Bitcoin has had a great few weeks, more than a 60% price increase since September 11, as highlighted by CoinGecko. This upturn is part of a larger increase in recent years, driven by growing market dominance and a steady increase in public interest.
In addition, the blockchain itself showed increased activity in the chain during 2023, excluding slowdowns in May and October, indicating a broader resurgence in Bitcoin’s use and interest.
This on-chain activity renaissance is largely driven by Ordinal Inscriptions – a relatively new way to include unique data, such as art, in the Bitcoin blockchain.
Read more: Ethereum won’t topple Bitcoin anytime soon, but Ordinals could change that
While Ordinals bring new use cases to Bitcoin, they have also made transactions on the network more expensive and slower to settle. In the past year, the average transaction fee has increased by 25x, according to Blockworks research. Meanwhile, the Bitcoin mempool continues to face unprecedented levels of congestion.
As a result, this new asset class has ignited a long-running debate within the Bitcoin community about the incorporation of arbitrary data into the blockchain; a discussion further fueled by the mining of the largest ever Bitcoin block following Ordinals’ debut on the network’s mainnet in January 2023.
The debate over Ordinals in the Bitcoin community reflects a clash between traditionalists and innovators. On the one hand, figures such as Hashcash inventor Adam Back have criticized the rankings for not being “space efficient”. Others like longtime Bitcoin developer Luke Dashjr criticize Ordinals for their potential to “spamm the blockchain” by exploiting Bitcoin’s Segwit and Taproot upgrades in unintended ways.
Dashjr’s position is not only theoretical; he actively worked to filter Ordinals transactions from his personal Bitcoin node and his mining pool’s node. This action sparked controversy, with some in the community accusing him of censorship.
Vocal challengers to the Ordinals craze often argue for Bitcoin’s fundamentals, arguing that the blockchain should prioritize its original intent — peer-to-peer financial transactions. Opponents of Ordinals often believe that maintaining the network’s efficiency and core purpose is paramount, as the intrusive assets and similar innovations are seen as deviations from Bitcoin’s intended use.
But Ordinals supporters argue the inscriptions are ultimately good for the network.
Austin Alexander, co-founder of Bitcoin sidechain project LayerTwo Labs, told Blockworks that Bitcoin’s long-term security relies on transaction fees. These fees incentivize miners to continue validating transactions, essential to the network’s health. Alexander emphasizes the need for Bitcoin to demonstrate its utility to justify this cost.
“Bitcoin is not inevitable and needs to be paid for. And people will only pay if they see the benefit of it [Bitcoin],” Alexander said.
Andrew Poelstra, a seasoned Bitcoin developer, argues that efforts to block Ordinals could backfire. He said such measures could inadvertently lead to “spam” being hidden in “useful” transaction data such as signatures, thereby complicating the network rather than simplifying it.
He also argues that strong opposition to Ordinals from some quarters may inadvertently strengthen interest in them.
“The more the high priesthood of Bitcoin culture disapproves [ordinals]the merrier,” Alexander said.
Ordinals work by embedding unique identifiers on satoshis, Bitcoin’s smallest divisible units. This process effectively turns each subscribed satoshi into a unique digital asset, similar to non-fungible ERC-721 tokens (NFTs) on Ethereum.
Unlike Ethereum’s NFT-ready design, Bitcoin’s original blueprint was originally intended for more simple exchangeable financial transactions. As a result, Bitcoin now struggles with the added strain of accommodating increased network congestion and higher transaction fees.
The subscription boom was enabled in part by Bitcoin’s Taproot upgrade; A 2021 soft fork of the network that allowed larger scripts to be included in blocks, thus enabling more complex data. In addition, the Segregated Witness (SegWit) update in 2017 made certain types of data, such as transaction inputs, less space-intensive on blocks. This made the creation of innovations like Ordinals more cost effective.
The popularity of Ordinals is evident, with Bitcoin digital art sales reaching $449 million in 30 days. In fact, Ordinal-based art surpassed the sales volume of Ethereum NFTs over the same period, per CryptoSlam.
Read more: Web3 Watch: Solana and Bitcoin top Ethereum in NFT sales
Bob Bodily, of ordinal marketplace Bioniq, told Blockworks that a significant majority — between 75% to 90% — of these inscriptions are for the creation of BRC-20 tokens, not digital art. These tokens are volatile interchangeable, made by appending JavaScript Object Notation (JSON) data to Ordinals. This data-rich process essentially standardizes tokens within the Bitcoin network, leveraging the blockchain’s inherent security and immutability.
Interestingly, Ordinals is not the first instance of the Bitcoin network hosting unique digital assets. As far back as 2013, users were writing the Bitcoin blockchain using the OP_RETURN function. Despite initial concerns about inflating the blockchain, it has become an accepted feature for specific types of data.
After OP_RETURN, a protocol known as Counterparty emerged in 2014, predating Ethereum. The network uses the Bitcoin blockchain to create and trade digital assets similar to NFTs without requiring a separate blockchain. This technology, although older, did not have the same scalability issues currently associated with Ordinals, even at the height of its adoption.
Although some die-hard counter-party advocates have admonished the rise of Ordinals, the sentiment is not universal.
Cryptochainer, an early Bitcoiner and prolific counterparty art collector, told Blockworks that “Ordinals are a natural and interesting progression of the blockchain.” While he acknowledged that they exacerbated problems with the network’s fees and transaction times, he disagreed that the ongoing craze has dampened collector interest in older Bitcoin-based collectibles.
“Interest in Ordinals is generally positive for Counterparty (XCP) art collectors. Their excitement drives new users to investigate the origins of this type of technology, which is a net positive for everyone involved. They are definitely here to stay unless drastic changes are made to the Bitcoin core blockchain.”
It may also be essential to consider Bitcoin creator Satoshi Nakamoto’s vision for the network’s capabilities. While Satoshi designed Bitcoin’s script to potentially support a range of transaction types, including big data entries, he was wary of overloading the main Bitcoin blockchain. This cautious approach led to the implementation of checks that limited transaction types, with the possibility of adding commonly used ones later.
Read more: 13 years ago, Bitcoin’s pseudonym creator signed off
In discussions about a proposed naming service called BitDNS, Satoshi advocated for using a separate blockchain for larger data functions. He indicated an openness to blockchain technology being used for multiple data types and applications, but stressed that these expanded uses should not come at the expense of the Bitcoin blockchain’s efficiency and scalability.
As long as bitcoin’s (BTC) price continues to rise, its mempool bloat and high fees are unlikely to subside. Researchers have published a paper in Finance Research Letters showing that the size of Bitcoin’s mempool, transaction fees on the network and bitcoin’s price over the preceding six months are all positively correlated.
Bitcoin’s price also looks primed for continued upward movement. Potential ETF approval could fuel a surge in institutional investment and propel bitcoin past its previous peak of around $69,000, analysts say. And the halving, which will reduce the block reward paid to miners from 6.25 bitcoin per block to 3.125, could fuel further price upside.
As the block reward decreases, increased fees can help secure the network by incentivizing miners to continue validating transactions on the network. A Fidelity research note argued that Bitcoin congestion has not necessarily led to higher fees for miners. This is due to its lack of speculative use cases relative to DeFi-focused Ethereum.
However, BRC-20s – Ordinal’s native drawing class – can change that.
Jeffrey Albus reported.
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