Fixed supply of block space creates a pure auction. Bitcoin's 1MB base block and 10-minute target interval create a perfectly inelastic supply of transaction slots. Demand spikes from Ordinals inscriptions or Runes token minting directly translate to fee pressure, as users outbid each other for priority.
bitcoins-evolution-defi-ordinals-and-l2s
Blog
Why Bitcoin Fees Stay Volatile Today
Bitcoin's fee market is no longer just about simple transfers. The rise of Ordinals, BRC-20 tokens, and nascent L2s like Stacks and Merlin are creating a new, permanent competition for block space, making fee volatility a core feature, not a temporary bug.
introduction
THE BLOCK SPACE ECONOMY
The Fee Market is Working as Designed (And It's Getting More Expensive)
Bitcoin's fee volatility is a direct consequence of its fixed block space and a monetary policy that prioritizes security over user experience.
Subsidy-to-fee transition is accelerating. The block reward halves every 210,000 blocks, systematically reducing the security subsidy. Miners now rely more on transaction fees for revenue, incentivizing them to prioritize high-fee blocks, which entrenches the auction model.
Fee volatility is a feature, not a bug. The protocol's design accepts sporadic congestion as the cost of decentralization and censorship resistance. This contrasts with Ethereum's base fee mechanism, which smooths costs but requires a more complex fee market design.
Evidence: The 2024 halving cut miner rewards from 6.25 to 3.125 BTC. During the April Runes launch, average transaction fees exceeded $128, demonstrating the market's extreme sensitivity to demand shocks on a fixed supply curve.
key-trends
BITCOIN FEE VOLATILITY
The New Drivers of Block Space Demand
Bitcoin's fee market is no longer just about payments; it's a battleground for new, high-value transaction types competing for limited block space.
01
The Problem: Inelastic Supply Meets Sporadic Demand
Bitcoin's ~4MB block size is a hard cap. Demand spikes from ordinals inscriptions or Runes mints create winner-take-all auctions, causing fees to jump from $2 to $100+ in hours. The base layer has no mechanism to smooth this volatility.
~4MB
Block Cap
100x
Fee Spike
02
The Solution: Layer-2s as Demand Sponges
Protocols like Lightning Network and Mercury Layer batch thousands of payments into a few on-chain settlements. This absorbs retail transaction demand, freeing block space for high-value finality proofs and reducing fee competition volatility for everyday users.
- Key Benefit: Batches 10k+ tx into one
- Key Benefit: Creates a predictable fee layer
10k+
Tx per Batch
-99%
User Cost
03
The New Competitor: Ordinals & Runes as Permanent Storage
Inscriptions treat block space as immutable data storage, creating inelastic demand that competes directly with financial transfers. A single Runes mint event can consume an entire block, demonstrating that cultural assets now drive fee markets as much as DeFi settlements do on Ethereum.
- Key Metric: 3.5MB blocks filled with images/text
- Result: Permanent on-chain cost basis
3.5MB
Data per Block
Permanent
Storage
04
The Architectural Limit: 10-Minute Block Time Amplifies Spikes
The ~10-minute block interval means urgent transactions have only ~6 chances per hour to be included. During demand surges, this creates intense, short-lived fee auctions. Compare to Solana's 400ms slots or even Ethereum's 12-second blocks, which allow for smoother fee estimation and less extreme volatility.
- Consequence: All-or-nothing inclusion pressure
- Contrast: Ethereum has base fee smoothing
10 min
Block Time
6x/hr
Inclusion Chances
BITCOIN LAYER-1 REALITY
Fee Volatility in the Ordinals Era: A Data Snapshot
A comparison of key metrics and protocol behaviors that define Bitcoin's fee environment, highlighting the structural drivers of volatility.
| Metric / Feature | Pre-Ordinals Baseline (2022) | Ordinals/Inscriptions Peak | Post-Taproot Wizards (Current Trajectory) |
|---|---|---|---|
Avg. Fee per Tx (USD) | $1.50 | $37.80 | $8.20 |
Max Block Size (vBytes) | 1-2M | 3.9M (Full Blocks) | 2.5-3.5M |
Dominant Tx Type | P2PKH/P2WPKH | Inscription (Text/Image) | BRC-20 & Runes |
Mempool Backlog > 100k Tx | true (Sustained) | true (Episodic) | |
Fee Spike Duration | < 6 hours |
| 12-48 hours |
% of Fees from Non-Financial Use | < 5% |
| 40-60% |
Avg. Confirmation Time at 10 sat/vB | < 30 minutes |
| 2-8 hours |
deep-dive
THE FEE SPONGE
Why L2s Won't 'Fix' Fee Volatility (They'll Amplify It)
L2s shift fee volatility from the user to the protocol, creating systemic risk and new MEV vectors.
L2s are fee sponges. They absorb thousands of user transactions into a single L1 settlement batch, concentrating fee risk. The protocol, not the user, must pay the volatile base-layer fee to post data or proofs.
Sequencers face margin calls. A sudden L1 gas spike during batch submission creates a direct P&L crisis. Protocols like Arbitrum and Optimism must manage this risk with treasuries or fee models that lag reality.
Users pay for worst-case hedging. To mitigate this risk, L2s overcharge via priority fees or implement complex EIP-4844 blob pricing, passing the volatility premium to users. The fee is smoothed, not eliminated.
Amplified MEV emerges. Sequencer control over transaction ordering and the urgent need to post cheap batches creates new extractable value. This centralization pressure contradicts L2 decentralization roadmaps.
risk-analysis
WHY BITCOIN FEES STAY VOLATILE TODAY
The Bear Case: When Volatility Breaks Things
Bitcoin's fee market is a direct auction where block space is the commodity. This creates a predictable failure mode during demand spikes.
01
The Inelastic Block Supply
Bitcoin's protocol enforces a ~10-minute block time and a ~4MB block size limit. This creates a perfectly inelastic supply of transaction space. When demand for blockspace surges—like during a new token standard (e.g., Ordinals, Runes) or a market frenzy—the only clearing mechanism is price.
- Fixed Capacity: Supply cannot scale with demand.
- Auction Dynamics: Users must outbid each other for inclusion.
- Predictable Congestion: Any popular on-chain event guarantees a fee spike.
~4MB
Max Block Size
10 min
Fixed Interval
02
The Mempool as a Pressure Cooker
Unconfirmed transactions queue in the mempool, a global, unordered list. Without a fee market sophistication like Ethereum's EIP-1559, there is no base fee or priority fee separation. This leads to fee estimation failures and transaction replacement chaos.
- No Priority Queue: Transactions aren't ordered by fee rate until a miner includes them.
- RBF Gambits: Replace-By-Fee becomes a necessary but user-hostile tool.
- Stranded TXs: Low-fee transactions can linger for days, clogging the network state.
100k+
TX Backlog
Days
Stranded Time
03
The Miner Extractable Value (MEV) Vacuum
Bitcoin's simple transaction model is being subverted by complex transactions (e.g., BRC-20 swaps, PSBTs). This creates opportunities for transaction ordering arbitrage that miners can exploit, further distorting the fee market.
- Emergent Complexity: New use cases create opaque bidding wars.
- Opaque Auctions: Miners can privately auction block space for high-value transactions.
- User Unawareness: Regular users compete with sophisticated bots, overpaying or getting censored.
$10M+
Daily MEV
Bots
Primary Bidders
04
The Layer 2 Band-Aid Problem
Solutions like the Lightning Network and sidechains (Liquid Network) exist but fragment liquidity and security. They are not default settlement layers, forcing users to actively manage capital across systems. This fails to solve the base layer's fundamental auction problem.
- Liquidity Fragmentation: Capital is trapped in siloed L2s.
- Settlement Delays: Moving to/from L1 reintroduces base layer volatility.
- Not a Fee Market Fix: Defers but does not eliminate the core auction mechanism.
<1%
TVL on L2
2 Steps
Extra Hops
future-outlook
THE BLOCK SPACE ECONOMY
The Inevitable Future: A Permanently Expensive Settlement Layer
Bitcoin's fee volatility is a structural feature of its fixed supply and security model, not a temporary bug.
Fixed block space supply creates permanent fee pressure. Bitcoin's 1 MB base block size and 10-minute target are constants, while demand for transactions fluctuates. This inelastic supply guarantees congestion during peak usage, turning block space into a pure auction.
Security budget transition from inflation to fees is non-negotiable. As the block subsidy halves, transaction fees must replace lost revenue to secure the network. This economic shift mandates that fees, on average, trend upward over the long term.
Layer-2 scaling solutions like Lightning and sidechains (e.g., Liquid Network) divert routine payments but intensify settlement demand. Each L2 channel opening, closing, or dispute requires an on-chain transaction, concentrating demand for the most secure, final settlement.
Evidence: The 2024 Runes protocol launch caused average fees to spike above $120. This event previews the future: new, high-value use cases will perpetually compete for the limited settlement slots, making low-fee periods the exception.
takeaways
THE BLOCK SPACE MARKET
TL;DR for Protocol Architects
Bitcoin's fee volatility is a structural feature, not a bug, driven by its inelastic block space and a dynamic, uncoordinated fee market.
01
The Problem: Inelastic Block Space
Bitcoin's ~4MB block weight limit creates a fixed-supply auction for transaction inclusion. Demand spikes from ordinals inscriptions, BRC-20 mints, or exchange batching instantly saturate this supply, causing fee bids to skyrocket.
- Fixed Supply: Block space is perfectly inelastic; no surge pricing can create more.
- Demand Spikes: A single popular NFT drop can increase the mempool backlog to 300k+ transactions.
- No QoS: All transactions compete in a single, winner-take-all market.
~4MB
Block Limit
300k+
Queue Spikes
02
The Solution: Fee Market Without Coordination
Users signal value via fee-per-byte (sat/vB) bids. Miners, motivated by profit, include the highest-paying transactions. This creates a Vickrey auction where users must outbid each other, but lack perfect information on future demand.
- Profit-Driven Miners: They are not coordinators; they simply maximize revenue per block.
- Information Asymmetry: Users must guess the clearing price, leading to overbidding during congestion.
- No Native Batching: Unlike Ethereum with rollups, Bitcoin lacks a dominant scaling layer to absorb and compress demand.
sat/vB
Bid Unit
Vickrey
Auction Type
03
The Consequence: Unpredictable Settlement Costs
For architects, this means Bitcoin is unsuitable for high-frequency, low-value transactions. Protocols must design for batch processing, time-locked contracts, or Layer 2 settlement to achieve cost predictability.
- Settlement Layer Only: Treat mainnet as a finality layer, not a execution environment.
- Batch & Optimize: Aggregate user actions into single transactions (see Lightning Network channel updates).
- Fee Estimation is Hard: APIs like mempool.space provide estimates, but sudden spikes render them obsolete in ~1-2 blocks.
L2 Required
For Scale
1-2 Blocks
Estimate Lag
04
The Future: Layer 2s & Sidechains
Long-term fee stability requires moving activity off-chain. Lightning Network (payment channels) and Rootstock (sidechain) absorb volatility by settling net balances on-chain. Emerging protocols like BitVM could enable optimistic rollups.
- Lightning: Shifts billions in value with sub-cent fees and ~1s finality.
- Sidechains: Offer EVM-compatible environments with more elastic block space.
- Fundamental Trade-off: You exchange Bitcoin's absolute security for predictable cost on these layers.
~1s
LN Finality
Sub-cent
LN Fees
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