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Welcome to the second edition of Onchain Lense, where we break down key developments in the crypto ecosystem through insights derived from onchain activity.

Today, we delve into the progress of the Bitcoin blockchain, which is scaling thanks to two recent, significant protocols launched on the network.

The need for Bitcoin scaling has become more apparent than ever before. Multiple layer 2 solutions and sidechains have been available for the Bitcoin network for some time now, but the rise of Ordinals and Runes is seen as one of the most promising ways to scale the network.

These new protocols have resulted in an exponential rise in Bitcoin transaction fees and network congestion. For several days, Ordinals and Runes transactions were more than 50% of all transactions processed on the network. As per CoinGecko, the top 10 Bitcoin Ordinals and Runes projects have reached a market cap of more than $1 billion. The following chart represents the share of different types of transactions on the Bitcoin network.

Ordinals is a protocol created by Casey Rodarmor and launched on the Bitcoin network in March 2023. It allows the creation of non-fungible tokens (NFTs) using Satoshis, the smallest unit of Bitcoin. Each such unit is assigned a unique number based on the order in which it was mined. These numbers serve as ordinals, which can be easily tracked to determine ownership. Users can add data such as text and images to them through a process called inscribing.

So, the ordinals protocol enhanced the capability of the Bitcoin network by creating native NFTs without relying on a layer 2 solution like Stacks. It expands Bitcoin’s use beyond simple transactions by enabling the creation of digital art, collectables, and other unique assets.

An anonymous developer named Domo introduced an experimental standard known as BRC-20 to create fungible tokens. It utilises the Ordinals protocol and imprints a unique serial number onto individual Satoshis, validating their ownership and preventing duplication.

In April 2024, the developer who introduced the Ordinals protocol launched another protocol called Runes on the Bitcoin blockchain. It represents a ground-breaking token standard explicitly designed for issuing fungible tokens on the Bitcoin network. Runes debuted on the network, with the same block that implemented the fourth Bitcoin halving in April 2024.

Runes were created to give users a more efficient way to develop fungible tokens than BRC-20 tokens. They are based on a UTXO model and simplify token creation and management, transferring directly to the Bitcoin network.

As these innovations increased the network capabilities, users started experimenting, resulting in higher transaction fees. The day Runes launched, the demand for blockspace was so high that the total fees in a single day reached 1258 BTC. This was on April 20th and Runes transactions alone accounted for 881 BTC in fees.

Increased transaction fees have certainly helped miners increase their revenue, but the Bitcoin community remains divided on whether this innovation benefits the network or causes more spam, devaluating Bitcoin’s potential as a peer-to-peer electronic cash system.

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