Ordinals hype is real, with NFT tokens now regularly taking up 50% of Bitcoin’s block space.
Miners made nearly $600,000 in two months for a controversial new non-volatile token (NFT) protocol called Ordinals that sparked a surge in user activity.
What are Bitcoin Ordinals?
Queues allow users to insert image data and other types of media into newly mined blocks on a blockchain that is otherwise mostly used for peer-to-peer (P2P) transactions.
Since Ordinals launched in mid-December 2022, users have injected nearly 74,000 NFTs into the Bitcoin blockchain, earning miners a cumulative $574,000 in BTC transaction fees to date, according to data from Dune Analytics.
These NFTs contain “digital artifacts” derived from project clones such as CryptoPunks and the Bored Ape Yacht Club collection.
Increasing demand for Bitcoin block space
The Ordinals protocol was made possible by Segregated Witness (SegWit) and Taproot, updates to the soft forks of the Bitcoin network in 2017 and 2021, respectively.
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For example, the SegWit update effectively increased Bitcoin’s block capacity to four megabytes (4 MB).
Similarly, the Taproot update helps to merge and verify multiple transactions together as long as their size does not exceed 4MB. This feature allows data, such as images and videos, to be written to Bitcoin blocks.
The introduction of Ordinal coincided with Bitcoin’s median block size jumping from a typical average of 1.5-2MB to between three and 3.5MB in early February.
At the same time, the number of upcoming SegWit and non-SegWit blocks in the Bitcoin mempool also increased significantly – the highest since the FTX crash, as shown below.
At times, Ordinals data accounts for over 50% of Bitcoin’s block space, according to BitMEX Research.
“This highlights the growth of the user base and the upward pressure on the payment market due to uses outside of typical investment and money transfer,” Glassnode said in its weekly report, adding:
“Ordinals are a new frontier […] for tracking how this affects and manifests both in the chain network and in investor behavior.”
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Bitcoin miners derive most of their income from the network’s block grants, i.e. to find or “mine” new blocks. In comparison, the percentage of miners’ income from transaction fees is only about 3%.
Currently, the Bitcoin network rewards miners with 6.25 BTC per block. But this subsidy will drop by 50% to 3,125 BTC in the spring of 2024 in the event of a halving, which occurs every four years. As a result, the share of miner’s revenue from transaction fees is expected to increase over time as block rewards decrease.
For some, Ordinals introduce what is called miner-extractable value, or MEV, which was previously associated with Ethereum mining.
Simply put, MEV is the maximum value miners can get from producing new blocks excluding block rewards and transaction fees.
However, critics argue that Ordinals is an “attack” that will price out real financial activity, thus damaging Bitcoin’s image as a secure P2P payment network.
“Bitcoin is designed to be immune to censorship,” said Adam Beck, founder and CEO of Blockstream, adding:
“[It] doesn’t stop us from mildly commenting on the sheer waste and stupidity of coding.” At least do something effective. Otherwise, it’s another proof of block space usage.