The Role of Ordinals in Bitcoin’s On-Chain Activity
This revival in on-chain activity can be attributed to the use of Ordinals, a novel method of embedding unique data, such as art, onto the Bitcoin blockchain. While Ordinals introduce new use cases for Bitcoin, they have also resulted in increased transaction fees and slower settlement times. According to Blockworks research, average transaction fees have risen by over 25 times in the past year.
The introduction of Ordinals has sparked a long-standing debate within the Bitcoin community regarding the incorporation of arbitrary data into the blockchain. Figures like Adam Back and Luke Dashjr have criticized Ordinals for various reasons, including concerns about efficiency and the potential for spamming the blockchain.
Opposing Views on Ordinals and Bitcoin’s Original Intent
Critics of Ordinals argue that the blockchain should prioritize its original purpose, which is peer-to-peer financial transactions. They claim that new assets and similar innovations deviate from Bitcoin’s intended use. Supporters of Ordinals, on the other hand, believe that attempts to block their use could complicate the network and inadvertently encourage spamming.
Austin Alexander, co-founder of LayerTwo Labs, emphasizes that transaction fees are essential to maintaining Bitcoin’s long-term security, as they incentivize miners to validate transactions. Andrew Poelstra, a seasoned Bitcoin developer, warns that blocking Ordinals could lead to the concealment of spam within otherwise useful transaction data.
Understanding Ordinals and Their Impact on Bitcoin
Ordinals work by embedding unique identifiers onto satoshis, the smallest divisible units of Bitcoin, effectively turning each inscribed satoshi into a unique digital asset similar to non-fungible tokens (NFTs) on the Ethereum network. However, unlike Ethereum’s NFT design, Bitcoin’s original blueprint was mainly intended for fungible financial transactions. Therefore, Bitcoin now faces challenges in accommodating increased network congestion and higher transaction fees.
Despite these challenges, the popularity of Ordinals is evident, as Bitcoin’s digital art sales have reached $449 million over the span of 30 days. The majority of these inscriptions serve to create fungible BRC-20 tokens rather than digital art. BRC-20 tokens leverage the Bitcoin network’s security and immutability by appending JSON data onto Ordinals, thereby standardizing tokens within the network.
The Historical Context of Unique Digital Assets on Bitcoin
Ordinals are not the first instance of the Bitcoin network hosting unique digital assets. Users were already inscribing the Bitcoin blockchain as far back as 2013 using the OP_RETURN function. Later, in 2014, a protocol called Counterparty emerged, predating Ethereum. Despite being older, Counterparty did not encounter the scalability issues associated with Ordinals, even during its peak adoption.
Early Bitcoin user Cryptochainer acknowledges that Ordinals have exacerbated fee and transaction time issues but maintains a positive outlook on their progression within the blockchain space. Satoshi, the creator of Bitcoin, designed the script to support various transaction types, including large data inscriptions. However, Satoshi also advocated for caution in overloading the Bitcoin blockchain, preferring to implement checks that limited transaction types to preserve efficiency and scalability.
As Bitcoin’s price continues to rise, it is unlikely that its mempool bloat and high fees will subside. A study published in Finance Research Letters establishes a positive correlation between Bitcoin’s mempool size, transaction fees, and the cryptocurrency’s price over the previous six months.
The potential approval of an exchange-traded fund (ETF) could further drive institutional investment and propel Bitcoin beyond its previous high of approximately $69,000. Additionally, the upcoming halving event, which will reduce the block reward for miners, may contribute to further price increases.
While the decrease in block rewards could lead to elevated fees, BRC-20 tokens derived from Ordinals may disrupt this trend. Those supporting the use of BRC-20 tokens anticipate a transformation in the Bitcoin network, potentially mitigating current issues related to fees and transaction processing times.