Bitcoin Block Space Demand Rise and Its Impact on Mining Revenue

As the Bitcoin halving approaches, miners are facing significant pressure from a sharp decrease in mining revenue. However, the notable increase in transaction fees may offset or even completely negate the effects of the halving. This prediction is based on emerging changes in the Bitcoin transaction landscape, where non-monetary use cases are bringing greater differentiation to the fee market.

The simple peer-to-peer electronic cash system is evolving into a more complex settlement form. Users are adopting external software to view and use Bitcoin in new ways, such as treating Bitcoin supply as unique fragments, attaching data files to transactions, and interpreting certain standardized messages as the issuance or expenditure of external assets.

Emerging Trends in Bitcoin Transaction Demand

Homogeneous Token Standard

Although early Bitcoin token projects failed to gain widespread adoption, the demand for external assets is rising again. New projects, such as BRC-20 assets, have had a significant impact on transaction fees. Since its launch in March 2023, the issuance and transfer of BRC-20 assets have incurred fees of over 4.8k BTC.

The launch of new standards such as Runes may bring significant trading demand during the halving period. The market value of future Runes tokens has exceeded $1.2 billion, which could lead to fee levels soaring to 150 Bitcoins per day, offsetting one-third of the reduction in mining revenue caused by the halving.

collectibles

The Ordinals protocol introduces a new way to track and identify the smallest unit of Bitcoin (satoshi). By attaching data files to these units, users create unique, non-fungible Bitcoin units. Certain satoshis have gained high collectible value due to their digital significance or associated inscriptions, with the highest auction price reaching $240,000.

During the halving period, the demand for the first batch of mined coins may be very intense, leading to a spike in fees.

Privacy Trading and Transaction Accelerator

Some mining pools have launched transaction accelerator products that allow users to communicate and pay transactions directly with the mining pool. This practice may indirectly raise fees, as it creates a private fee market that may lead users to pay significantly more than the actual needs.

Miner Extractable Value (MEV)

With the changes in Bitcoin software and the way users transact, MEV has become more pronounced in the Bitcoin network. Emerging applications such as collectibles, tokenized assets, and Bitcoin plugins provide miners with additional income opportunities.

The Importance of Transaction Fee Markets

The diversification of Bitcoin transaction demand may become the salvation of the mining economy. New uses for block space could significantly increase transaction fees, offsetting the loss of block rewards and sustaining miner profitability.

Currently, transaction fees are expected to account for about 14% of mining revenue after the halving, but this percentage could rise significantly. Looking back at the two-month period at the end of 2023, the average fee level accounted for 30% of mining revenue after the halving. If this level can be maintained, it would cover the 43% impact caused by the halving.

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