Fees are rising slightly due to inscriptions, but for how long?
For ordinal inscriptions, February was a turning point. After a relatively quiet month of January, miners earned $1.35 million in transaction fees in February from over 200,000 inscriptions (and those are just the in-band fees we are aware of; more on that later).
By the end of February, the inscription fever had abated. We can see that the inscription spree peaked in the middle of February and tapered by the last week of the month thanks to data from Data Always’s Ordinals Dune dashboard (which has since been made private).
Out-of-band inscription fees are not included in the data that was just presented. To have their inscription (or a group of inscriptions, as in the tweet below) mined in a custom block, an inscriber or collection curator can get in touch with a mining pool or miner directly and pay them directly in another transaction.
A significant portion of inscription transaction fees come from out-of-band ordinal inscriptions. It might be as much as 100% of in-band ordinal fees on some days. There is no reliable way to track out-of-band payments, but you should take these into account for a more thorough analysis of how inscriptions affect transaction fees.
We have a month’s worth of inbound data that we can use to track the effects of inscriptions on the Bitcoin blockspace market, even in the absence of out-of-band payment information. February showed us that inscriptions are driving demand for blockspace and increasing on-chain fees marginally. However, the real honeypot for miners is out-of-band payments for inscriptions. Inscriptions could have a big impact on Bitcoin-native MEV for miners if they endure.
How Ordinal Inscriptions Are Impacting Transaction Fees, Blocksizes
Without the inscriber demand for blockspace, transaction costs would be much lower.
Since China’s mining ban, November 2022 has seen the most activity in the Bitcoin fee market, with fees from February’s inscription fervor being higher in USD terms ($14 million vs. $12.3 million). November 2022 also saw the collapse of FTX.
The amount that BTC miners made from transaction fees in November and February is evidence that the price increase of bitcoin from November to now is largely responsible for the increase in fee revenue there. (In-bound transaction fees generated by miners in February were 601 BTC as opposed to 712 in November.
For a number of reasons, including the fact that they take advantage of SegWit’s data discount, inscriptions have generated controversy. With the introduction of the Segregated Witness (SegWit) upgrade in 2017, a block with the data for the inscription was created. Inscriptions cost less satoshis per byte of data than a typical, economic transaction because witness data is less expensive to transfer per byte than other data included in the transaction.
In the charts above and below, using the window to the right of either chart, we can see the SegWit discount in full action. According to the graph above, blocksizes increased due to inscriptions in February while transaction fees barely changed.
The graph below shows that during the height of February’s inscription fever (February 9–20), the number of transactions per block decreased significantly. Unsurprisingly, miners included fewer total transactions per byte of blocksize as ordinals flooded the mempool. However, from November 12, 2022, to February 20, 2023, the total number of transactions included in each block trended upward.
All things being equal, inscriptions are bringing in more fees for miners than they otherwise would. They have driven demand for blockspace and created direct pressure on transaction fees with their own fees and indirect pressure by raising the floor for average fees for other transactions. The fees miners are collecting would be much higher if all of the blockspace demand were financial transactions instead of SegWit discounts.
Although it isn’t a fortune right now, miners will appreciate the increased fee income they receive from these inscriptions because there is a demand for them even though that demand isn’t there right now.
Start mining Bitcoin with Antminer S19 ASIC miners!
Inscriptions Are Promising for Bitcoin Miners, But It’s Early
It is still too early to predict what the actual, long-term effects of inscriptions will be.
It’s possible that inscriptions could put significant pressure on transaction fees if the demand for blockspace significantly rises in 10 years. However, the future viability of NFTs on any chain is still up in the air.
Inscriptions are currently increasing in-band transaction fees slightly for miners, but they are also earning fees for custom mints through out-of-band transactions. This is a kind of proto-MEV for bitcoin that is worth looking into to see if other monetizing methods emerge from inscriptions.