On-Chain-Strain: How Ordinals Inscriptions Are Impacting Bitcoin

Bitcoin NFTs, better known as Ordinals, have become nearly inescapable as of late, with more than 89,000 inscriptions in existence. For the first time in Bitcoin’s 14-year history, the blockchain is being used for something other than peer-to-peer transfers, but not everyone is pleased. While a significant portion of Web3 is thrilled with the way this new area of the NFT market is growing, others have raised concerns about the novel tech behind this burgeoning sector.

Although opportunity abounds as more users find it possible and desirable to move their collecting and trading efforts over to Bitcoin, the blockchain itself might be suffering as a result. While the barrier to entry into the Ordinals ecosystem continues to be lowered as popularity rises and more creators look to inscribe data on Bitcoin, network congestion has emerged as a potential symptom that Bitcoin NFTs might be creating on-chain strain.

Bitcoin blocks are booming

The new Ordinals protocol, launched by software engineer Casey Rodarmor on January 21, allows users to inscribe data directly on the blockchain, as opposed to NFTs on other chains, like Ethereum, which often point to off-chain data hosted on a decentralized file storage system. That data can include smart contracts, which in turn enable the creation of NFTs. While this on-chain capability has led to much fanfare, with Ordinals being referred to as “true NFTs,” it also means that Bitcoin NFTs take up a lot of space.

Anecdotally, Bitcoin block storage capacity hasn’t been something to worry about because the chain has, until now, only been used for peer-to-peer monetary transactions. But as Ordinals continue to gain prominence, and NFT enthusiasts either learn the ins and outs of inscription or find ways to onboard into the Ordinals ecosystem via developer tools, more use has meant more traffic and has ultimately led to network congestion.

To put it in perspective, although Bitcoin blocks — the sequential groups of transaction data that are packaged together — can, theoretically, go as high as 4MB in size, they more often cap out around the 1 – 2MB range. Some have even dictated 2MB as a more realistic maximum size for Bitcoin blocks because a 4MB block size represents the absolute maximum size of a block of data that can be added to the blockchain.

Yet, according to Glassnode, since Ordinals launched, the upper range of the mean Bitcoin block size has increased from 1.5-2.0 MB to 3.0-3.5 MB in a matter of weeks. In fact, on February 1, Inscription 652, the first in the Taproot Wizards collection, made history as the largest block and transaction in Bitcoin’s history at 4MB.

Short term spikes

Since Ordinals arrived on the scene, the mining of large blocks became both commonplace and necessary, leading to, as reported by Bloomberg, higher transaction fees on the Bitcoin blockchain. The day before the protocol’s launch, transaction fees peaked at 3.28 percent. While February 13 saw fees peak at 5.68 percent. While this might seem like a concerning pattern, Glassnode reports that these are “short lived-spikes,” and we have yet to see a significant surge.

Perhaps as the causation to this effect, Glassnode reports that the total number of Bitcoin wallet addresses holding assets (those with a non-zero balance) has pushed to a new all-time high of over 44 million. As the report notes, this demonstrates a short-term uptick in Bitcoin network usage, with the primary source of this activity being due to new users and Ordinals data rather than coin volume.

While this spike in numbers has been welcomed by some Bitcoin maximalists who have very publicly embraced the booming Ordinal market, others have voiced concerns about the diminishing accessibility of the blockchain. One Twitter user in particular, who goes by the name Bitcoin is Saving, remarked that those in developing countries might be affected to a much greater degree by higher transaction fees than those in the U.S. An assertion that seems to be reinforced by the fact that counties like Vietnam and the Philippines were found to have most substantial rates of crypto adoption in 2022, while the U.S. and China maintained their statuses as Bitcoin mining powerhouses, accounting for around 30 and 60 percent, respectively, of all Bitcoin mining in 2022.

While surely only time will tell if short-term concerns like rising transaction fees become a cause for long-term worry, it seems that — as was the case with other NFT trends like PFPs and Open Editions — nothing can slow the spread of Ordinals throughout the NFT ecosystem. Yet, considering the environmental concerns raised in response to the early Ethereum NFT boom, Bitcoin NFTs will be in for a similar period of uncertainty and doubt.

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