If you’ve been trying to use Bitcoin over the last few months, you’ve likely noticed that you’re forced to cough up premium fees to secure a transaction in the next block. Fees are a function of block space demand, and when plenty of users are bidding to get into the next block, fees adjust upwards as users compete to entice miners with their transactions.
Usually, these periods of high fees work themselves out over time, but for the last few months, fees have remained consistently high due to the popularity of ordinals.
This new form of transaction has birthed an entirely new market for Bitcoin block space and is full of jargon, with new terms appearing daily. Among the latest buzzwords are “free mint” and “fair mint,” which are often thrown around in the context of Bitcoin NFTs and BRC-20 tokens.
These terms offer insights into how this new market attracts users and why these users are relatively price-insensitive regarding on-chain Bitcoin transactions.
The great minting for fools gold rush
In the Ordinals ecosystem, in order to create an “asset”, you need to inscribe data into the blockchain, which requires a transaction. The first inscriptions revolved around adding images to the chain, resulting in a type of art NFT.
The first inscriptions or mints were made up of random images and users trying out the ordinals protocol, but it later morphed into a more established practice with entire NFT collections either choosing to mint on Bitcoin or migrate from other chains.
Eventually, these inscriptions added tokens, with the deployment of the first BRC-20 token, called ORDI and ever since, altcoins, meme coins, and pump-and-dumps have started to launch on Bitcoin.
Tokens and NFTs are nothing new; they’ve existed on altcoin chains like Ethereum for years, so why is there such a frantic race to mint tokens and NFTs using the Bitcoin blockchain?
Well, the driving factor comes from the concept of “free mints” or “fair mints”.
Free Minting: Where Costs Disappear (or Do They?)
Token creation has been one of the primary use cases for altcoin chains; the ability to create smart contracts to issue unregistered tokens has taken off like wildfire, with thousands of tokens living on multiple blockchains, ready for any user to speculate on.
The gripe surrounding token creation has always been its issuance program, with
- Initial Coin Offerings (ICO)
- Initial Exchange Offerings (IEO)
- Initial DEX Offerings (IDO)
All have the same issue that the issuer gets to dictate the distribution of the coins. Usually, when a token is created, the issuer reserves a portion for themselves, often referred to as a “premine”, while the rest might be distributed as an airdrop and later through some issuance program like proof of stake.
When the issuer gets to determine how many tokens they hold, the ability to dump on retail is pretty much baked into the incentive structure; in fact, dumping is a coin founder’s primary source of income.
Many retail investors and degen traders have fallen prey to pumps and dumps and have become jaded and apprehensive about investing in tokens, so coming up with a new issuance model and narrative was needed to reinvigorate the enthusiasm for speculation.
This is where free mints come into play; instead of being at the mercy of some pre-programmed issuance model that favours the creator, Ordinals (NFTs and Tokens) are issued based on a “minting transaction”.
When a token or NFT is launched, it is created with certain parameters: its ticker, its hard cap and its issuance per mint amount. For example, I could launch a TBM Token on Bitcoin.
- Ticker: TBM
- Hard Cap: 21 000 000
- Issuance: 1000
Users who want to participate in the mint will broadcast a transaction to the blockchain to claim their 1000 TBM tokens, and if successful, they could claim that amount, which is inscribed on the chain and referenced via the specific UTXO.
If the floor price for a TBM token is $1 and for the price of a $30, $40, $60, or $100 Bitcoin transaction, users can claim $1000, they’re going to see it as a no-brainer.
This is why Ordinal users aren’t bothered with the cost of fees: they’re claiming altcoins they feel are making them wealthy on paper, regardless of the liquidity of that market or the future fees involved in trading these tokens.
Depending on the number of token projects launched on Bitcoin at any one time, they can spike fees as users flock to perform these minting transactions and claim their tokens. Users who claim these tokens feel they are less likely to get rugged as it requires on-chain transactions and real Bitcoin to participate in this lottery, limiting whales’ ability to acquire a large portion of the supply.
Fair Minting isn’t all that fair or free.
The current narrative around fiar mints is that they translate to a transparent, decentralised, and manipulation-resistant minting process. Ordinal proponents claim this model provides a well-lit marketplace where everyone plays by the same rules.
This involves setting a fixed token supply and establishing a clear and public minting schedule. Ultimately, “fair mint” aims to create a level playing field for all participants, preventing whales and insiders from hoarding tokens like digital dragons guarding their treasure.
Unfortunately, for some minters, they can be front-run by traders and bots that watch the mempool and deploy MEV transactions.
Another claim around this issuance model is that since there is no central issuer, and it requires proof of work through the creation of a Bitcoin transaction, it shouldn’t be considered a security.
While regulators have yet to take a stance on Ordinals, it’s highly unlikely that these tokens, their issuers, their purpose and their expectations of future appreciation don’t see them passing the Howey Test.
Lastly, “free” mint may not be so free, depending on the time and day. Since fee markets are programmed into BTC and its limited block space, if a collection is desirable (or the blockchain is congested that day for whatever reason), fees could spike during the mint, making the mint not so fair at all, turning it more into an auction and eating into your possible margins.
The appeal of the secondary market
Buyers who participate in this market are actively looking to resell the moment they mint tokens; the entire game revolves around getting in on the minting round and selling to greater fools who weren’t able to mint but see the early price appreciation and want to get in on the action, only to end up as the exit liquidity.
Minting is correlated with its secondary market price and if the minter can profit. If a buyer is minted at the initial sale price or on the secondary market, and the floor price of the NFT collection drops below that, or the tokens minted are worth less than the fees paid, they likely have a negative feeling.
By using the free mint model, you distribute your tokens to a wider base of enthusiastic resellers; this group becomes your marketers instead of the creators having to do so themselves and will happily shill the token, trying to pump the price to try and exit their positions.
Since the amount of tokens any single user owns is limited through the issuance model, it’s unlikely these thinly traded tokens can be dumped fast enough to erode the drummed-up liquidity, allowing more users to benefit from the greater fools and claim their rewards.
As more early minters turn a profit, their stories only add fuel to the frenzy, encouraging the next round of minting of pump and dumps.
The free mint virus is spreading.
The concept of free mint or fair mint has become so popular with the launch of Ordinals that we’ve seen the BRC-20 market reach $1 billion in market cap and show no signs of slowing down.
As more money sloshes around this secondary market, it only encourages more users to come to participate in the next round of mints or try to trade these. markets, adding to further congestion on-chain and leading to consistently higher fees.
This is worrisome from a Bitcoin perspective as layer two solutions have not matured enough to the point where average users would easily migrate to them, understand the trade-offs they make, or be willing to use a multi-layered Bitcoin approach, which could see users leaving funds with custodians or avoiding Bitcoin altogether.
One positive tailwind could be that this demand will eventually be diluted across multiple chains. As this free mint concept is now what attracts liquidity, we’re starting to see other chains launch similar products despite already having native smart contract token standards.
- Ethscriptions are a new way of creating and sharing digital artefacts on Ethereum using transaction calldata
- Doginals are the ordinals protocol forked and applied to Dogecoin
- Solana Inscriptions are another way of embedding data into Solana’s chain
As other chains begin to offer the ability to do fair mint or free mint, traders might look to move over to these networks instead due to their faster transactions, higher throughput, larger block sizes and established on-chain markets.
Minting arbitrary data on-chain is only one part of the grift, and third-party indexers and sequencers are required to read this data and feed it into wallets and DEXs to make it easy for the average user to trade. Since a lot of this work has already been deployed on chains like Ethereum, it would be easier to manage secondary market trading versus the likes of Bitcoin, where things have to be built from scratch or migrated to sidechains like Rootstock or a remora chain like Stacks.
The trend is not your friend
BRC-20 tokens and their various iterations are part of this new trend, but they are nothing new; like all previous altcoin frenzies, they are still games of digital hot potato, with the ones in the know able to get out of their positions in time to secure a profit in Bitcoin while the majority will be left with worthless tokens.
The real worrisome difference between this current altcoin craze is that they can claim it was built on Bitcoin. Previously, altcoins were relegated to other chains allowing for a clear distinction between Bitcoin and altcoins, memecoins and shitcoins.
Now, the lines have been blurred, and with so much hype around BRC-20, those new to Bitcoin can easily get lost and spend their money on worthless meme coins and a dust-sized UTXO and miss out on the real store of value that is Bitcoin.