Ordinals…Anything But Ordinary.
The Bitcoin world has recently been consumed by debate over the topic of Ordinals, a new open-source protocol that allows arbitrary data to be inscribed to the Bitcoin blockchain. The data is linked to the specific UTXO of the inscription transaction, which can then be traded in a way that is analogous to NFTs on other blockchains such as Ethereum.
There are numerous potential applications of Ordinal Inscriptions on the Bitcoin blockchain, some of which are legitimately useful (a topic to be covered in a future blog), but the first several weeks since the protocol was launched on January 21, 2023 have been dominated by efforts to mimic NFTs on other blockchains. At the time of writing this blog, over 325,000 inscriptions have been made, the vast majority of which are silly digital images such as “Apes,” “Punks,” and “Pepes.” In theory, NFTs associated with digital art should not have any economic value. NFT tokens do not confer legal or actual ownership of the digital images that they are associated with. Anyone can copy the image and do anything they want with it. In reality, however, some NFTs do have value (but most of them are worthless), and who are we to argue with the free market?
Ardent proponents of Bitcoin view the blockchain as a cathedral of cryptography, elegant and sublime, the emergent product of human action and thermodynamic energy. Many of those who have such reverence for Bitcoin view low-definition images of monkeys and rodents on the blockchain as a vulgar form of digital graffiti, desecrating that which they hold so dear. Nevertheless, Bitcoin is a permissionless network, and no one can censor transactions. Even those who have strong aesthetic objections to NFTs on Bitcoin understand this. If Ordinal Inscriptions could be censored, then so could the transactions of politically persecuted individuals and groups.
But beyond the aesthetic objections to Ordinal Inscriptions, there are serious concerns about its impact on Bitcoin’s security, accessibility, and decentralization. To understand these concerns we need to look back at a contentious and emotionally charged period in Bitcoin history–the Blocksize War.
Satoshi Nakamoto programmed Bitcoin with a 1 MB blocksize limit. The intention was to prevent spam transactions from overloading the network and bloating the blockchain to such a large size that the computational power and storage space required to run a full node would exceed the capacity of most Bitcoin users.
The 1 MB block size limit was uncontroversial in the early years of Bitcoin, but as Bitcoin grew in popularity, the blocksize limit became the subject of fierce debate. As more people began to use Bitcoin, the number of transactions increased, leading to longer confirmation times and higher transaction fees. The solution seemed obvious: increase the blocksize limit so that more transactions can be included in each block, thus reducing confirmation times and fees. But the solution was not so simple.
The reason Satoshi created the blocksize limit was to preserve Bitcoin’s decentralization. He understood that if the blockchain was allowed to grow at an unlimited rate, ordinary users would lack the bandwidth, storage space, and computer processing power necessary to run a full node. Instead, users would have to rely on centralized third-parties to process and verify transactions, which would defeat Bitcoin’s purpose as a permissionless payment network. Without the ability to run a full node and verify transactions, users would be at the mercy of those centralized third-parties and the governments that regulate them.
The blocksize debate culminated on August 1, 2017, when the big block faction hard forked from the Bitcoin network and created Bitcoin Cash (BCH). Bitcoin Cash raised the blocksize limit from 1MB to 32MB, while Bitcoin Core implemented Segregated Witness (SegWit), which included a conservative increase of the blocksize limit to 4 MB. Since then, the block size debate has cooled down and Bitcoin Cash has faded into obscurity. The 4 MB limit has served Bitcoin well and there have been no serious discussions about changing it.
Bitcoin Core developers always anticipated that blocks would be full at some point in the future. Widespread adoption makes it inevitable. As it became clear that the capacity for on-chain transactions was approaching its limit, the Lightning Network emerged as a solution to take on the burden. The Lightning Network is a layer-2 protocol that allows a single on-chain transaction to facilitate thousands of off-chain transactions. The Lightning Network increases Bitcoin’s transaction capacity by orders of magnitude, but it is still not unlimited, because on-chain transactions are required to open and close payment channels. It will never be able to process all of the world’s financial transactions.
If Bitcoin is ever to achieve its potential to be the world’s leading currency, banks and centralized payment services such as PayPal, Venmo, and WeChat will need to process a significant portion of the Bitcoin transaction load completely off-chain. They will function much the same way they do now, but users will have Bitcoin denominated accounts in addition to fiat currency.
Physical Bitcoin bearer assets such as Ballet’s PURE Bitcoin can also play a role, where people can exchange encrypted private keys in physical form for goods and services in the real world, just like physical coins and cash have been used for thousands of years.
Only time can tell whether Bitcoin Ordinals will turn out to be a passing fad or enduring innovation. What we can be confident of is that the fear of crippling blockchain bloat caused by Ordinal Inscriptions is exaggerated. No matter what happens with Ordinals, the 4 MB block size limit will remain in place to throttle the growth of the blockchain and ensure that the Bitcoin network stays decentralized.
If every block is full, the Bitcoin blockchain will increase in size by approximately 210 GB per year (the total size of the blockchain was 420 GB in February 2023). The trends of decreasing cost of data storage (40% less per year since 1990) and increase in availability of high-speed internet bandwidth around the world strongly indicate that technological progress will allow Bitcoin to stay decentralized. 210 GB per year is a relatively small increase compared to the improvements in storage capacity and bandwidth.
In conclusion, although the emergence of Ordinal Inscriptions has rekindled the Bitcoin blocksize debate, we should not expect the controversy to rise to the level of the intensity that resulted in the Bitcoin Cash hard fork. Most of the important questions have already been asked and answered by historical experience.