This article is from Bitcoin Magazine “Inscription problem”. click here To get an annual subscription to Bitcoin Magazine,
This article is based on data as of November 15, 2023. The data in this article was generated by SQRR Research. https://sqrr.xyz
Bitcoin, not blockchain
Bitcoin, not blockchain. This has been a prominent meme throughout the past two eras, leading newcomers to a Bitcoin-only lifestyle away from deceptive “cryptocurrencies” that promise better “blockchain technology.” But we’re more focused on blockchain here than ever before. But this time it’s different. The whole world is paying attention to the Bitcoin blockchain. Driving this attention is a new meta-protocol (a protocol that sits on top of the Bitcoin protocol) called Ordinals. Ordinals is a new approach to “naming” individual Satoshis from the Bitcoin UTXO set, but perhaps more interestingly, it includes a way to “write” data files to the Bitcoin blockchain. In this article, we analyze how the ordinal has affected the demand for block space on the Bitcoin blockchain in 2023 and explore the challenges and opportunities this development poses.
Technical overview of ordinal numbers
Ordinals is a protocol on top of the Bitcoin protocol. It consists of two distinct parts of his: the Order Theory and the Inscriptions. Ordinal Theory is a protocol for assigning a serial number to SATOSHI, the smallest unit of Bitcoin, and for tracking his SATOSHI used in transactions. This has led to controversial conversations about fungibility, as the market may assign greater value to one Satoshi than another, but the market has gained interest in this part of the Ordinals Protocol. I am. His second main focus in this article is inscriptions. Inscriptions allow you to attach arbitrary content to individual Satoshis, turning them into Bitcoin-native digital artifacts. Perhaps the simplest example to explain an inscription would be to inscribe (store) a photo on the Bitcoin blockchain (a large hard drive or database) and assign that photo to a single Bitcoin Satoshi. That one Satoshi will indicate when that inscription was inscribed on the blockchain, and that one Satoshi representing that inscription, or photo, can be transferred from one person to another. Although many people see no value in collecting or trading these inscriptions, and some refer to inscriptions against Bitcoin as “spam” or “denial of service attacks,” a new market emerges from the Ordinals protocol. The years have been shown to have a significant impact on the shape, demand, and cost of block space. Even more interesting are the possibilities that Inscription brings to Bitcoin, some of which we will discuss further in the future, but many of which are yet to be imagined.
As Ordinals moved from whitepaper at the end of 2022 to production in 2023, there was a visible increase in the growth rate of the Bitcoin blockchain. In February of this year, we saw a noticeable change in the trajectory of the blockchain’s daily growth. It is important to note that the block size has not increased, rather more block space is being used each day. Block space is limited by the Bitcoin protocol code to approximately 4 MB per block. This graph shows that in February 2023, block space usage increased significantly.
If you zoom in on the graph, you can see that the average block size increases meaningfully in February 2023. This can be attributed to the widespread use of the Ordinal protocol. We’ll talk a little more about blockspace in the next section, but the important point is that the growth trajectory of blockspace is accelerating, and this new demand doesn’t seem to be going away anytime soon.
Block space demand analysis
The advent of Ordinals influenced market demand for a limited supply of block space with inscriptions. These inscriptions take up bytes on each block, and the people carving the inscriptions pay a dynamic market rate for that space. In 2022, Ordinals did not yet exist, so demand for block space was only seen from “economic” transactions. Now that Ordinals is live, we can see that “economic” transactions are competing with blockspace inscriptions. Due to lack of block space, each block can only contain a limited number of bytes, and therefore transactions. With inscriptions now requiring more space, a free market for block space operates, with the market emptying approximately every 10 minutes.
As we look further into the impact of the inscription on Bitcoin’s blockspace economics, we will first delve into the demand for blockspace in 2023. As mentioned earlier, Ordinals only started in 2023, so it’s easy to see how these transactions started to be used. Space in blocks.
In February, we’ll see where Ordinals begins to have a significant footprint on blockspace. In January, an average of 0.5 MB of writes were added to the blockchain each day, while from February through the rest of this year, an average of 85 MB of writes were added per day.
economic impact
The economic impact of Ordinals is significant, especially in terms of transaction fees and miner revenue. An analysis of transaction fees in 2023 shows an upward trend that will impact both users and miners. Miners in particular benefit notably from this increase, as increased fees translate into increased revenue. Indeed, in recent years, we have heard calls for an imminent collapse of Bitcoin if fees are not increased in a meaningful way, but with Ordinals innovation, we have seen fees increase significantly. In January 2023, an average of 12.97 BTC was paid in fees per day, with 0.005 BTC generated from inscriptions. However, from February to November 15, daily fees averaged 44.22 BTC, an increase of 240%, of which 8.67 BTC came from inscriptions.
Considering that the total number of new Bitcoins mined each day is currently around 900 BTC, total transaction fees represent only 4.5% of a miner’s revenue. While this is not enough revenue to make a big difference to small to mid-sized miners, it is significant for industrial scale miners who have the added benefit of lower power costs with larger purchases. In particular, he sees a direct correlation between hash prices and transaction fees in May 2023. The rest of the graph does not show exact correlations. This is mainly because the hash price is a function of his BTC priced in USD and the overall network difficulty. We know that as mining becomes more profitable, additional miners will come into operation to take advantage of the increased revenue. Mining difficulty has exploded this year, rising from 252 EH/s in January 2023 to 457 EH/s in November 2023. That’s an 81% increase in just under a year.
Future outlook and halving impact
As we approach the April 2024 halving, it will be interesting to see what happens to the dynamics of blockspace as daily mining supply is halved. How does the skyrocketing price of the cryptocurrency BTC make satellites so valuable? Will demand for inscriptions continue, or will they become too costly in USD terms? Others Another consideration is the emergence of new data markets within the Bitcoin ecosystem that could lead to new applications and future uses of Bitcoin block space beyond traditional transactions and registration. The potential of Ordinals to store diverse data types and the development of a marketplace for this data opens up exciting future possibilities, from digital art storage to complex data applications, and the Bitcoin Blockspace utility. It heralds the arrival of a new era.
What’s interesting to think about is what will happen to fees and subsidies up until the halving in 2024 and beyond. Earlier, we found that averaging his daily revenue from transaction fees and registration fees equals about 4.5% of a miner’s daily revenue. But what happens after the halving? Also, in a vacuum, what would happen if he held fees constant until the halving in 2028?
If we continue at the current pace, we will see transaction fees become even more important to mining revenue after the fourth halving, and have great value in the post-halving environment in 2028. It is unlikely that demand for block space will remain flat throughout his two halvings, and using current demand is quite conservative. This also ignores the invention of new uses for block space that we haven’t yet imagined.
market is clear
Finally, the emergence of the Ordinals inscription fundamentally restructured the Bitcoin blockchain, leading to major changes in both its technical landscape and economic dynamics. As we delve deeper into this new world of Bitcoin evolution, we must consider the broader meaning of ordinal numbers and new uses of block space and their potential impact. Ordinal’s role in shaping Bitcoin’s future becomes even more interesting as new supply complexities are poised to be introduced in the upcoming halving. From my perspective, this is a thrilling chapter in the blockchain story, full of uncharted territory and immense potential. This isn’t about his JPEG. This is about a free market that can withstand censorship. As the Bitcoin protocol continues to evolve, it remains to be seen how the market will adapt to these changes and how other new uses for block space will emerge. One thing is clear: the journey ahead will be unpredictable and strange. But at the end of the day, the market clears.
This article was published in Bitcoin Magazine “Inscription problem”. click here To get an annual subscription to Bitcoin Magazine,
