1. What are network processing fees?

There are two ways that you can make a bitcoin payment today: as an on-chain transaction or a lightning transaction.

• On-chain transactions are the original way of making bitcoin payments using the blockchain network. On-chain bitcoin payments are processed by a vast network of so-called “bitcoin miners”, who validate and record transactions. These miners receive two types of rewards for their work: a block reward (paid by the bitcoin network) and a network processing fee (paid by the person making the transfer).
  
  

• Lightning transactions are the newer way of making bitcoin payments using peer-to-peer technology. Lightning bitcoin payments are processed instantly and processing fees are typically just a few cents.
  
  

On-chain transactions and lightning transactions are just technically different ways of making a bitcoin payment. It’s similar to how ACH payments and Zelle transfers are just different ways of making a dollar payment.

2. What just happened to the “block rewards” for on-chain transactions?

The bitcoin system is designed to automatically decrease the amount of “block rewards” that miners receive for processing on-chain payments. The popular term for this decrease is “the halving”, as the value of the block reward halves every few years.

The last halving happened on April 19th and the price of bitcoin increased dramatically during the first few months of 2024 in anticipation of this event.

3. What just happened to the “network processing fees” for on-chain transactions?

Network processing fees are set by the “bitcoin miners” who process on-chain transactions and are paid by the people making those on-chain payments.

Network processing fees increase when the volume of on-chain transactions increase, and decrease when the volume of on-chain transactions decrease. It’s a simple supply-and-demand mechanism that balances itself out over time.

During 2023, network processing fees for an on-chain transaction were usually in the range of $1-$3 per transaction. In recent days, however, the network processing fee has risen as high as $100 per transaction, making it impossible to send small, on-chain bitcoin payments.

4. What just happened to lightning transactions?

Nothing. Lightning bitcoin payments are working exactly as they always have done: transactions are completed in less than a few seconds and fees are usually just a few cents.

It’s worth noting here that lightning payments are what make it possible for people to use bitcoin for their everyday spending, saving, or sendingGo to /blog page. On-chain payments are just too slow and expensive for buying groceries, paying for a coffee, or sending a few dollars to friends and family.

5. Why has the “network fee” increased so dramatically in the last few days?

Normally, the network processing fees increase or decrease in response to the natural volume of on-chain bitcoin transactions.

However, since April 19th, a small group of tech bros have deliberately been flooding the on-chain network with artificial transactions for their new OrdinalsLink to: https://docs.ordinals.com/introduction.html and RunesLink to: https://decrypt.co/221962/bitcoin-runes-launch-at-the-halving-heres-everything-you-need-to-know projects.

These artificial transactions are not a security threat for bitcoin and will decrease within a few weeks. However, in the short term, these transactions are pushing up the network processing fee for on-chain payments.

6. What are “ordinals” and “runes”?

OrdinalsLink to: https://docs.ordinals.com/introduction.html and RunesLink to: https://decrypt.co/221962/bitcoin-runes-launch-at-the-halving-heres-everything-you-need-to-know are a niche technology that allow individual satoshis (there are 100 million satoshis in a bitcoin) to be “inscribed”, tagged, and tracked.

Imagine a $1 banknote with the serial number MG-314159265. Now imagine that you could inscribe a message on that banknote (which no one can ever remove) and that you can then tag and track who owns that banknote. That’s what ordinals and runes allow you to do with satoshis.

Remember, there are 100 million satoshis in a single bitcoin and today 1 satoshi is worth approximately US$0.0002616.

7. Why would you want to inscribe, tag, and track individual satoshis?

That’s a very good question but there don’t seem to be any very good answers…

Technically, ordinals and runes might (or might not) be very clever but the reasons for needing them or wanting to use them are very unclear.

One example given to date is the ability to track and own individual satoshis with rare or exotic “ordinal numbers”. A bit like being able to track and own a bank note with a rare serial number.

Another example given is the ability to create “NFT-like inscriptions” on the bitcoin network. However, people are still trying to figure out a real-world use case for NFTs and it’s not going well...Link to: https://www.forbes.com/advisor/au/investing/cryptocurrency/are-nfts-dead/

A quick recap of the story so far…

• On-chain bitcoin transactions include a network processing fee that is paid by the person making the payment. During 2023, the average fee was typically $1-$3.
  
  

• Lightning bitcoin transactions include a processing fee that is typically just a few cents. Lightning fees have not changed in recent weeks.
  
  

• On-chain network processing fees increase and decrease automatically in response to the volume of on-chain transactions.
  
  

• On-chain transaction fees have risen as high as $100 per transaction in recent weeks due to tech bros flooding the network with artificial transactions for their new RunesLink to: https://decrypt.co/221962/bitcoin-runes-launch-at-the-halving-heres-everything-you-need-to-know project.
  
  

• Ordinals and runes are a niche technology that allow you to inscribe, tag, and track individual satoshis. The real-world benefits and use cases for this are unclear.

What’s the point of a technology that has no practical utility but is being used to disrupt a payment system used by millions of people around the world?

Ah, we’re glad you asked…

One point of view here would be to say that if a technology doesn’t have any practical benefits that make the world a better place, then what’s the point?

Another point of view would be to say that technology is like art and should be developed just because it’s there (even if that development causes a major negative impact on others by disrupting their ability to send payments). This is known as the graffiti artist argument...Link to: https://www.nytimes.com/roomfordebate/2014/07/11/when-does-graffiti-become-art/graffiti-is-always-vandalism

As Grandma used to say: “Just because you can, doesn’t mean you should.”

So, what’s next in this story?

• On-chain transaction fees will spike for a few weeks until the artificial ordinal transactions run out of steam.
  
  

• Lightning transaction fees and processing times will be completely unaffected.
  
  

• More people will consider using lightning transactions for their bitcoin purchases or payments.
  
  

• More consumers around the world will continue to adopt bitcoin for their everyday spending, saving, and sendingGo to /blog page.
  
  

• Some people will continue to try to argue that being able to inscribe virtual content on a digital asset is useful.