In January 2023, developer Casey Rodarmor found a way to store data on the BTC blockchain that circumvents the intended limitation set by the protocol developers. He created a protocol called Ordinals, where digital artifacts (think NFTs) can be inscribed to an individual satoshi. Since then, the BTC network has seen nearly 10 million inscriptions created, causing yet another schism in the BTC community over the following two questions:
Should these types of transactions be allowed?
Should the block size be raised?
Technically, Ordinals exploit a loophole caused by BTC Core developers protocol changes Segregated Witness, and Taproot. The ability to store more than 40 bytes of data via OP_RETURN into a transaction was explicitly forbidden via changes to the protocol made years ago. Thus, the question of whether inscriptions of data should be allowed are raised by the Core developers, as many of them interpret Ordinals as a bug that needs to be fixed.
Because of the huge demand for tokens on the most popular and valuable blockchain with the highest hashrate, the network has become congested and fees have increased to 2-year highs. As a result, BTC miners earned more Bitcoin from transaction fees than the block subsidy for the first time since 2017. Note that the price of BTC is much higher in 2023 than in 2017 and these blocks were sustained for a time, meaning that in fiat terms, BTC miners were earning multiples more, up to $320,000 total per block (every 10 minutes).
Fees have risen because of demand, as users creating tokens are engaging in a flourishing on-chain, digital economy. Digital art, fungible tokens, and news posts are being speculated upon and spurring a renaissance of innovation that was believed not to be possible before January 2023. For example, the total market cap of fungible tokens deployed on BTC (aptly named BRC-20s) reached $1 billion in just 60 days, after the first was deployed on March 9th.
As a result of these developments, we will explore five possible outcomes, their likelihood and potential impact on the digital currency space.
Bitcoin Core developers change the protocol to explicitly ban Ordinals
Miners unilaterally raise the block size, causing a contentious hard fork, creating two versions of BTC both with meaningful demand, with the other preserving the 1MB block size cap
Users and miners realize another version of big block Bitcoin already exists in BCH and BSV, and move their economic activity to one of those two chains
Demand for digital artifacts on BTC naturally subsides
BTC raises the block size without a contentious hard fork persisting
1. Bitcoin Core developers change the protocol to explicitly ban Ordinals
Joshua: I believe this to be extremely unlikely. Too much money has been made in a short time and the value proposition of tokens is to have decentralized, truly owned digital artifacts that last lifetimes. This is the spirit of this renaissance, and I believe allowing protocol developers to halt this activity arbitrarily will simply not be tolerated. If this does occur, I believe outcome #2 is likely.
Zach: I view this as the most likely outcome. Ordinals were not intended to be allowed and it seems like the majority of BTC core devs want to keep the BTC network small and very much bounded, even if there are billions of dollars that could be lost to entrepreneurs, artists and miners in the near term from stopping all the economic activity only possible because of ordinals. I am rooting against this but at least at this time, I wouldn’t bet against this outcome.
2. Miners unilaterally raise the block size, causing a contentious hard fork, creating two versions of BTC both with meaningful demand, with the other preserving the 1MB block size cap
Joshua: I believe this to be the most likely outcome. This instance of the block size war is not theory, but an economic reality. Miners have had a taste of more than doubling their income overnight for no additional work. I do not believe any reasonable entity would allow their income to be arbitrarily reduced at the whims of protocol developers. Granted, an increase in block size would be a headwind against BTC’s current fee model, but the users have demonstrated that demand exists. Applying the unseen principle in economics, the 5-year high in fees perhaps prevented even more economic activity as many users waited for fees to subside before transacting.
If this action causes a fork where a 1MB block size version of BTC exists, I believe unless it gains exchange support and speculation on its price, it will cease to have any miner support, thus ceasing to produce blocks. If this version does persist, I believe outcome #3 to be probable.
Zach: I view this as the second most likely outcome. Some may argue that the NFTs and other tokens that have driven most of the economic activity to date are only possible on Ordinals, but there are many viable networks today even outside of the BSV network that can support token issuance and NFTs at the scale that is currently happening, even if the vast majority of these solutions are not viable at scale.
So why is this relatively likely? Because of miner revenue. If miners are convinced that ordinals are not a bubble but potentially the beginning of much more potential transaction fee revenue, they will want to seriously revisit many of the assumptions made to justify a 1 MB block size.
3. Users and miners realize another version of big block Bitcoin already exists in BCH and BSV, and move their economic activity to one of those two chains
Joshua: I believe this to be very unlikely, without a hard fork first occurring on BTC. Many participants in this economy still despise BSV and its “leaders”. Moreover, (while contrary to standard economics) an element of this frenzied demand is the high fees, creating a bit of exclusivity which is a factor in why these artifacts are appreciating in value so much. However, many participants likely are unaware of Bitcoin’s history and the existence of alternative versions so there is always a chance.
The biggest reason is the existence of these assets on BTC, not BSV. Much of the innovation stems from a “first is first” theory, where the first to inscribe an artifact, or token gives it value (just as Bitcoin was the first digital cash). All of this economic activity and the speed of its development occurred on BTC itself, and that fact is important.
Zach: The team behind Ordinals Wallet, the most popular ordinals wallet and exchange, is the team behind Twetch, a popular application on BSV. In just a few short months, Ordinals Wallet has done tens of millions in trading volume and their Twitter following has nearly reached 100k. They recently tweeted,
If this team, or some of the other teams behind the most popular Ordinals products that have been building on BSV for years and understand its potential decide to make a push to its user base that coincides with the BTC core devs stopping Ordinals from being possible, there is a meaningful possibility of many new builders moving from Ordinals on BTC to some of the different token protocols on BSV, including the BSV ordinals implementation.
4. Demand for digital artifacts on BTC naturally subsides
Joshua: I believe this to be the most unlikely outcome. I have been publicly stating that Ordinals on BTC is a permanent change to the entire crypto industry, as the fundamental assumption that tokens and data were not possible on Bitcoin has now been broken. The existence and justification of every other altcoin is because Bitcoin is fundamentally flawed and technically incapable of tokens and smart contracts. This has been disproven in less than 4 months, and lots of innovation has occurred and as a result, is just starting to become adopted by more of the incumbents in the crypto industry (exchanges, miners, etc.).
Another reason these assets have appreciated so much in value, so quickly is this idea of building and owning assets on the ‘original Bitcoin’ (ironically). It is quite clear the market values assets on the blockchain with the largest market cap, and the momentum in this movement is staggering. I would equate this outcome’s likelihood to human innovation halting altogether because of government intervention.
Zach: Humans always have and always will have a strong desire to gamble. New mouse traps will always be built even if they are often neutral or negative sum in nature like the vast majority of cryptoassets. The question here is not will there continue to be demand for digital artifacts, which I think is very likely to continue to grow broadly, but will continue to grow on the BTC version of Bitcoin? As long as it stays possible in some fashion, given how much mindshare BTC has of crypto enthusiasts, gamblers, artists, etc. I view continued growth as a lot more likely than not.
5. BTC raises the block size without a contentious hard fork persisting
Joshua: I believe this to be the second most likely option to #2, mainly due to the reasons I explained why #4 is most unlikely. My personal viewpoints on the crypto industry have undergone a fundamental shift this year due to these developments. Due to this, I personally believe a hedge of BTC and/or assets on BTC is appropriate given the uncertain fate of which Bitcoin will be adopted. I still believe massive scale and unbounded block sizes are required but which chain implements those and gains users is unclear at this point. If demand continues as I believe it will, a fork with BTC that continues to peddle the digital gold narrative has no long-term compelling use case, as we have been pointing out here at Unbounded Capital for years.
Zach: I think this is the least likely outcome. So much of the value proposition of BTC to BTC hodlers is wrapped up in BTC being a censorship-resistant asset. Getting the majority of BTC core devs and hodlers to change or put aside their misconceptions about the security of Bitcoin that have gotten us to where we are today seems implausible. That being said, I think if this were to happen, this I think would make an unbounded-Bitcoin being used at scale most likely in the near term so I certainly hope I am wrong!