Bitcoin Ordinals: NFT Fad or Existential Threat?
Selected statistic:
- Miners have earned nearly $600,000 in two months since the launch of Bitcoin Ordinals.
What are Bitcoin Ordinals?
January 2023 was an exciting month for the Bitcoin community. Bitcoin launched a new technology that goes under the name Bitcoin Ordinals. Since it shares similarities with Ethereum NFTs, Bitcoin Ordinals are often referred to as Bitcoin NFTs or Bitcoin-based NFTs.
In our previous article ‘What are Bitcoin Ordinals? Bitcoin NFTs Explained’, we examined the nature of Bitcoin Ordinals, how they work, and the similarities they share with NFTs.
However, Bitcoin NFTs differ from traditional non-fungible tokens minted on Ethereum due to some of its core features. These differences have been pointed out by the Ordinals creator Casey Rodarmor, who refers to the technology in question as ‘digital artifacts’. Ordinal NFTs are arguably more complex than Ethereum NFTs since they don’t store any data off-chain, don't use complex smart contracts, and include a higher level of security and immutability.
In simple words, Bitcoin Ordinals are pieces of Bitcoin inscribed with data, such as an image or text. Ordinal inscriptions are used for the creation of these ‘digital artifacts’..
Unpacking the Bitcoin NFT craze
In this article, we are going to focus on the societal aspect of Bitcoin Ordinals since their launch caused controversial opinions and heated debates across the crypto community. For every user that thinks of the Bitcoin Ordinals project as something exciting and groundbreaking, there is at least one Bitcoin user that is opposed to this idea.
Bitcoin has moved on and made the headlines once again.
If you are a frequent reader, you probably remember our 'Do you feel like you've missed the Bitcoin boat?' blog post. Well, the boat hasn't even left the harbour.
Why does the Bitcoin community think Bitcoin NFTs are controversial?
In simple terms, this can be explained in a statement issued by Blockstream CEO Adam Back who commented that ordinals are useless and that he is more into Bitcoin as a cryptocurrency.
The launch of the Ordinals protocol and ‘digital artefacts’ fractured the Bitcoin community. The new protocol has reignited an age-old debate on whether Bitcoin should be used for non-financial purposes and the true purpose of the Bitcoin network. In 2010, the pseudonymous creator of Bitcoin, Satoshi Nakamoto, answered that question with a simple ‘no’.
If you are interested in learning more about the beginnings of Bitcoin, why not take a look at this article: ‘The Legacy of Satoshi Nakamoto’.
The birth of Ordinals quickly divided the crypto community; Was Bitcoin created for processing financial transactions? Should it be used for non-financial purposes such as inscribing NFTs?
For many users within the crypto community, Bitcoin stands firmly as a rallying symbol of defiance against centralisation and intermediaries such as banks and central authorities. However, the pioneering cryptocurrency that sparked the whole blockchain movement now has another trait – inscribing ‘digital artifacts’.
Decentralisation is a frequently used term within the crypto community. There is a good reason behind that. Read more about it in this article: ‘What is decentralisation & why is it important?’.
You probably wonder why a simple trait or technological advancement would decrease the value and decentralised nature of Bitcoin. When NFTs were incorporated into the Bitcoin blockchain technology, a part of the community felt that their symbolism and historical value were diminished.
Some even thought of it as an attack on the technical aspect of the Bitcoin network since an inscription transaction is enabled to take up an entire 4MB block of space. On the other side of the debate, some thought leaders have entirely embraced Ordinals and the Ordinals protocol, highlighting it as a solution to the ever-decreasing Bitcoin block subsidy - the amount of Bitcoin awarded to a miner for successfully mining a new data block.
Why is the Bitcoin block space controversial?
The controversy is linked to the assumption that increasing the block size can come at the cost of decentralisation. When processing a larger-than-average block size, you generally need the nodes securing the network to have better hardware and bandwidth.
That could introduce a new barrier to entry for becoming a miner. If the block space is used consistently to its full extent of 4 MB, it shall add roughly 210.24 GB of data to the blockchain each year. This isn’t a big cost hindrance for running a full node, but it could be considered pricey in areas of the world where technology isn’t cheaply available.
If the cost to run a full node increases substantially because users need more storage space and bandwidth to download all these amounts of data that aren’t related to monetary transactions, fewer users might run full archival nodes, centralising Bitcoin’s ledger.
The Ordinals' double-edged sword
There are two sides to every story. It seems that is the case with the potential future of Bitcoin transaction fees since Ordinals came to the crypto scene. If you are new to crypto, we recommend reading first our 2021 ‘How Bitcoin transaction fees work’ article.
Is there a ‘fee war’ on the horizon?
Now that Bitcoin NFTs are here, when a user wants to create one, they have to pay a higher transaction fee to inscribe data in a block. If it is successful, the next thing that happens is an increase in the transaction fees that are paid to Bitcoin miners. Such transaction fees are usually a very low percentage of the total block reward but since Ordinals were launched in January 2023, we are starting to see that percentage tick.
Remember how we mentioned that a part of the Bitcoin community doesn’t like Bitcoin’s new NFT project. If those users who dislike the Ordinals project want to refrain from using them and try to stop the entire project, they are going to have to start using the base layer chain more and be willing to pay transaction fees that are large enough to incentivize miners.
A fee war could appear if transaction fees became so burdensome that only very broad value transactions can happen on the blockchain.
Are Ordinals the future of mining?
Then there is the other side of the Ordinals' double-edged sword. A part of the Bitcoin community considers Bitcoin NFTs as something beneficial for the network’s security budget. By driving up fees of Bitcoin transactions, the creation of Bitcoin NFTs could incentivize miners to secure the network while the revenue from mining rewards would decrease with each Bitcoin halving.
We examined halvings and other Bitcoin’s periodic events when talking about the Ordinals’ rarity system.
Bitcoin Ordinals may provide a new use case for Bitcoin that is going to make it more commercially profitable. The growing interest in Ordinals may be the first step in creating a larger Bitcoin ecosystem.
It could also be the subject of the next great civil war among Bitcoin purists…