Bitcoin fees soar after halving, understanding the gaming mechanics behind runes

Original title: ##Halving Fee Chaos

Author: Jimmy Song

##Compiled by: Luffy, Foresight News Bitcoin halving is a planned event and one of the festivals that happens every once in a while on Bitcoin. Like soft fork activations and the launch of various financial instruments, it is an unpredictable day that only occurs every few years, and therefore attracts special attention from Bitcoin enthusiasts and mainstream media.

This year’s halving is also highly anticipated, but we encountered some 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, as expected, but what was unexpected was the accompanying 37.626 BTC handling fee, which is the highest ever in Bitcoin’s history The block with the highest ratio of transaction fees to block subsidies in history, with one transaction paying nearly 8 BTC in fees.

More handling fees

Not only are the handling fees for the 840,000th block high, but so are the handling fees for the next 5 blocks: 4.486, 6.99, 16.068 respectively. , 24.008 and 29.821 BTC, which created a historical record and a similar situation has never happened on the Bitcoin network.

In the history of Bitcoin so far, it is very rare for transaction fees to be higher than the block subsidy. In the days of 50 and 25 BTC block rewards, there were a few, but these were the result of user error (usually forgetting to enter the change address), and almost all of the fees came from a single bad transaction. In the era when the block subsidy was 12.5 BTC, there were several transactions at the end of 2017 where the cumulative fees exceeded the block subsidy. In the 6.25 BTC era that just ended, there were many block fees that exceeded the block subsidy during the ordinal boom.

Still, such instances are relatively rare, and even in the period leading up to 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 this writing (block 840018), fees per block exceed the subsidy, some even by several times the subsidy. So what happened? Why are block fees so high after the halving?

Rune

The reason is related to 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 tokens to be issued on the native UTXO set.

Now to review, colored coins have been around for a long time. The main idea is that you can "color" certain Bitcoin transaction outputs so that they have meaning other than the amount of Bitcoin in the output. 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 most recently RGB, Taro Assets, and BRC-20.

As Rodarmor said in his blog, his motivation for the new protocol was to bring some of the assets issued by other chains into Bitcoin. To make the launch of this protocol more interesting, Rodarmor decided to start the issuance at block 840,000, leading to the chaos we saw.

Simplification and Game Theory

Casey Rodarmor is also the creator of ordinals, and he adopted one of the concepts of naming assets using capital Latin letters on runes. This is a normal choice, but what happens when a conflict occurs? If two assets have the same name, how do we differentiate them?

To simplify operations, the protocol only looks for assets that already exist and will not issue new assets if their names conflict with existing assets. This really simplifies things for the client and gives each asset a globally unique name. Unfortunately, this also creates some terrible incentive problems.

Sniper Asset Issuance

The first motivating problem is that if a transaction to issue an asset is sent to the Bitcoin mempool, then when that transaction is broadcast to network nodes, other observers can Stealing names through earlier trades.

Now, "earlier" in Bitcoin is a strict concept. Blocks are in order, and transactions within blocks are also in order, on a first-come, first-served basis. But if you want to grab a good symbol name, you can look for mempool transactions that try to create new assets and create your own at a higher fee. This is the nature of sniping.

The really scary thing about this situation is that both transactions may enter the block, but only the first transaction can successfully issue the asset. The second transaction does not issue the asset, but still requires payment of fees.

Miners typically order transactions by rate, so higher fees may mean they will be able to issue assets. I say "maybe" because there is a second motivational issue here that I will discuss later. But from a game theory perspective, both sides are incentivized to keep raising fees to outdo each other. This dynamic is similar to a bid auction, where participants ultimately make rational choices but receive irrational outcomes (such as paying $1.50 for $1). Every loser pays a lot and gets nothing.

Second Order Game

Given the existence of the above mechanics, it’s no surprise that many issuers initially intentionally set fees high to discourage anyone from trying to grab the symbol. After all, if your preemption attempt fails, you lose the fee you were trying to preempt. For this reason, the use of RBF (replacement of fees) has also increased significantly, so that you can pre-empt others and preemptors can do the same against issuers.

Note that RBF cannot avoid paying fees here, as the replacement transaction must pay more than the previous transaction. Either way, miners ultimately benefit.

Now back to the role of the miner. If they wish, miners can prioritize transactions with lower fees for inclusion in blocks. In fact, the incentive is to give miners off-site fees whenever possible in order to order transactions in a certain way by not revealing how much you paid. Miners in this protocol have a lot of leverage.

Conclusion

Runes are responsible for some very high fees on the Bitcoin network. It's hard to know if this design is intentional or not, what we do know is that Runes have been hyped and anticipated for the past few months, and as one of the first assets released under the protocol, it certainly has a certain marketing value.

Sadly, aside from the normal scam of altcoins being fully centralized, blockspace congestion is more costly and the current fee of 1000 sats/vbyte is not enough to get into some blocks. Rune asset issuance currently covers almost every other use case.

Having said that, the current pace of Runes releases is completely unsustainable. In the first 18 blocks alone, more than $20 million was spent in fees, most of which was spent on Runes issuance. At this rate, Runes publishers will be spending $150 million per day or $1 billion per week. I honestly don't think they'll be like this for much longer. At the same time, it must be fun to be the miner producing these blocks.

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