{"id":39154,"date":"2023-07-06T00:00:00","date_gmt":"2023-07-05T12:00:00","guid":{"rendered":"https:\/\/bravenewcoin.com\/insights\/bitcoin-ordinals-boom-triggers-questions\/"},"modified":"2023-11-28T00:34:41","modified_gmt":"2023-11-27T11:34:41","slug":"bitcoin-ordinals-boom-triggers-questions","status":"publish","type":"post","link":"https:\/\/bravenewcoin.com\/insights\/bitcoin-ordinals-boom-triggers-questions","title":{"rendered":"Bitcoin Ordinals boom triggers questions"},"content":{"rendered":"

Bitcoin (BTC), the oldest and largest cryptocurrency network, is dealing with a controversial new feature that is dividing community opinion. Introduced in January 2023, the Bitcoin Ordinals protocol has caused an increase in transactions on Bitcoin. Described by some as Bitcoin NFTs, Ordinals bring a new type of utility to the Bitcoin network that has immediately resonated with users. It has, however, courted controversy because it is both leading to congestion on the network and is not designed to be a payment solution (check World Coin Stats<\/a> for updated data and performance metrics on Bitcoin, as well as other cryptocurrencies).<\/p>\n

Bitcoin is a decentralized, encrypted decentralized digital currency transfer network. Using blockchain technology, it allows for permissionless peer-to-peer transactions without needing to use intermediaries. It was created in 2008 by pseudonymous creator Satoshi Nakamoto<\/a> and was released in 2009 as open-source software.<\/p>\n

The Bitcoin network has utility as a medium to facilitate private transactions. It has been used for peer-to-peer payments, POS merchant sales, and online payments. It is also used for investments. The asset powering the network, bitcoin or BTC, has a digital gold-like value proposition. It has a limited supply of 21 million coins, so it has scarcity. It is also incredibly secure and has a hard-coded emission release schedule.<\/p>\n

What Is A Bitcoin Sat?<\/h2>\n

Ordinals theory powers the controversial new Ordinals protocol. Ordinals theory defines satoshis (sats) as an atomic unit that can be identified and traded individually on the Bitcoin network. There are 100 million sats that makeup 1 Bitcoin. Bitcoin sats are ordered based on their sequence of mining, and this ordering number which uniquely identifies a satoshi, is the ordinal number.<\/p>\n

These sats are uniquely identifiable, and can therefore be inscribed with digital content. This capability is the core of the Ordinals model. Once inscribed, an Ordinal-powered sat can become an immutable digital collectible. It can be attached to images, text, and a variety of other assets.<\/p>\n

Ordinals were enabled by November 2022\u2019s Taproot upgrade. Taproot enabled the Ordinals protocols and has opened the door for fungible or non-fungible tokens to be issued on the Bitcoin network.<\/p>\n

There are a number of different use cases Ordinals can power. They have primarily been used to create non-fungible tokens (NFTs)<\/a> but they are now gaining popularity as a way to issue fungible tokens. Ordinals power the BRC-20 standard which resembles Ethereum\u2019s popular ERC-20 standard.<\/p>\n

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Source: Dune Analytics, @dgtl_assets<\/em><\/p>\n

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Source: Dune Analytics, @dgtl_assets<\/em><\/p>\n

The total number of Ordinals inscriptions has exploded since the 3rd week of April. There tend to be around 100,000-200,000 new Ordinal inscriptions being made every day and there are now over 14 million inscriptions in the wild. This number has more than doubled since May 15th.<\/p>\n

Particularly in terms of fees being generated, the momentum of Ordinals has dropped off considerably since the mid-May peaks. Ordinals are by no means dead, however, and are still being activlely created everyday.<\/p>\n

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Source: Glassnode, fees on the Bitcoin network surge<\/em><\/p>\n

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Source: Glassnode, Transaction count on the Bitcoin network explodes<\/em><\/p>\n

A similar pattern can be observed with overall network activity on the Bitcoin chain. Bitcoin ordinals triggered a sudden sharp uptick in activity on the network in mid-May. This activity eventually fell away and the sharp peaks could not be maintained. Activity on the Bitcoin network, however, remains higher than pre-Ordinals levels.<\/p>\n

Bitcoin Ordinals Clogging The Network<\/h2>\n

The emergence of Ordinals has had a clear impact on the wider Bitcoin protocol. While it has boosted transaction activity and increased demand to interact with Bitcoin, it has also bloated the network to the point of incapacity. The scalability of Bitcoin is yet again being questioned<\/a>, with Ordinals now affecting the ability of Bitcoin to fulfill its primary function of peer-to-peer payment transactions.<\/p>\n

One of the factors leading to Ordinals bloating the network is the NFT size. Ordinal interactions are layered and can require close to Bitcoin\u2019s max capacity of 4mb, standard Bitcoin transactions only take up a few kilobytes. The reason the Ordinals NFT size is so large is that they store data directly on-chain instead of pointing to a separate physical asset.<\/p>\n

On June 17th, onchain data provider GLASSNODE\u2019s Twitter account<\/a> reported that concerns that the popularity of the Ordinals protocols would bloat the Bitcoin chain size to unfeasible levels, were exaggerated. The Onchain data provider has said that the Bitcoin block size is still growing at a manageable rate of 1.89MB per block. This means that future node runners will still be able to download the Bitcoin without excessive hardware requirements.<\/p>\n

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It is noticeable that the moving average of the total Bitcoin block size has leveled off considerably since the launch of Ordinals in January 2023. This suggests Ordinals creators have developed ways to efficiently create Ordinals and release them to the network.<\/p>\n

Ordinals pushes Bitcoin further with the inception of BRC-20s<\/h2>\n

Glassnode has recently reported that,<\/span> for only the 5th time in history, the average fee per block exceeded the block subsidy. The last instance of this occurring was the 2017 market peak. In all five of the historical cases, high fees eased and the network normalized. Glassnode say that the fee boom was driven by the popularity of the BRC20 standard, enabled by the Ordinals protocol.<\/p>\n

Transaction fees reached 6.66BTC, well above the 6.25BTC block reward. This made the total miner reward a staggering 12.9BTC per block or ~US$348,000.<\/p>\n

BRC-20 was created by anonymous developer Domo. They are similar to Ethereum\u2019s ERC-20 custom token model but are not powered by smart contracts. This means that they are not able to be plugged into decentralized applications or have multiple functions like Ethereum tokens. Users can presently only mint, deploy and transfer tokens.<\/p>\n

Not all Ordinals are BRC20s but all BRC20s are Ordinals. While there are millions of Ordinals there are around 35,000 BRC20s<\/a>. The market cap of BRC20s has quickly risen to ~US$163 million but has dropped from peak levels hit late May and early June.<\/p>\n

BRC20s function using JSON to initiate simple token contracts, create new tokens and move tokens around. The limited functionality has meant that they have become a popular way to issue meme coins which are designed to have no utility and act more as community badges. Some of the largest BRC20s include PEPE, MEME, and BRUH. Ordi\u2013the largest BRC20\u2013has a market cap of ~US$149 million and is listed on exchanges such as Crypto.com and Gate.io.<\/p>\n

BRC20s and Ordinals have created controversy because of how they are stressing the network. There are also naysayers who believe that Ordinals are tainting the network because they are not aligned with Satoshi\u2019s version of a peer-to-peer decentralized money transfer network. They consider Ordinal transactions as spam.<\/p>\n

The most well-documented of the limitations of Bitcoin\u2019s Proof-of-Work network consensus is a lack of scalability. Blockchains like Bitcoin face scaling challenges because every node in the network has to verify and execute every transaction. This is computationally intensive and expensive.<\/p>\n

Developments in the Ordinal Space<\/h2>\n