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Bitcoin Ordinals are arguably the most interesting development to take place on the world’s most valuable public blockchain in years.
At the beginning of 2023, Bitcoin Ordinals were the only topic discussed by the crypto community. Not only do Ordinals bring new use cases for the Bitcoin blockchain, but they also landed with a bang and divided opinions within the community.
A part of the Bitcoin community criticizes that ordinals are clogging up the blockchain, while others hope that ordinals will save Bitcoin in the long term.
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 cryptocurrency Bitcoin. 100 million Satoshis make one Bitcoin.
Bitcoin and Satoshi cryptocurrencies are inherently fungible, meaning you cannot distinguish one Bitcoin from another. To give you a real life example, think of a 100 dollar bill. The $100 bill you have in your wallet is the same as the $100 bill in your friend’s wallet and the millions of other $100 bills in the world.
With the help of the ordering scheme we can now create non-fungible Satoshis. To do this, the Satoshi coins are tagged with data that makes them unique and distinctive, creating a non-fungible token (NFT).
It’s like scribbling your name, date and location on your $100 bill to distinguish it from the others.
Are Ordinals the Key to Bitcoin’s Long-Term Sustainability?
Let’s divide this section into two parts to get an overview of how the emergence of ordinals impacts the Bitcoin blockchain.
1. The existence of Bitcoin questioned
Bitcoin is the oldest and most valuable public blockchain in the world. The cryptocurrency Bitcoin has made a name for itself over the last decade as an inflation-resistant alternative to fiat currency.
Bitcoin is viewed as a hedge against inflation due to its unique monetary properties. The Bitcoin protocol is designed to reduce its emissions by half approximately every four years.
Emissions refer to the block rewards that miners receive every time they create a new block.
Currently, a miner receives 6.25 Bitcoins for each new block created. The next halving event, expected in April 2024, will see the block reward reduced to 3,125 Bitcoins.
Halving events occur every 210,000 blocks (approximately four years) and continue until block rewards are reduced to zero (probably in 2140).
There are fears in the Bitcoin community that the abolition of block rewards could lead to the downfall of the Bitcoin blockchain. The reason for this is that block rewards currently make up a significant portion of the blockchain’s “security budget.”
Block Rewards encourages miners to validate, authenticate and confirm transactions on the Bitcoin blockchain. Without block rewards, miners rely solely on transaction fees (gas fees), which may not be profitable due to the high expenditure on electricity and mining hardware.
As miners move on to greener pastures, the Bitcoin blockchain becomes vulnerable to attacks.
2. Ordinals support miner revenue
Before the advent of ordinals in early 2023, the Bitcoin blockchain had a specific use case: transferring value over the internet.
The Bitcoin blockchain works like a banking system where users can send their Bitcoins (or fractions of Bitcoins) to others. With each transfer, miners are charged gas fees and the transaction is included in the next block.
As people are now able to inscribe artwork, text, and other data onto Satoshis, a new market for Bitcoin NFTs is emerging.
Every time a Satoshi is minted, bought, sold or transferred, miners receive gas fees to make the transaction possible.
In the first half of 2023, the hype surrounding Bitcoin Ordinals caused the number of transactions on the Bitcoin blockchain to explode. Gas fees rose to as much as $30 per transaction by May 2023, compared to an average of $1 to $2 per transaction over the past two years.
The most incredible thing is that all of this happened in the middle of a crypto bear market – a time usually associated with a below-average number of crypto transactions.
Bitcoin Ordinals divide the community
The Bitcoin community is divided over ordinals. Purists strongly believe that blockchain should only be used for its original purpose: peer-to-peer value transfer.
Purists have criticized ordinals for clogging up the blockchain. Ordinals technology has been used to create thousands of digital artworks and meme coins, resulting in longer transaction confirmation times and higher gas fees.
Meanwhile, Ordinal enthusiasts have pointed out the newfound utility that Ordinals bring. This part of the community has also pointed out the fact that the data engraved on each Satoshi is stored on-chain, creating “digital artifacts.”
In contrast, NFTs on other Layer 1 blockchains such as Ethereum (ETC) use off-chain storage solutions such as InterPlanetary File System (IPFS) to store their data.
Can Ordinals Help Bitcoin Avoid a Security Crisis?
The debate about Bitcoin Ordinals is an exciting matter. There are good arguments from enthusiasts who point out that ordinals play 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 competitors like Visa and Mastercard, whose fees range from $1 to $2 per transaction (let alone $30 per transaction!).
Additionally, Bitcoin’s 4MB block size only allows a limited number of transactions in a block (although recursive entries provide a way around this). This makes it impossible to increase the total amount of gas fees charged for a block while keeping per unit gas fees to a minimum.
On an optimistic note, we should remember that the blockchain industry is evolving at a rapid pace. We have already seen network upgrades to improve scalability on leading blockchain networks such as Ethereum. One can expect that the Bitcoin blockchain will also be upgraded to maximize its success.
We would also like to highlight the fact that Bitcoin Ordinals is still in its early stages. Over time, Ordinal’s technology will expand beyond artwork and meme coins. The possibility of entering data into an immutable blockchain will certainly interest more than a few people.
The bottom line
At the time of writing this article, the hype surrounding Bitcoin Ordinals has already passed its peak. The crypto world will not be surprised by this news – people easily get intoxicated by hype, FOMO and the chance for outsized profits. Once a product gets old, people tend to abandon it in droves.
The real work for the Ordinals Community begins now. The developers have created a promising product that has clearly resonated with early adopters.