Cryptoverse: Busy bitcoin births new breed of crypto

© Reuters. FILE PHOTO: Representations of the virtual currency Bitcoin stand on a motherboard in this picture illustration taken May 20, 2021. REUTERS/Dado Ruvic/Illustration

By Medha Singh and Lisa Pauline Mattackal

(Reuters) - Things are heating up on the bitcoin blockchain.

Daily transactions have rocketed to an all-time high of 682,000 this month, according to data from Glassnode, almost 40% higher than the previous peak in 2017. Bitcoin's dominance, or its share of the overall $1.16 trillion cryptocurrency market, has swelled to 44% from 38% at the start of the year.

What's going on?

Enter BRC-20, the first class of crypto tokens to be built on the bitcoin blockchain, besides bitcoin itself. Nearly 25,000 of the experimental coins have already been minted this year, sending transactions through the roof.

"BRC-20 tokens are a phenomenon we haven't seen before," said Gordon Grant, co-head of trading at Genesis trading.

Primarily due to the creation of these tokens, the average daily transactions over seven days stands at more than 531,000, nearly twice as high as a month ago, according to Blockchain.com data.

This new class of crypto has no specific use beyond speculation, akin to memecoins. Yet its nascent popularity points to interest in bitcoin not just as a store of value or payments method, but as the foundation for developing new coins and applications - previously considered the domain of more modern blockchains such as Ethereum and Solana.

Some investors and developers view bitcoin's blockchain as a safer long-term basis for creating tokens and applications in the wake of the crypto carnage that followed the collapse of high-profile firms like FTX and a general flight from riskier assets, according to market players.

"People have seen what is possible with other blockchains and they want it on bitcoin, as the oldest network, bitcoin has a track record that people can trust," said Alex Miller, CEO at bitcoin developer network Hiro.

Still, the BRC-20 frenzy has been volatile.

The total value of these tokens - which are typically traded in secondary markets, particularly decentralized exchanges - exceeded $1 billion in early May, but has since fallen back to $446 million, according to tracker BRC-20.io.

INSCRIBED ON SATOSHI

As bitcoin's blockchain wasn't originally developed to support a crypto ecosystem, unlike Ethereum and Solana, BRC-20 tokens are created using ordinals theory, which allows data to be inscribed on each satoshi - the smallest denomination of bitcoin, or one hundred millionth.

"There isn't much utility when it comes to BRC-20 tokens and Ordinals," said CJ Reim, contributor at blockchain firm CoreDAO, though he sees the trend as "promising" in terms of interest in building products on the bitcoin blockchain.

The race to create these new coins hasn't had a significant impact on the price of bitcoin, which has been trading under $30,000 since mid-April.

The rapid creation of BRC-20 tokens hasn't been without contention, with detractors saying the issuance of these tokens has made it more difficult for users who want to use bitcoin for its originally intended purposes.

"Gas" fees, or transactions costs on the bitcoin blockchain have soared over the past month, with the total dollar-denominated fees paid per day touching near a new all-time-high of $17.8 million per day, according to Glassnode data.

The median transaction fee spiked as high as $30.91 versus a range of 90 cents and $4.23 between January and May 1, Blockchain.com data showed.

The network has also slowed considerably. The congestion was so acute, that the world's largest crypto exchange Binance had to briefly pause bitcoin withdrawals on May 7.

"Although congestion has eased somewhat, it is still elevated and at its peak users were waiting over 30 hours for transactions to be confirmed," said Nauman Sheikh, head of treasury management at digital asset investment manager Wave Digital Assets.

"This has pushed the limitations of bitcoin's technology."