For the past three issues, I've been examining the structural forces pressing on Bitcoin's security model — the difficulty adjustment's elegance and limits (Issue 8), the declining block subsidy and whether fees can replace it (Issue 9), and AI's displacement of mining from premium energy markets (Issue 10). Each piece painted a picture of a system under long-term revenue pressure.
Then something unexpected happened. People started paying unprecedented amounts for Bitcoin block space — not for payments, but for JPEGs, JSON tokens, and protocols that Satoshi never designed for.
This issue documents the mechanics: what Ordinals, BRC-20, and Runes actually do, how they generate fees, and what the fee data tells us about the demand structure for Bitcoin block space.
Ordinal Theory
Casey Rodarmor launched Ordinal Theory in January 2023. The core idea assigns unique identification numbers to each satoshi using sequential tracking via a first-in-first-out convention. The numbering system includes six rarity tiers from "common sats" to a single "mythic" satoshi — the genesis block satoshi.
The crucial insight: this is a convention, not a protocol change. No consensus rules changed; Bitcoin nodes have no protocol-level concept of ordinals. The scheme represents a Schelling point dependent entirely on collective agreement.
Inscriptions
Inscriptions leverage two prior Bitcoin upgrades repurposed beyond their original intent. SegWit (2017) created a 4:1 discount favoring witness data over standard transaction data, designed to encourage signature format adoption. Taproot (2021) removed witness script element size limits — a housekeeping change that inadvertently enabled large data storage.
Inscriptions embed arbitrary data in witness sections through two-transaction processes: commit transactions create taproot outputs containing inscription content; reveal transactions spend those outputs, making data visible on-chain.
The impact proved substantial: average block size increased from ~1.2 MB pre-Ordinals to 1.7–2.5 MB post-launch (47–75% growth). At peak, inscriptions consumed roughly 60% of block space.
BRC-20
Domo created BRC-20 in March 2023, building a fungible token standard atop inscriptions using JSON-encoded operations (deploy, mint, transfer). The architecture depends entirely on off-chain indexers — Bitcoin itself cannot validate token balances.
The inefficiency is structural: token transfers require two transactions rather than one. BRC-20 drove UTXO growth from 86 million (April 2023) to 140 million (November 2023). By mid-2025, over 30% of UTXOs linked to Ordinal inscriptions, with the chainstate database exceeding 11 GB.
Domo warned the tokens were "worthless" at launch; by early May 2023, BRC-20 market cap reached $991 million. Average transaction fees surged from ~$1.20 to $16–$29, with May 9 peaks creating 469,000-transaction mempools.
Runes
Rodarmor launched Runes deliberately on April 20, 2024 — Bitcoin's fourth halving block (840,000) — as a technically superior alternative using OP_RETURN data rather than witness space. OP_RETURN outputs are provably unspendable, allowing nodes to prune data after processing, unlike BRC-20's permanent UTXO dust.
The halving-day launch produced Bitcoin's most dramatic fee spike: average fees hit a record $127.97, with the halving block generating $2.4 million in fees (12+ times typical subsidy). Daily fee revenue hit $78 million before collapsing to $2 million within eleven days.
Runes attracted $135 million in total post-halving fees, following the speculative spike-and-normalization pattern seen with BRC-20 and other protocols.
The Spam Debate
Luke Dashjr and others argued inscriptions exploit unintended SegWit behavior, proposing filtering in Bitcoin Core. The January 2024 rejection reflected developer consensus impossibility — miners have economic incentive to accept fee-paying transactions regardless of content.
By April–June 2025, developers merged proposals removing OP_RETURN's 80-byte limit, allowing up to 4 MB per output. Gloria Zhao's rationale: the limit created worse outcomes (users creating fake spendable outputs for data storage) than permitting larger OP_RETURN usage.
Bitcoin Core's node share dropped from ~98% to 88% following this change; Bitcoin Knots grew to ~5%.
What the Fee Spikes Tell Us
The fee data is dramatic but uneven. May 2023 saw a 469,000-transaction mempool backlog where fees exceeded block subsidies for roughly ten days. April 2024 produced a single block generating $2.4 million in fees versus typical $40,000–$60,000 amounts. The August 2024 Babylon staking launch saw fees spike from 0.14 BTC to 9.52 BTC within two blocks as 12,720 stakers competed for confirmation.
Each spike proved the fee market mechanism works — when demand exceeds supply, fees rise, and high-value transactions get confirmed while low-value ones are priced out. This is exactly how a competitive market for scarce resources should behave.
But each spike was also event-driven — a launch, a cap fill, a halving — rather than demand-floor-driven. After each event, demand evaporated because there was no recurring use case keeping inscription transactions in mempool competition. The fee market works on the way up. The question is whether it works on an average Tuesday.
The UTXO Problem
The externalities are real. BRC-20 drove UTXO set growth from 86 million (April 2023) to 140 million (November 2023). By mid-2025, over 30% of UTXOs were linked to Ordinal inscriptions, with the chainstate database exceeding 11 GB. Every Bitcoin full node must store the entire UTXO set in memory for transaction validation.
Runes was designed to mitigate this — OP_RETURN outputs are provably unspendable and prunable. But whether Runes' theoretical UTXO advantages translate to practical network health depends on whether inscription activity compounds rather than displaces BRC-20 usage.
Where I Might Be Wrong
The UTXO bloat risks to node decentralization may outweigh fee revenue benefits. If the cost of running a full node rises substantially due to chainstate growth, the network's censorship resistance — the very property I argued in Issue 8 justifies proof-of-work's higher security cost — could degrade from below.
Market forces might resolve the feature-versus-attack debate more definitively than developer philosophy. If inscription demand creates a durable fee market, the "spam" framing becomes untenable regardless of ideology. If inscription demand proves purely speculative and temporary, the UTXO bloat remains without the compensating fee revenue.
The speculative froth interpretation may also be wrong in a subtler way. Ethereum's NFT market looked like pure speculation in 2021. Five years later it still generates meaningful daily volume and fee revenue. The Ordinals ecosystem is young. The decline from 400,000 daily inscriptions to under 3,000 looks like death, but it could also look like the trough before maturation.
The Question This Issue Doesn't Answer
The mechanics work. The demand is real. Each protocol generated dramatic fee spikes. Each spike decayed rapidly.
The question that connects everything back to Issue 9 is whether that demand actually solves the security budget problem. Sustained daily fee revenue that compounds into genuine miner income differs fundamentally from speculative cycles. That's the question for Issue 12.
Sources & Further Reading
Ordinals & inscriptions
- Casey Rodarmor, Ordinal Theory documentation and GitHub (2023)
- Crypto.com Research, "Bitcoin Ordinals" (March 2024) — 63 million inscriptions, ~6,370 BTC in fees
- Investing.com, "Inscriptions Are Filling Bitcoin Block Space, Consumes 50% of Space" (February 2023)
BRC-20
- Glassnode, "The Week On-Chain, Week 20" (May 2023) — BRC-20 congestion analysis
- OBM.io, "Bitcoin Fee Market Dynamics" — BRC-20 fees exceeded 50% of total transaction fees on May 7–8, 2023
- Grayscale Research, "Market Byte: Awaiting Confirmations" (May 2023)
Runes
- CoinDesk, "Miners Reap Windfall as Runes Debut Sends Transaction Fees to Record Highs" (April 2024)
- Cointelegraph, "Bitcoin Runes Earn 2,500 BTC in Fees in 2 Months" (June 2024)
- The Defiant, "Bitcoin Fees Normalize After Runes Coming-Out Party Abruptly Ends" (April 2024)
UTXO & node impact
- Blockchain.news, "Bitcoin UTXO Set Jumps to 169M in Ordinals Era"
- NFT Evening, "Bitcoin Network Activity Hits Lowest" (2025)
OP_RETURN debate
- Gloria Zhao, Bitcoin Core PR discussion (2025)
- Bitcoin Core vs. Bitcoin Knots node share data (2025)
Staking events
- Decrypt, "Bitcoin Fees Skyrocket as Babylon Launches Native BTC Staking" (August 2024)
Academic literature
- "Bitcoin Ordinals: Determinants and Impact on Total Transaction Fees," ScienceDirect (2024)
- Journal of the British Blockchain Association (2026)
Geo Nicolaidis
Builder, TrailBit.io
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