Market Byte: Awaiting Confirmations – Bitcoin Mempool Remains Crowded

Recently, Bitcoin has garnered significant attention due to the introduction of Ordinals¹ — a protocol for minting NFT-like² assets on Bitcoin (more on that here) – and the resulting surge in on-chain activity. As of May 8, 2023, the Bitcoin network is experiencing a record high of 465,000+ transactions awaiting confirmation in Bitcoin’s mempool (also known as “memory pool,” which is a waiting area for pending transactions) and costly high-priority transaction fees ($40+ vs. the normal $1-5 fee). Followers have been trying to make sense of these recent events, with some arguing that high fees could be net-positive for Bitcoin miners and have a negligible long-term impact on the network, and others noting that these events are making Bitcoin temporarily inaccessible to smaller players in the ecosystem.

The Bitcoin network has seen high transaction fees in the past (2017 and 2021), but this instance is unique because it is the first time transaction fees have spiked during a bear market. According to on-chain data, the drastic increase in transaction fees and related backlog can be attributed to the growing popularity of the BRC-20 token standard, derived from Ordinals. The BRC-20 token standard is a mechanism for creating fungible tokens on the Bitcoin network.

Figure 1: Bitcoin Mempool

Source: mempool.joenicke.de, as of 5/8/23. vMB (virtual megabytes) is the total size of transactions in the Bitcoin mempool, accounting for both data size and transaction priority.

This Market Byte delves into the potential effects of a congested mempool on Bitcoin – examining its unique causes, historical precedents, and future implications to the network and the broader community.

Context: Miners and the Mempool

The Bitcoin mempool is a collection of unconfirmed transactions waiting to be included in a block and added to the blockchain. Bitcoin miners play a crucial role in the Bitcoin ecosystem; their primary responsibility involves validating and selecting transactions from the mempool, assembling them into blocks, and subsequently appending these blocks to the blockchain for processing. In exchange for their efforts in validating and processing transactions, miners receive two rewards: 

• The first reward comes in the form of the block reward—a fixed amount of newly minted bitcoins (currently 6.25 BTC per block). 
• The second reward comes from the transaction fees associated with the processed transactions, which provide an additional revenue stream for miners.

When selecting transactions to process, miners typically prioritize those with higher fees, as these offer greater financial incentives. When miners successfully mine a new block, they effectively confirm all the transactions within that block, and those transactions are then cleared from the mempool.The mempool “gets clogged” when there are a lot of unconfirmed transactions on the network. When the transaction volume increases, and more transactions are initiated than can be accommodated within a block, a backlog forms in the mempool. As the mempool becomes congested, users who want their transactions to be processed faster will often opt to pay higher fees, creating a competitive environment where users outbid each other to have their transactions confirmed faster. To draw an analogy: on days when transaction volumes spike during the holiday shopping season, credit card networks get bogged down with requests and the timing associated with transactional throughput slows considerably. Similarly, a clogged Bitcoin mempool can lead to increased transaction fees and delays.

Short History of Transaction Fee Spikes on Bitcoin’s Network

Bitcoin network users can set their transaction fees to any level they desire, but transactions with low fees may take longer to confirm, as miners prioritize transactions with higher fees (higher income for them). Technically, transaction fees are calculated based on the transaction’s size in bytes (also known as its “weight”) and the fee rate, expressed in satoshis per virtual byte (sat/vB). Historically, Bitcoin has maintained relatively low transaction fees – at about $1 – $5 on average per transaction. Throughout Bitcoin’s history, there have been a few instances of spiked transaction fees. For example, in 2017 higher transaction fees were driven by the crypto bull market, and in 2021 higher transaction fees were driven by a sharp decline in hash rate. 

Transaction fees spiked in early 2017 due to increased interest from institutional and retail investors in Bitcoin. The 1 MB block size cap limited the number of transactions per block, and as demand surged during the bull run, fees reached a then-record high of over $56³ per transaction. This heightened interest led to greater network usage, congestion in the Bitcoin mempool, and subsequently, higher transaction fees.

Figure 2: Bitcoin Mean Transaction Fees during 2017

Source: Coin Metrics, data from 1/1/2017 – 5/8/2023

The 2021 Bitcoin transaction fee spike, driven by renewed interest from investors similar to 2017, occurred during a bull run in which COVID-19 pandemic-related quantitative easing pushed asset prices higher with Bitcoin reaching a new all-time high of $67k. This price surge led to an increase in transactions, creating network congestion. Meanwhile, China had banned Bitcoin mining, causing miners to go offline, temporarily exacerbating the network’s throughput constraints.

Why is 2023 Different?

While Bitcoin network transaction fee spikes in 2017 and 2021 were largely fueled by a broader crypto bull market,  the current spike is occurring during a bear market and is primarily driven by demand for new on-chain innovations, specifically BRC-20 tokens that debuted in March 2023. In the past, increased transaction fees were mainly due to a higher volume of value transfer transactions. However, from May 7 to 8 2023, fees resulting from BRC-20 activity constituted more than 50% of the total transaction fees (Figure 3).

Figure 3: Bitcoin Transaction Fee Breakdown

Source: Grayscale Research, Dune, as of 5/8/2023

One reason for the surge in BRC-20 activity is the explosive growth in meme coin trading on Ethereum, which has prompted users to speculate on Bitcoin as well. For instance, Pepecoin (“PEPE”), an ERC-20 token launched just a few weeks ago on April 17, 2023, quickly achieved a market capitalization exceeding $1 billion with a staggering gain of nearly 5,000,000%.⁴ The frenzy surrounding PEPE led Ethereum users to spend over 7,500 ETH (Figure 4), or nearly $10 million, in transaction fees to trade the coin, consequently driving up gas fees for users across the Ethereum network.

Figure 4: Gas Spent on PEPE Transactions

Source: @thiccythot_ on twitter, as of 5/6/23

BRC-20 tokens on Bitcoin experienced a similar uptick in demand spurred by the speculative activity on Ethereum. As of May 8, 2023, the total market capitalization of BRC-20s approached nearly $1 billion. This pattern reflects the highly correlated nature of the crypto world, where developments in one prominent blockchain, like Ethereum, can influence the behavior of participants in another, like Bitcoin.

Figure 5: BRC-20 Market Capitalization

Source: ordspace.org, as of 5/8/23. For illustrative purposes only. Past performance is not indicative of future results.

Reactions to the record-high pending transactions have been mixed. On one hand, increased transaction revenue offers higher rewards for Bitcoin miners, and emergence of these new innovations on the Bitcoin network can help address the long-standing security budget issue within Bitcoin’s economic model. It’s also heartening to see new users engaging actively with the network, driven by their curiosity about Ordinals and BRC-20s.
On the other hand, a congested mempool can hinder select, likely smaller users on the Bitcoin network from sending transactions, as they may be deterred by elevated fees, and some users are continuing to question if the speculative minting of new assets and NFTs deviates from Bitcoin’s intended purpose (as previously discussed here).

Potential Implications

The innovation and the recent fee increase is likely to have implications on Bitcoin for today and in the future.

First, this situation highlights the expansion of the broader Bitcoin community to include new participants. The fee spike, primarily driven by a blend of developer innovation and increased user engagement, suggests that the Bitcoin community will likely continue to attract new users and developers. This growth could pave the way for a fresh influx of creative developers who can further enhance the ecosystem.

Moving forward, it is also likely that layer-2 solutions for Bitcoin will capture greater attention from developers. As the creation of fungibility and non-fungibility standards, such as BRC-20s and Ordinals, is now possible on Bitcoin’s main layer, baseline transaction fees are expected to rise in the long term. This increase could make it too expensive for some users to send transactions directly through the main chain. Consequently, there will likely be a renewed focus on developing scaling solutions, such as the Lightning Network and Stacks, which aim to facilitate lower fees for BTC transfers.

Lastly, as Bitcoin’s functionality now encompasses both fungible tokens and NFTs, it is possible that Bitcoin activity will become more closely correlated with Ethereum activity and the wider smart contract ecosystem, due to their convergence towards similar user bases. Before the introduction of Ordinals, on-chain BTC activity primarily revolved around value transfer and was not closely tied to behaviors associated with smart contract platforms, such as NFT minting. However, as demonstrated by the increased interest in Pepecoin and the corresponding increase in BRC-20 market cap, there seems to be a growing correlation between the behaviors of users on different blockchain networks.

While there’s no telling what will happen in the future, we believe one thing is for certain: Bitcoin feels more alive than ever.

1. “Ordinals” refers to a numbering scheme for satoshis that allows tracking and transferring individual satoshis.
2.  A non-fungible token (NFT) is a unique digital asset that represents ownership and provenance of a specific item, such as artwork, collectibles, or virtual real estate, using blockchain technology to ensure authenticity and rarity.
3. CoinMetrics as of 12/22/2017.
4. For illustrative purposes only. Past performance is not indicative of future results.