After the halving, Bitcoin fees soared, understanding the game mechanics behind the runes

Original Title: Halving Fee Chaos

Author: Jimmy Song

Compiled by: Luffy, Foresight News

Bitcoin halving is a scheduled event, one of the holidays that occur periodically on the Bitcoin network. Like soft fork activations and the launch of various financial instruments, it is an unpredictable day that happens every few years, which is why Bitcoin enthusiasts and mainstream media pay special attention.

This year's halving is also highly anticipated, but we encountered some minor incidents that need further explanation. The fourth Bitcoin halving reduced the block subsidy from 6.25 BTC to 3.125 BTC at block 840,000, as expected, but surprisingly, there was a subsequent 37.626 BTC in fees, marking the highest ratio of transaction fees to block subsidy in Bitcoin's history, with one transaction paying nearly 8 BTC in fees.

More Fees

Not only was the fee for block 840,000 high, but the fees for the next 5 blocks were also substantial: 4.486, 6.99, 16.068, 24.008, and 29.821 BTC respectively, setting historical records that the Bitcoin network has never seen before.

In the history of Bitcoin so far, it is very rare for fees to exceed the block subsidy. There were indeed some instances during the eras of 50 and 25 BTC block rewards, but these were all due to user errors (usually forgetting to input a change address), and almost all fees came from a single erroneous transaction. During the 12.5 BTC era, there were a few transactions at the end of 2017 where the cumulative fees exceeded the block subsidy. And in the recently concluded 6.25 BTC era, many block fees exceeded the block subsidy during the ordinal frenzy.

Nevertheless, such occurrences are still relatively rare. Even in the period leading up to Bitcoin's fourth halving, most block fees did not exceed 1.5 BTC. However, in this new era of 3.125 BTC subsidy, as of the writing of this article (block 840018), every block's fee has exceeded the subsidy, with some even surpassing it by several times. So what happened? Why are the fees for blocks so high after the halving?

Runes

The reason relates 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.

Looking back, colored coins have been around for a long time. The main idea is that you can "color" certain Bitcoin transaction outputs, giving them meanings beyond just the Bitcoin amount. It can represent another "asset" and be issued as a token. The first implementation of such a protocol occurred 11 years ago in 2013, followed by multiple attempts, including MasterCoin (renamed Omni), CounterParty, and more recently RGB, Taro Assets, and BRC-20.

As Rodarmor mentioned in his blog, his motivation for creating the new protocol was to bring some assets issued on other chains into Bitcoin. To make the launch of this protocol more interesting, Rodarmor decided to start issuing at block 840,000, leading to the chaos we are witnessing.

Simplification and Game Theory

Casey Rodarmor is also the creator of ordinals, and he adopted one of its concepts, using uppercase Latin letters on Runes to name assets. This is a normal choice, but what happens when conflicts arise? How do we distinguish between two assets with the same name?

To simplify operations, the protocol only looks for existing assets; if the name conflicts with an existing asset, a new asset will not be issued. This indeed simplifies the client and provides a globally unique name for each asset. Unfortunately, this also brings some terrible incentive problems.

Sniping Asset Issuance

The first incentive problem is that if a transaction issuing an asset is sent to the Bitcoin mempool, other observers can steal the name through an earlier transaction when that transaction is broadcast to network nodes.

Now, "earlier" in Bitcoin is a strict concept. Blocks are ordered, and transactions within blocks are also ordered, first come, first served. But if you want to snatch a good symbol name, you can look for mempool transactions attempting to create new assets and create your own asset with a higher fee. This is the essence of sniping.

What is truly frightening about this situation is that both transactions may enter a block, but only the first transaction can successfully issue the asset. The second transaction will not issue the asset but will still incur fees.

Miners typically sort transactions by fee rate, so a higher fee may mean they will be able to issue the asset. I say "may" because there is a second incentive problem that I will discuss later. But from a game theory perspective, both parties are incentivized to continually raise fees to outbid each other. This dynamic resembles a bidding auction, where participants ultimately make rational choices but end up with irrational results (for example, paying $1.50 for a $1 asset). Each loser incurs substantial fees with nothing to show for it.

Second-Order Game

Given the existence of the above mechanism, it is not surprising that many issuers initially set high fees to deter anyone from attempting to snatch the symbol. After all, if your sniping attempt fails, you will lose the fees you tried to snatch. For this reason, the use of RBF (Replace-By-Fee) has also significantly increased, allowing you to preemptively act, while the sniper can take similar actions against the issuer.

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 miners. If they wish, miners can prioritize lower-fee transactions and include them in blocks. In fact, the incentives are to provide miners with off-chain fees as much as possible, so that transactions can be sorted in some way without revealing how much you paid. Miners in this protocol have significant leverage.

Conclusion

Runes have led to some very high fees on the Bitcoin network. It is hard to know whether this design was intentional or unintentional; what we do know is that Runes have been hyped over the past few months, and people have been anticipating them. As one of the first assets issued under the protocol, it certainly has some marketing value.

Sadly, aside from the normal scams of completely centralized altcoins, the cost of block space congestion is higher, with current fees of 1000 sats/vbyte insufficient to enter certain blocks. The issuance of Runes currently nearly overshadows all other use cases.

That said, the current rate of Runes issuance is completely unsustainable. In just the first 18 blocks, over $20 million in fees have been spent, most of which is for Runes issuance. At this rate, Runes issuers will spend $150 million daily or $1 billion weekly. Frankly, I don't think this situation will last long. Meanwhile, miners producing these blocks must be quite happy.