this week on the galaxy brains podcast i spoke with dan held, long time bitcoiner with stints at kraken, blockchain.com and more. it's a great conversation about bitcoin history and culture. i also talk with galaxy trading’s beimnet abebe to unpack the federal reserve’s latest rate hike.
in the newsletter, we write about the emergence of “BRC-20” tokens, a new standard on bitcoin that uses the inscriptions to create tokens, the launch of leveraged NFT trading by marketplace blur, and the kingdom of bhutan doubling down on its bitcoin mining strategy.
have a great weekend,
alex
Market Update
Data via Messari as of 5:30 pm on 5/4/23
The total implied network value (market cap) of the digital assets market stands at $1.2tn, down 3.3% from last week (when it stood at $1.24tn). Bitcoin’s network value is 4% of gold’s market cap. Over the last 7 days, BTC is down 2%, ETH is down 2%, and DOGE is down 2%. Bitcoin dominance is 46.45%, up 45 basis points from last week.
Stories of the week
001
🔥 Tokens on Bitcoin Spiking Fees to 2021 Highs
BRC-20 is a new token standard on Bitcoin that allows users to inscribe token data to individual sats (the smallest unit of a bitcoin). The mechanism used to create tokens on Bitcoin is a byproduct of the emergence of Ordinals, which introduced the ability to inscribe arbitrary data and connect them to individual satoshis, thus creating immutable digital collectables that live on-chain. Ordinals and BRC-20 tokens share similar frameworks as creating a token involves inscribing text files constructed in a JSON format in the witness field of a transaction. The only difference with ordinals is the type of inscribed arbitrary data, which usually involves JPEG files. BRC-20 tokens are by default restricted to a hard cap set by the token creator, and any minted token past the specified token cap is considered invalid. For example, the first BRC-20 token, ORDI, is capped at 21mn tokens; however, an additional 1.5m ORDI tokens were minted past the supply cap. To solve the issue of minting tokens past the supply cap, the BRC-20 indexing scheme automatically deems these tokens invalid, making them un-tradable by any who observe the token standard.
Since the launch of the BRC-20 token standard in March, developers have begun rapidly building wallet and marketplace infrastructure to support BRC-20 tokens. Although any Taproot-compatible Bitcoin wallet can hold BRC-20 tokens, Unisat and Ordinal Wallet are the first to rollout a user interface that recognizes these tokens in wallets. As a result, both Unisat and Ordinal Wallet where users can currently trade these tokens. So far, these two marketplaces cumulatively facilitated 2.4m BRC-20 minting transactions. It should be noted that the process of purchasing a BRC-20 token is different from an ERC-20 token as BRC-20 tokens are sold in batches priced in sats; token offers are comprised of a fixed price attached to a set number of tokens ranging from 100-20,000 units.
The recent parabolic spike in Bitcoin transaction fees is from users minting BRC-20 tokens. Similar to Ordinals, in order to mint a BRC-20 token, users are required to perform a standard bitcoin transaction and pay the market sat/vbyte feerate. Consequently, the new demand for blockspace to mint BRC-20 tokens has recently increased bitcoin transaction fees. On May 1, 50% of bitcoin transactions were BRC-20 mints. In the past 14 days, mean transaction fees on Bitcoin increased 297%. Additionally, BRC-20 related transactions generated a total of 124 BTC ($3.58mn) since March 8.
Our Take
The emergence of BRC-20s is a notable development for Bitcoin as this is the first-time users can easily create fungible tokens on Bitcoin’s native chain. Prior options for launching tokens include Omni, Counterparty, and Stacks, but these are mostly sidechains or second layer solutions. But none of these solutions have ever really taken off beyond some smaller NFT uses and Tether’s use of Omni, which itself is now almost nonexistent. Whether this new token standard can gain durable traction or is merely a meme-driven flash-in-the-pan remains to be seen, but they do appear to be gaining some traction in the wake of the introduction of Ordinals.
Regardless of their potential for long-term impact, BRC-20s are gaining massive support from Bitcoin’s mining community. Miners are generating substantial amounts of new revenue from increased transaction fees as a result of the large number of BRC-20 transactions entering mempools. While fees have increased notably since the beginning of the year, the last few days have seen fees spike enormously following increased BRC-20 activity. Tuesday and Wednesday of this week saw 117 BTC and 120 BTC paid in fees, 4x the 30d daily average. Increased transaction fees benefit miners, particularly after a year in which many miners struggled to remain profitable.
While this new token standard is seeing increased activity, there are members of the Bitcoin community that are opposed to tokens on Bitcoin. Broadly, many believe the mission of bitcoin is something deeper and more profound than merely asset issuance, and that activities like token creation and trading should occur on less mission-critical systems, such as sidechains or layer 2s like RGB or Lightning Network after Lightning Labs’ Taro protocol launches. The reality is that Bitcoin is not purpose built for this activity and both Ordinals and BRC-20 tokens are essentially a hack making use of features of the Taproot upgrade that most didn’t know existed when Taproot was activated. But, ultimately, debates how bitcoin should be used tend to be more cultural than technological, as any valid bitcoin transaction will be accepted by the network and none have ever been rolled back. Whether BRC-20 tokens, or Ordinals for that matter, find long-term product-market fit really remains to be seen. But Bitcoin is an open, permissionless system, and it’s still exciting to see people use it new ways. - GP/AT/BB
002
⛰️ Bhutan Wants to Mine More Bitcoin
Kingdom of Bhutan raising $500m fund to mine bitcoin. The Kingdom of Bhutan, a nation of 770,000 nestled at the base of the Himalayan mountains between Bangladesh, Nepal, and Tibet, is partnering with Bitcoin mining firm Bitdeer to raise a $500m fund to expand its Bitcoin mining operations. After Bhutan’s sovereign investment arm Druk Holding & Investments was identified in Celsius bankruptcy documents, local reporters and Forbes inquired and received confirmation from Bhutanese officials that the country has been mining Bitcoin since April 2019.
Ujjwal Deep Dahal, the CEO of Druk Holding & Investments, said Wednesday that “it’s important for us to look at assets that are low volume, high value, or digital assets for that matter, and try to position ourselves in a way that we can be competitive globally over time to build our economy.” According to a regulatory filing, Bitdeer expects to launch a 100-megawatt facility in Bhutan to be completed by the beginning of this Fall. Druk Holding & Investments had also made investments with BlockFi and Celsius in the past.
Our Take
It was recently revealed that Bhutan has been mining bitcoin for years. It’s no surprise that a nation state with large amounts of hydroelectric power, is seeking ways to monetize that electrical output efficiently. Bhutan’s large hydro comes from abundant water resources deriving from glacial melt and perennial rivers. As of 2021, hydropower accounts for nearly 99% of Bhutan’s total electricity generation capacity, with multiple large-scale projects in operation, and the revenue from exporting electricity contributes about 25% to the country’s GDP, with much of it being sent to India.
Bhutan almost certainly has more hydro capacity they would like to monetize, hence their interest in Bitcoin mining. To monetize electricity typically involves building transmission lines, which are lossy?, or building production next to the facilities, which can create emissions or require other infrastructure (such as takeaway capacity, distribution, etc.). Bitcoin, on the other hand, can be created on-site and instantly sent worldwide with just a cellphone connection. One of the primary inputs to a bitcoin mining operation’s profitability is electricity cost, and if Bhutan’s hydroelectric power is extremely competitive cost-wise, the country could reap large profits from mining Bitcoin.
Bhutan’s push also makes sense from a green energy standpoint. Hydroelectric power generation is among the most abundant energy sources and has an extremely low carbon footprint. Bitcoin mining machines themselves create no emissions, but the electricity sources that power them can have a variety of carbon footprints depending on energy mix.
Lastly, amassing credibly neutral money makes sense given Bhutan’s geopolitical situation – nestled between much larger and more powerful nations with superpowers China and India each looming large nearby. When El Salvador formally adopted Bitcoin as legal tender in 2021, we wrote that we would likely see more nation states get involved in Bitcoin and bitcoin mining due to both profitability and sovereignty it can offer. The world didn’t know Bhutan was mining Bitcoin until recently, and it’s possible there are already other nation states doing the same. And we still expect we’ll see more in the future. -AT
003
🛒 Buy Now, Pay Later for NFTs on Blur
Blur, the leading NFT marketplace by trading volume, is offering NFT lending services with its new product “Blend.” Blend is a permissionless peer-to-peer lending protocol that supports NFTs as collateral to borrow ETH and allows whatever interest rates and loan-to-value ratios the market will bear. As part of its peer-to-peer lending features, Blend loans have fixed rates and never expire, allowing borrowing positions to remain open indefinitely until liquidated. Additionally, borrowers can close out the loans at any time, while lenders can call for a refinancing auction at any time, resulting in either another lender stepping in or liquidation of the collateral.
NFT traders on Blur can now implement advanced trading strategies by purchasing NFTs without paying the full price upfront. Borrowers can either pay off the loan in full or sell the NFT if it increases in value, resulting in a net profit for the borrower. Today, Blend’s lending feature is only available for CryptoPunks, Azuki, and Milady Maker NFTs, although the list of available tokens is likely to expand.
Our Take
As Blur continues to maintain its dominance in the NFT marketplace sector, Blend will inevitably increase Blur’s trading volume. We wrote about Blur’s increasing dominance in twoprior newsletter editions. The ability for collectors to purchase NFTs for a fraction of the listing price is extremely attractive for traders who don’t own large amounts of ETH, which is the majority of NFT collectors. Blur has done well incentivizing user acquisition through token airdrops, and it’s likely that Blend’s usage will further increase when Blur’s upcoming “season 2” airdrop occurs.
Blend will compete for market share against NFT lending platforms that have a significant head start. BenDAO and NFTfi are the two largest NFT lending protocols, and have together accumulated a total of $720mn in lending volume. Although Blend is evidently late to the NFT lending space, the platform has a clear competitive advantage over the rest of the field by being the largest NFT marketplace in volume and second largest in userbase. Despite Blend releasing four days ago, it reached $31mn in cumulative lending volume and already has 830 users.
Considering that the NFT market is down across all key metrics, the only demand for leverage is coming from sophisticated NFT traders. This is highlighted when looking at Blur’s user base, which is mostly comprised of wealthy NFT traders and airdrop farmers (the top 250 users make up 50% of trading volume). Although Blend’s product is marketed as “buy now, pay later,” the purpose is not to make expensive NFTs affordable for the average collector (as it is with the “buy now, pay later” products offered on ecommerce sites and for luxury goods), but instead to offer leverage for high-volume NFT traders.
From the beginning, Blur has targeted sophisticated NFT traders, while OpenSea has offered more of a mass-market NFT marketplace product. As Blur has risen, OpenSea has losst market share and in response effectively copied some of Blur’s features, such as its advanced NFT trading interface. Whether OpenSea also decides to add leveraged trading products to further its competition with the rival upstart remains to be seen. -GP
On May 4, 2023, Ethereum core developers gathered over Zoom for their 108th All Core Developers Consensus (ACDC) call. Chaired by Ethereum Foundation Researcher Danny Ryan, the ACDC calls are a bi-weekly meeting series where developers discuss and coordinate changes to the consensus layer (CL) of Ethereum.
A lot has changed over the last 12 months, but the industry continues to grow. We’ve tracked, evaluated, and summarized fund activity since 2018 to bring you key institutional takeaways through the course of a vibrant 2021 and an arresting 2022.
Bitcoin transaction fees have spiked in light of the recent surge in BRC-20 tokens. The current daily average 34 sat/vbyte fee rate was last seen in July 2021.
With expectations of an upcoming LayerZero airdrop, Stargate Finance—a bridging solution built on LayerZero technology—has seen a significant increase in user activity since the start of April. The average bridged amount per transaction has declined meaningfully, suggesting much of the activity surge has been driven by airdrop hunters and Sybil addresses.
