or are merely a temporary phenomenon of a bull market will require time to verify.