The Bitcoin blockchain has been completely taken over by Ordinals, a contentious new protocol that allows NFTs to be inscribed on Bitcoin transactions. As a result, the weekly average transaction volume reached 313'000, the highest level since February 2021, the average block size reached an all-time high of 2.20 MB on February 6th, and the average hash rate increased 10.3% to 275.4mn TH/s, making February the most energy-intensive month in the history of the Bitcoin network.
Bitcoin has been revolutionary since it first came out. Early adopters were fascinated by the technology and recognized it as a way to establish an independent and decentralized system for payments and to store value. While more and more alternative Blockchains with different features, transactional throughput and degrees of decentralization emerged over time, there have also been continuous updates to the Bitcoin Blockchain itself.
One of the main reasons being that there were several limitations to storing arbitrary data on chain. The previous limit of 40 bytes was doubled in 2016, with another significant reduction to the cost of storing data in the following year through the Segwit update. In 2021, the Taproot update further decreased the cost, but more importantly, allowed for easier storage of data on the Bitcoin blockchain. Now, users were able to store data in a single transaction instead of spreading it in multiple ones, allowing people to store any amount of data as long as the block size stayed within 4 megabytes and they were willing to pay for it.
Utilizing these updates, people recently began embedding image data into the Bitcoin Blockchain. This so-called “Ordinals” system has set fire to a heated debate between pure BTC enthusiasts, who tend to be opposed to the concept of art based Non-Fungible-Tokens (NFTs) on the chain, and NFT advocates. The critique may be justified too, as a data set by BitMEX indicates that about 70% of the Bitcoin block space was occupied by Ordinals last week. Rene Pickhardt, a developer of the Lightning network, also points out that the proof-of-work concept was supposed to be a system that mitigates spam. Now, Ordinals are doing exactly that by occupying data storage that has nothing to do with financial transactions.
Firstly, it should be said that we at flovtec are agnostic to the success of any blockchain. We believe that the success of the overall industry outweighs the one of a single protocol or dApp by far. Users and companies utilizing the advancing technological capabilities of blockchains and testing out new ideas is not only good but eminently desirable.
However, if one was to make a case for NFTs it should be clear that other Blockchains, such as Ethereum, BNB Chain (Binance Smart Chain) or Solana are technologically better suited to the use-case of image based NFTs. Opposed to the mentioned blockchains that allow for actual NFTs, the Ordinals system basically set out to find a way to turn fungible Bitcoin into something non-fungible. That is achieved by assigning a number to every satoshi (Sat) based on the order in which it was mined. This numbering system is used alongside some other parameters to maintain continuity. None of this is natively supported by Bitcoin, which means that Ordinals NFT holders need to be careful not to spend their NFT accidentally on transaction fees. User experience is therefore heavily compromised in comparison to blockchains that were better suited in the first place.
Neither of these technological critiques is the most important aspect though. We believe the biggest issue may be damage to the Bitcoin brand itself. While Web 3.0 native users may be fans of image based NFTs and collectibles, the public perception of them is far more negative. This goes back to numerous rug pulls of NFT collections and ridiculous prices seen for digital art in recent years. People outside of Web 3.0 are often highly skeptical and do not see any value in these NFTs (“I just took a screenshot of your bored ape, now what?”).
So, what about Bitcoin then. Bitcoin itself has taken an important role in the crypto market, in that it has become an agreed-upon store of value, sometimes reserve currency, and the largest and most liquid market for derivatives alongside Ether (ETH). These factors foster trust into digital assets and enable capital inflow from traditional financial institutions. The spamy and scamy image of “useless” image data, used purely for speculation, undermines the value of Bitcoin and the legitimacy of digital asset adoption. This branding issue should not be underestimated.