Ordinals are driving up Bitcoin fees — but that may be good for the network

Bitcoin has had a stellar few weeks, up more than a 60% price increase since Sept. 11, as highlighted by CoinGecko. This upswing is part of a larger increase over the past year, buoyed by growing market dominance and a steady rise in open interest.

Moreover, the blockchain itself has shown increased on-chain activity throughout 2023, barring slowdowns in May and October, indicating a broader revival in Bitcoin’s usage and interest.

This on-chain activity renaissance is largely driven by Ordinal inscriptions — a relatively new way to embed unique data, like art, onto the Bitcoin blockchain.

While Ordinals bring new use cases to Bitcoin, they have also made transactions on the network more expensive and slower to settle. Over the past year, the average transaction fee has soared upwards of 25x, according to Blockworks research. Meanwhile, the Bitcoin mempool continues to face unprecedented levels of congestion.

As a result, this new asset class has reignited a longstanding debate within the Bitcoin community about incorporating 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 one side, figures like Hashcash inventor Adam Back have criticized ordinals for not being “space-efficient.” Others like longtime Bitcoin developer Luke Dashjr critique Ordinals for their potential to “spam the blockchain” by exploiting Bitcoin’s Segwit and Taproot upgrades in unintended ways.

Dashjr’s stance is not just theoretical; he has actively worked to filter out Ordinals transactions from his personal Bitcoin node and his mining pool’s node. This action has sparked controversy, with some in the community accusing him of censorship.

Vocal challengers to the Ordinals craze often advocate for Bitcoin’s foundational principles, arguing that the blockchain should prioritize its original intent — peer-to-peer financial transactions. Ordinals opponents often believe that maintaining the network’s efficiency and core purpose is crucial, viewing the intruding assets and similar innovations as deviations from Bitcoin’s intended use.

But Ordinals supporters argue the inscriptions are ultimately good for the network.

Austin Alexander, co-founder of the 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 for the network’s health. Alexander emphasizes the need for Bitcoin to demonstrate its utility to justify these costs.

“Bitcoin is not inevitable and needs to be paid for. And people are only going to pay if they see the utility of [Bitcoin],” Alexander said.

Andrew Poelstra, a seasoned Bitcoin developer, argues that attempts to block Ordinals could backfire. He said that such measures could inadvertently lead to “spam” being concealed within “useful” transaction data like signatures, thereby complicating the network rather than simplifying it.

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He also argues that strong opposition to Ordinals from some quarters might inadvertently amplify interest in them.

“The more that the high priesthood of Bitcoin culture disapproves of [ordinals], the more fun it is,” Alexander said.

Ordinals work by embedding unique identifiers onto satoshis, Bitcoin’s smallest divisible units. This process effectively turns each inscribed satoshi into a unique digital asset, similar to non-fungible ERC-721 tokens (NFTs) on Ethereum.

However, unlike Ethereum’s NFT-ready design, Bitcoin’s original blueprint was originally intended for more straightforward fungible financial transactions. As a result, Bitcoin now grapples with the added strain of accommodating increased network congestion and higher transaction fees.

The inscription boom was partly enabled by Bitcoin’s Taproot upgrade; a 2021 soft fork of the network that allowed larger scripts to be included in blocks, thus allowing for more complex data. Additionally, the Segregated Witness (SegWit) update in 2017 made certain types of data, like transaction inputs, less space-intensive on blocks. This has made the creation of innovations like Ordinals more cost-effective.

The popularity of Ordinals is evident, with Bitcoin’s digital art sales reaching $449 million over 30 days. In fact, Ordinal-based art surpassed the sales volume of Ethereum NFTs over the same period, per CryptoSlam.

Bob Bodily, from the Ordinal marketplace Bioniq, told Blockworks that a significant majority — between 75% to 90% — of these inscriptions are for creating BRC-20 tokens, not digital art. These tokens are fungibly interchangeable, crafted by appending JavaScript Object Notation (JSON) data onto Ordinals. This data-rich process essentially standardizes tokens within the Bitcoin network, leveraging the blockchain’s inherent security and immutability.

Interestingly, Ordinals are not the first instance of the Bitcoin network hosting unique digital assets. As far back as 2013, users were inscribing the Bitcoin blockchain using the OP_RETURN function. Despite initial concerns of bloating the blockchain, it became an accepted feature for specific types of data.

Following OP_RETURN, a protocol known as Counterparty emerged in 2014, predating Ethereum. The network utilizes the Bitcoin blockchain to mint and trade digital assets akin to NFTs without requiring a separate blockchain. This technology, though older, did not face the same scalability issues currently associated with Ordinals, even at the height of its adoption.

Though some diehard Counterparty advocates have taken to admonishing 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.” Though he acknowledged that they have exacerbated issues with the network’s fees and transaction times, he disagreed that the ongoing craze has tempered collector interest in older Bitcoin-based collectables.

“Interest in Ordinals is an overall 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 large data inscriptions, he was cautious about overloading the main Bitcoin blockchain. This cautious approach led to implementing checks that limited transaction types, with the possibility of adding commonly used ones later.

In discussions about a proposed name service called BitDNS, Satoshi advocated for the use of a separate blockchain for larger data features. He indicated an openness to blockchain technology being used for various data types and applications, but emphasized that these expanded uses should not be at the expense of the Bitcoin blockchain’s efficiency and scalability.

So long as bitcoin’s (BTC) price continues to rise, its mempool bloat and high fees are unlikely to subside. Researchers 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 prior six months are all positively correlated.

Bitcoin’s price also seems primed for continued upward movement. Potential ETF approval could spur a surge in institutional investment and drive bitcoin past its prior high of roughly $69,000, analysts say. And the halving, which will cut the block reward paid to miners from 6.25 bitcoin per block down to 3.125, could spur further price upside.

As the block reward decreases, elevated fees could help secure the network by incentivizing miners to keep validating transactions on the network. A Fidelity research note argued that Bitcoin congestion has not necessarily led to higher fees for miners. This is because of its lack of speculative use cases relative to DeFi-focused Ethereum.

BRC-20s — Ordinal’s native token class — could change this, however.

Jeffrey Albus contributed reporting.

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