Bitcoin Block Space Demand Rise and Its Impact on Mining Revenue

The Bitcoin halving will lead to a reduction in the main source of income for miners, prompting them to invest in more efficient equipment and prepare for a decline in output. However, transaction fees are expected to increase significantly due to the unconventional use of Bitcoin block space. These fees are becoming a more important part of mining revenue and may even offset the decrease in income caused by the halving of block rewards.

Recently, due to the emergence of non-monetary use cases, projects based on the Bitcoin network (such as on-chain markets, collectibles, and multi-layer platforms) have experienced a revival, leading to a surge in transaction demand. These projects have also paved the way for other new revenue strategies, such as Miner Extractable Value (MEV) and transaction accelerators, capitalizing on significant changes in the Bitcoin transaction market.

During the upcoming halving period, transaction fees are likely to become the main source of income for miners. At the same time, the expected increase in transaction demand may offset nearly half (about 43%) of the impact of the halving on fee revenue.

Emerging Trends in Bitcoin Transaction Demand

homogeneous token standard

The early attempts to introduce new assets into Bitcoin laid the foundation for innovation in the cryptocurrency space, but failed to gain widespread adoption within the Bitcoin community. However, the demand for external assets has risen again. Although new projects have not addressed the challenges of the past, the current market environment is different.

The BRC-20 asset and other new Bitcoin token projects have brought a significant increase in trading demand. Since its launch in March 2023, over $180 million (4.8k btc) has been spent on issuance and transfers. These transactions account for nearly one-third of all Bitcoin transactions, generating fees that make up 17% of the total fees on the Bitcoin network.

A new standard called Runes is being launched, with significant early demand and growing attention. The market demand for future Runes tokens exceeds $1.2 billion, accounting for half of all BRC-20 assets. The issuance of Runes tokens must use Bitcoin transactions, which may lead to a substantial rise in fee levels.

collectibles

The Ordinals protocol introduces a system for tracking the smallest unit of Bitcoin (Satoshi). Users can embed additional uniqueness for identifiable Satoshis, known as inscriptions. This gives certain Satoshis collectible value due to their digital significance or associated inscriptions.

The auction prices of some coins have reached hundreds of thousands of dollars, changing certain users' willingness to pay transaction fees. The demand for the first minted coins after the halving is expected to be very valuable, potentially leading to a surge in fees.

Privacy Transaction

Transaction accelerator products (such as Marathon's Slipstream) have opened new pathways to bypass the Bitcoin memory pool. Although these accelerators have not yet become widely popular, they may indirectly increase transaction fees. If transactions are submitted directly to mining pools, it could lead to confusion in the fee market, thereby pushing up costs.

Miners can extract value (MEV)

The importance of MEV in Bitcoin is rising. Factors such as collectibles, tokenized assets, and Bitcoin plugins are creating new profit opportunities for miners. As block rewards decrease, miners may be more inclined to explore these strategies to diversify their income sources.

Evolution of the Transaction Fee Market

The diversification of Bitcoin transaction demand may play an important role in the mining economy. New uses for block space could significantly increase transaction fees, helping to offset the loss of block rewards and maintain miner profitability.

The current level of transaction fees is expected to account for about 14% of the Mining revenue after the halving, which is several times higher than in recent years. This proportion may rise further in the future, exceeding 50% in certain Blocks. If the fee level can reach the average level of the last two months of 2023 (193 BTC per day), it will be able to cover 43% of the halving impact.

During this halving period, 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 the bull market will require time to verify.