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Bitcoin ordinals are arguably the most interesting development to occur on the world’s most valuable public blockchain in years.
In early 2023, bitcoin ordinals was the only topic that the crypto community was discussing. Not only do ordinals bring new use cases to the bitcoin blockchain, but they also landed with a bang and divided opinion within the community.
A section of the bitcoin community has criticized ordinals for clogging the blockchain, while others hope that ordinals will save bitcoin in the long run.
Will ordinals save bitcoin? Let’s find out.
What Are Bitcoin Ordinals?
Ordinals is a numbering scheme that allows tracking of individual satoshis.
A satoshi is the smallest unit of the bitcoin cryptocurrency. 100 million satoshis make one bitcoin.
By design, bitcoin and satoshi cryptocurrencies are fungible in nature, which means you cannot distinguish one bitcoin from another. To give you a real-life example, think about a $100 note. The $100 note you hold in your wallet is the same as the $100 note in your friend’s wallet and the million other $100 notes in the world.
Using the ordinals numbering scheme, we can now create non-fungible satoshis. This is done by inscribing satoshi coins with data to make them unique and one-of-a-kind, thereby creating a non-fungible token (NFT).
It’s like scribbling your name, date and location on your $100 note to make it distinguishable from the rest.
Are Ordinals Key to Bitcoin’s Long-Term Sustainability?
Let’s divide this section into two parts to get an overarching view of how the emergence of ordinals is affecting the bitcoin blockchain.
1. Bitcoin’s Existence in Question
Bitcoin is the oldest and the most valuable public blockchain in the world. The bitcoin cryptocurrency has made a name for itself over the last decade as an inflation-resistant alternative to fiat currency.
Bitcoin is seen as a hedge against inflation because of its unique monetary properties. The bitcoin protocol is designed to cut its emissions by half, roughly every four years.?
Emissions refer to the block rewards that miners receive every time they create a new block.
Currently, a miner is rewarded 6.25 bitcoins every time they create a new block. The next halving event, which is expected in April 2024, will see the block rewards reduced to 3.125 bitcoins.
Halving events occur every 210,000 blocks (roughly four years) and will continue until block rewards are reduced to zero (expected to occur in 2140).
There is fear among the bitcoin community that the elimination of block rewards may lead to the fall of the bitcoin blockchain. This is because block rewards form a significant chunk of the “security budget” for the blockchain at the moment.
Miners are incentivized by block rewards to validate, attest and confirm transactions occurring on the bitcoin blockchain. Without any block reward, the miners will have to depend solely on transaction fees (gas fees) which may not be profitable due to the high electricity and mining hardware expenditures. If miners move to greener pastures, the bitcoin blockchain will become vulnerable to attacks.
1/9) BTC has to double in value every four years for the next century or sustain extremely high fees
Just to maintain the current level of security
Such growth is impossible since it would exceed global GDP in 31 years based on current price
Therefore; BTC security is doomed!
— Justin Bons (@Justin_Bons) April 23, 2023
2. Ordinals Support Miner Revenue
Before the emergence of ordinals in early 2023, the bitcoin blockchain had one specific use case: transfer of value over the internet.?
The bitcoin blockchain works like a banking system where users can send their bitcoins (or fractions of bitcoins) to each other. Whenever a transfer is made, gas fees are collected by miners and the transaction is included in the upcoming block.
Today, with people able to inscribe artworks, texts and other data on satoshis, this makes a new market for bitcoin NFTs.?
Each time a satoshi is inscribed, bought, sold, or transferred, miners receive gas fees to facilitate the transaction.
In the first half of 2023, the hype around bitcoin ordinals caused the number of transactions on the bitcoin blockchain to explode. Gas fees spiked as high as $30 per transaction by May 2023, compared to an average of $1 to $2 per transaction over the last two years.
Most incredibly, all of this occurred in the middle of a crypto bear market – a time typically associated with lower-than-average numbers of crypto transactions.
BREAKING: #Bitcoin block 788695 contained transaction fees greater than the block subsidy.
6.7 BTC transaction fees + 6.25 BTC subsidy
This is a the first time in history this has ever occurred due to competitively high block space demand. pic.twitter.com/J7IcwzIVKE
— Joe Burnett, MSBA (??)3 (@IIICapital) May 7, 2023
Bitcoin Ordinals Divide the Community
The bitcoin community is divided over ordinals. The purists staunchly believe that the blockchain should be used only for its original intended use case: peer-to-peer transfer of value.?
Purists have criticized ordinals for clogging the blockchain. The ordinals technology has been used to create thousands of digital artworks and meme coins which has resulted in longer transaction confirmation times and higher gas fees.
Meanwhile, ordinals enthusiasts have pointed to the new-found utility that ordinals bring. This section of the community has also pointed to the fact that the data inscribed on each satoshi is saved on-chain creating “digital artefacts.”
In contrast, NFTs on other layer one blockchains like ethereum (ETC) use off-chain storage solutions like InterPlanetary File System (IPFS) to store their data.
Can Ordinals Help Bitcoin Evade a Security Crisis?
The debate around bitcoin ordinals is an intriguing one. There is merit in the argument presented by enthusiasts that point to the fact that ordinals are playing a central role in increasing miner revenue or the “security budget” of the bitcoin blockchain.
However, the increase in gas fees per transaction does not support bitcoin’s ultimate dream of becoming a global peer-to-peer payment system. Bitcoin simply cannot compete with traditional rivals, such as Visa and Mastercard, with gas fees as high as $1 – $2 per transaction (nevermind $30 per transaction!).
Furthermore, bitcoin’s block size limit of 4MB only allows a limited number of transactions to be included in a block (although recursive inscriptions allow a way around this). This eliminates the possibility of increasing the total gas fees collected for a block while keeping unit gas fees capped to a minimum.
On an optimistic note, we should keep in mind that the blockchain industry is evolving at a fast pace. We have already seen network upgrades for improved scalability at leading blockchain networks like ethereum. It is fair to say that we can expect the bitcoin blockchain to be upgraded to maximize its success.
We also want to highlight the fact that bitcoin ordinals are still in a nascent phase. With time, ordinals technology will go beyond artworks and meme coins. The ability to inscribe data onto an immutable blockchain is bound to intrigue more than a few.
The Bottom Line
At the time of writing, we have seen the hype around bitcoin ordinals drop from its peak. The crypto world will not be surprised by the news — people are easily intoxicated by hype, FOMO and the chance of making outsized profits. Once a product becomes older, the crowd tends to leave in droves.
The real work for the ordinals community starts now. The developers have created a promising product that has clearly resonated with early adopters.
