According to the current transaction fees, the issuance of Rune assets may not be sustainable.
The Bitcoin halving is a planned event that occurs every few years, and it is one of the highly anticipated events in the Bitcoin community. This year’s halving, the fourth one, reduced the block subsidy from 6.25 BTC to 3.125 BTC at block 840,000, as expected. However, unexpectedly, there was a high transaction fee of 37.626 BTC associated with it, which is the highest fee-to-subsidy ratio in Bitcoin’s history, with one transaction paying nearly 8 BTC in fees.
Not only was the fee for block 840,000 high, but the fees for the next five blocks were also high, ranging from 4.486 BTC to 29.821 BTC. This is a historical record, as the Bitcoin network has never experienced a similar situation before.
In the history of Bitcoin so far, it has been very rare for fees to exceed the block subsidy. There have been some instances during the time when the block rewards were 50 and 25 BTC, but those were usually due to user errors, such as forgetting to input a change address, and most of the fees came from a single erroneous transaction. During the time when the block subsidy was 12.5 BTC, there were a few transactions at the end of 2017 that had accumulated fees higher than the subsidy. And in the recent era of 6.25 BTC, there were many blocks with fees higher than the subsidy during the ordinal frenzy.
Nevertheless, this situation is relatively rare. Even in the period leading up to the fourth Bitcoin halving, most block fees did not exceed 1.5 BTC. However, in this new era of 3.125 BTC subsidy, as of the time of writing this article (block 840,018), the fees for each block have exceeded the subsidy, and some even exceed it by several times. So what happened? Why are the block fees so high after the halving?
The reason is related to a new protocol called Runes. This is another Bitcoin-based colored coin protocol designed by Casey Rodarmor in September 2023. The main idea is to allow the issuance of tokens on the native UTXO set.
Looking back, colored coins have been around for a long time. The main idea is that you can “color” certain Bitcoin transaction outputs, giving them additional meanings besides the Bitcoin amount. It can be another “asset” and be issued as a token. The first implementation of this protocol happened 11 years ago in 2013, and there have been multiple attempts since then, including MasterCoin (renamed Omni), CounterParty, and more recently, RGB, Taro Assets, and BRC-20.
As Casey Rodarmor mentioned in his blog, the motivation behind creating the new protocol was to bring some of the assets issued on other chains into Bitcoin. To make the release of this protocol more interesting, Rodarmor decided to start the issuance at block 840,000, which led to the chaos we are currently seeing.
Casey Rodarmor, also the creator of ordinals, adopted the concept of using uppercase Latin letters on Runes to name assets. This is a normal choice, but what happens when there is a conflict? How do we differentiate between two assets with the same name?
To simplify the operation, the protocol only searches for existing assets, and if there is a conflict in the name with an existing asset, the new asset will not be issued. This does simplify the client and provides globally unique names for each asset. Unfortunately, this also brings some terrible incentive problems.
The first incentive problem is that if a transaction issuing an asset is sent to the Bitcoin mempool, other observers can steal the name by creating their own asset with a higher fee when the transaction is broadcasted to network nodes.
Now, the concept of “earlier” in Bitcoin is strict. Blocks are ordered, and transactions within blocks are ordered, first come, first served. But if you want to preemptively claim a good symbol name, you can look for mempool transactions attempting to create new assets and create your own asset with a higher fee. That’s the essence of sniping.
What makes this situation really scary is that both transactions have a chance to enter a block, but only the first transaction can successfully issue the asset. The second transaction will not issue the asset but still has to pay the fee.
Miners typically sort transactions by fee rate, so higher fees may mean they are more likely to issue the asset. I say “may” because there is a second incentive problem, which I will discuss later. But from a game theory perspective, both parties are incentivized to continuously raise fees to outbid each other. This dynamic is similar to a bidding auction, where participants eventually make rational choices but end up with irrational results (e.g., paying $1.5 for $1). Each loser ends up paying a significant fee without gaining anything.
Considering the existence of the aforementioned mechanism, it is not surprising that many issuers initially set high fees to prevent anyone from trying to preempt the symbol. After all, if your preemptive attempt fails, you will lose the fee you tried to preempt. For this reason, the use of Replace-by-Fee (RBF) has also significantly increased, allowing you to take preemptive action, and the snipers can take the same action against the issuers.
Please note that RBF cannot avoid paying fees here because a replacement transaction must pay more fees than the previous transaction. Either way, miners eventually benefit.
Now, back to the role of miners. If they want, miners can prioritize lower fee transactions and include them in blocks. In fact, the incentive is to give miners as much off-chain fees as possible in order to sort transactions in some way without revealing how much you paid. Miners have a great leverage in this protocol.
In conclusion, Runes has resulted in very high transaction fees in the Bitcoin network. It is difficult to know whether this design was intentional or unintentional, but what we do know is that Runes has been hyped in the past few months and has been highly anticipated. As one of the first batch of assets issued under the protocol, it certainly has some marketing value.
Unfortunately, apart from fully centralized scams like altcoins, the cost of block space congestion is higher, and the current fee of 1000 sats/vbyte is not enough to get into certain blocks. Currently, Rune asset issuance almost covers all other use cases.
That being said, the current rate of Rune issuance is completely unsustainable. In just the first 18 blocks, over $20 million in fees were spent, with most of it going towards Rune issuance. At this rate, Rune issuers would be spending $150 million per day or $1 billion per week. Frankly, I don’t think this situation will last long. Meanwhile, the miners producing these blocks must be very happy.