Original author: Jimmy Song
Original translation: Luffy, Foresight News
Bitcoin halving is a planned event, one of the festivals that happens on Bitcoin every once in a while. Like soft fork activations and the launch of various financial instruments, it is an unpredictable date that only occurs every few years, so Bitcoin enthusiasts and mainstream media pay special attention to it.
This year’s halving was equally highly anticipated, but we encountered a few hiccups that require further explanation. Bitcoin’s fourth halving saw the block subsidy drop from 6.25 BTC to 3.125 BTC at block 840,000, which was as expected, but what was unexpected was the 37.626 BTC in transaction fees that followed, the highest ratio of transaction fees to block subsidy in Bitcoin’s history, withone transaction paying nearly 8 BTC in transaction fees.
More fees
Not only was the transaction fee for block 840,000 very high, but the transaction fees for the next five blocks were also very high: 4.486, 6.99, 16.068, 24.008, and 29.821 BTC respectively, which set a historical record. Nothing like this has ever happened on the Bitcoin network.
In Bitcoin’s history so far, it’s very rare for fees to be higher than the block subsidy. There were some instances when the block reward was 50 and 25 BTC, but these were caused by user error (usually forgetting to enter the change address), and almost all of the fees came from a single erroneous transaction. In the 12.5 BTC era, there were several transactions in late 2017 where the cumulative fees exceeded the block subsidy. And in the just-concluded 6.25 BTC era, there were many blocks with fees exceeding the block subsidy during the ordinal boom.
Still, this is relatively rare, and even in the period before Bitcoin’s fourth halving, most block fees were no more than 1.5 BTC. However, in this new era of the 3.125 BTC subsidy, as of the time of writing (block 840018), every block has had fees exceeding the subsidy, with some even exceeding the subsidy by several times. So what happened? Why are block fees so high after the halving?
Runes
The reason has to do with 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.
Now to recap, colored coins have been around for a long time. The main idea is that you can "color" certain Bitcoin transaction outputs so that their outputs have other meaning besides the Bitcoin amount. It can be another "asset" and issued as a token. The first implementation of such a protocol took place 11 years ago in 2013, and there have been many attempts since then, including MasterCoin (renamed Omni), CounterParty, and more recently RGB, Taro Assets, and BRC-20.
As Rodarmor said in his blog, his motivation for creating the new protocol was to bring some of the assets issued by other chains into Bitcoin. To make the release of this protocol more interesting, Rodarmor decided to start issuing at block 840,000, which led to the chaos we saw.
Simplification and Game Theory
Casey Rodarmor, also the creator of ordinals, took one of the concepts and used capital Latin letters on runes to name assets. This is a normal choice, but what happens when there is a conflict? If two assets have the same name, how can we distinguish them?
To keep things simple, the protocol simply looks for assets that already exist and doesn't issue new assets if the name conflicts with an existing asset. This really simplifies the client and gives each asset a globally unique name. Unfortunately, it also creates some terrible incentive problems.
Sniper asset issuance
The first incentive problem is that if a transaction issuing an asset is sent to the Bitcoin memory pool, then when that transaction is broadcast to network nodes, other observers can steal the name through earlier transactions.
Now, "earlier" in Bitcoin is a strict concept. Blocks are ordered, and transactions within blocks are ordered, first come first served. But if you want to grab a good symbol name, you can look for memory pool transactions that try to create new assets, and create your own assets with higher fees. This is the essence of sniping.
What is really scary about this situation is that both transactions may enter the block, but only the first transaction can successfully issue assets. The second transaction will not issue assets, but still needs to pay fees.
Miners typically sort transactions by fee rate, so a higher fee might mean they will be able to issue the asset. I say "might" because there is a second incentive problem here that I will discuss later. But from a game theory perspective, both parties are incentivized to keep raising fees to outperform the other. This dynamic resembles a bidding auction, where participants ultimately make rational choices but get irrational outcomes (such as paying $1.50 for $1). Every loser pays a lot of fees and gets nothing.
Second-order game
Given the existence of the above mechanisms, it is not surprising that many issuers initially set fees deliberately high to discourage anyone from trying to preempt the symbol. After all, if your preemption attempt fails, then you lose the fee you tried to preempt. For this reason, the use of RBF (Replacement by Fee) has also increased significantly, so that you can preempt and preemptors can do the same to the issuer.
Note that RBF cannot avoid paying fees here, since the replacement transaction must pay more in fees than the previous transaction. Either way, miners will benefit in the end.
Now back to the role of miners. Miners can, if they wish, prioritize transactions with lower fees for inclusion in blocks. In fact, the incentive is to give miners as much off-site fees as possible in order to sort transactions in a certain way by not revealing how much you paid. Miners in this protocol have a lot of leverage.
in conclusion
Runes have resulted in some very high fees on the Bitcoin network. It’s hard to know if this was intentional or not, what we do know is that Runes have been hyped and anticipated over the last few months, and as one of the first assets issued under the protocol, it certainly has some marketing value.
Sadly, aside from the normal scams of complete centralization of altcoins, blockspace congestion is more expensive and currently 1000 sats/vbyte is not enough to get into some blocks. Rune asset issuance currently covers almost every other use case.
That being said, the current rate of Runes issuance is totally unsustainable. In the first 18 blocks alone, over $20 million was spent in fees, most of which was spent on Runes issuance. At this rate, Runes issuers will be spending $150 million per day or $1 billion per week. I honestly don’t think they can keep this up for much longer. In the meantime, it must be fun to be a miner producing these blocks.
