“Innovation is the ability to see change as an opportunity – not a threat.”
— Steve Jobs
Ordinal inscriptions drove the largest increase in hashprice that Bitcoin miners have seen in years (image 1). While some argue ordinals to be a “temporary trend”, their effect on Bitcoin’s fees has been long-lasting and perceptible. As high fees raise mining revenues, they also reduce profitability for small mining operations. Can small miners have their cake and eat it, too? Can hashprice increase without mainnet transaction fees hindering mining payouts? Yes, but maybe not in the way that one may initially expect.
Around mid-December of 2022, bitcoin fees were cheap – a 1 sat/byte transaction would typically finalize within a few hours. During this time, the Lightning Network's total capacity and number of channels were reaching all-time highs. Today,12 months later, the Lightning Network seems to be losing its thunder as the number of channels drops by almost 30% throughout the year (image 2).
Although many hypothesized that Lightning’s infrastructure would solve the issue of fast and inexpensive payouts, as of December of 2023, Lightning adoption appears to be blockaded by the rise of ordinals (image 3).
While inscriptions boost mining revenue, they raise mining payout costs and lower profitability for smaller miners, potentially discouraging new and smaller miners from entering the industry. Miners that could help to decentralize the Bitcoin network.
Bitcoin mining is an essential component of Bitcoin's decentralization. As such, bitcoin mining can only truly decentralize if there are low entry barriers to enable even smaller, less sophisticated miners to enter the industry. Small mining operations are paramount to Bitcoin’s overall decentralization aspirations.
Looking forward, how can smaller miners move toward low payout fees in the face of a high mainnet fee environment? The answer may be in Bitcoin’s often overlooked sidechain - the Liquid Network.
Similar to Bitcoin blocks in early 2023, the Liquid network is vastly underutilized (see image 4) relative to its ability to serve bitcoin transactions and unique digital assets. Even during peak use, Liquid blocks are essentially empty, and transactions remain quick and inexpensive.
The objective is simple: offload a large portion of transactions onto the liquid network. Unfortunately, the Liquid Network is not ready to absorb a significant % of Bitcoin’s mainnet transactions. The roadblock? Hardly anyone has Liquid infrastructure developed into their platform. Of the 230 exchanges listed on coinmarket cap, only 22 support liquid.
So, how do smaller miners get large exchanges to adopt liquid? Rally the troops!
But how will the Bitcoin community persuade multi-billion dollar corporations to alter their operations? Well, let’s look into Bitcoin’s recent history for some optimistic signs that could signal a future success.
During the end of the 2017 crypto bubble, bitcoin transaction fees were bloated to numbers well above $50 for the first time. Bitcoin critics were armed with seemingly valid criticism, arguing that Bitcoin’s momentary struggles meant that the decentralized monetary network was doomed or even dead.
The Bitcoin critics would be short lived. As it is was a lesser-known argument within the Bitcoin community that would put their criticism to rest. The internal debate around SegWit split the community and as it emerged as the dominant method for scaling transactions and increasing transaction capacity per block, Bitcoiners unified to encourage exchanges to adopt SegWit. It was a lengthy process to spread SegWit’s adoption, and SegWit’s prevalence is the reason Bitcoiners enjoyed low fees post-2021 (image 5). If Bitcoiners can rally exchanges to adopt Liquid, they would enjoy lower transaction fees, at least for a portion of their transactions.
The best place for bitcoiners to start would be Binance. Binance was the most significant holdout for SegWit adoption pre-2022 and ince Binance makes up about 15% of bitcoin’s blockspace, their 2021 SegWit adoption may have been the catalyst that drove adoption up and fees down. Not only would Binance’s Liquid adoption have widespread influence throughout the crypto industry, but it could provide Binance the opportunity to leapfrog many of its mining pool competitors (image 6).
If Binance could leverage Liquid’s inexpensive asset transfers for their mining pool payouts, they could undercut all mining pools in terms of fees and establish a market advantage. Granted, freshly mined Bitcoin is not Liquid Bitcoin, but Binance could leverage its extensive network of incoming/outgoing transactions and reserves to attract new miners with the prospect of lower mining payouts. The opportunity to capture exchange fees on newly attracted customers is an undeniable upside Binance would be foolish to let pass by.
If Binance and other exchanges decide to adopt the Liquid Network, what would happen? Well, the result might be the ideal combination of inscribers minting unique assets on the most prime blockchain real estate available and even allow small bitcoin miners to maximize their efficiency and reduce the fees associated with liquidating mining revenue. While seemingly out of the question today, in the future Liquid Network adoption may be the key to help small miners have their cake and eat it, too.
