China woke up the mempool last weekend

Happy Tuesday!

Bitcoin’s mempool has risen from the dead, and Chinese BRC-20 traders are behind the resurrection. For today’s newsletter, a deep dive into why transaction fees rose last weekend, and what the degen community thinks about it.

NiceHash has moved to Switzerland, offering institutional miners a secure, compliant, and transparent platform to manage and maximize their mining output – delivering the reliability and performance expected from the best mining pools. 

China is pumping Bitcoin transaction fees

Fees ripped this weekend after China decided to mint BRC20s again. That’s right – there’s an entire market that the Western narrative doesn’t pay attention to, and it drives a significant amount of transaction activity on Bitcoin.

After close to a whole month of negligible transaction activity, which included the mempool fully clearing, BRC-20 trading activity spiked fees from 1sat/vbyte all the way to 15sats/vbyte. This phenomenon highlights an interesting market dichotomy where the West drives institutional bitcoin inflows and the East is the most active on-chain.

This BRC20 boom precipitated one of the biggest days for inscription activity since January 2023.

We wrote about this phenomenon last year, but for today’s update, we take a closer look and go straight to the source by consulting the degen traders who are most active in this market.

BRC-20s are pumping Bitcoin fees

Last weekend, Bitcoin fees spiked severalfold, driven mostly by China minting a single BRC20 token MASK, a reference to the Guy Fawkes mask from V for Vendetta that has become a symbol both for the Anonymous hacker group and Satoshi Nakamoto. 

Earlier in February, Bitcoin saw so few transactions that miners would pretty much include any transaction in the next block. But Sunday, as MASK minting kicked off, the number of transactions waiting in the average node’s mempool was close to 80 blocks worth or ~100k total unconfirmed transactions.

These transactions were almost entirely new BRC20 mints. While some activity does occur on-chain when BRC20s are transferred/exchanged, the popular (and best UX) method is to send these tokens to an exchange (usually OKX) and trade there. So secondary market volume does not really show up on-chain. As we can see from the graphic below, among all token minting activity (Runes, BRC20, other text protocols) MASK was the lion’s share of the volume over the weekend.

Brought to you by Luxor

Optimize Your Miner, Maximize Your Profits

LuxOS Firmware delivers more hashrate with less power. With advanced auto-tuning, your ASICs run at peak efficiency, reducing energy costs while increasing performance. This Antminer S21 Pro running LuxOS reaches 239.74 TH/s at just 3.09 kW, achieving an efficiency of 12.88 J/TH.

Upgrade to LuxOS today and take full control of your mining operation.

Why BRC20s and not Runes?

If you’re asking yourself why these traders are slinging BRC-20s instead of runes, you’re not alone. 

New runes activity has been near zero for several weeks now and secondary market prices have declined so much that the ecosystem is teetering on a measly $650 million market cap. Meanwhile, BRC20 secondary market volume has been outpacing runes volume about 8:1 over the past month. Case in point, runes have done just under $2 million in total volume in the past week whereas BRC20s have traded over $15 million.

Ironically, Casey Rodarmor created runes as a response to the poor technical design of BRC20s. Unlike BRC-20s, which require a new UTXO for every mint and transfer, runes use Bitcoin’s OP_RETURN for token operation messages which do not create new outputs. Rodarmor designed runes largely to address the unforeseen consequences of BRC-20’s negative impact to Bitcoin's UTXO set (creating a bunch of UTXOs could make it more difficult to run a node, for e.g., and BRC-20s are so data inefficient that minting and trading booms can clog the mempool).

This plan worked surprisingly well, at least at first. Take a look at the chart below where, upon the launch of runes, Bitcoin’s UTXO set growth immediately plateaued and then began to decline once users started consolidating their old BRC20 inscriptions.

Still, old habits die hard, and BRC20s have retained the commanding lead as the most popular token standard on Bitcoin. 

Why though? If BRC-20s are conceptually “worse,” why are they still so popular? 

To answer these questions, we go straight to the source for hot takes from a grab bag of Discord ordinal degens:

What’s driving this particular BRC20 run?

“BRC-20 2.0 on Bitcoin Testnet hits in March, and also some BRC-20 communities have resumed spaces, like the Rats community.” - BLOCK of Goosinals

Is a fee bump from 1sat/vbyte → 15 sat/vbyte actually a pump?

“Given how much activity it is on bitcoin, one ticker moving the mempool 8 sats more than the usual is a frenzy” - focs.hl of Debauchery

What’s the medium term outlook on speculative token activity on Bitcoin?

“It all comes down to when bitcoin will have another leg up. Speculative asset price action in the ordinals, BRC20, and runes space seems to coincide well with positive bitcoin price action. The most electric runs happen when BTC goes parabolic. I think we have at least 1 more leg up this cycle, and that's when we will see runes/ordinals/BRC20 euphoria once more” - t_clow of OrdinalPenguins

“I am always bullish on bitcoin, but tokens on Bitcoin are languishing. Hard to say if I am bullish on tokens on bitcoin at the moment” - BLOCK of Goosinals

With Runes teetering on the edge of oblivion and BRC20s having survived the winter memecoin collapse, does this mean that the BRC20 standard still reigns king among Bitcoin token standards? At least right now, this comically inefficient metaprotocol is still favored by the market, in particular the market’s most fee rate-inelastic participants: Chinese speculators.

Recent Blockspace Pods