Bitcoin Ordinals are a game-changer for the NFT community as they are seen as true non-fungible tokens (NFTs). However, their popularity seems to have a downside – network fees.
More Ordinals, more fees
Fees for completing a transaction on the Bitcoin blockchain increased when Ordinals and BRC-20 started. Mempool, which is the collection of data inscribed with the Ordinals protocol, have felt the effects of inscriptions.
The recent battle for block space can be attributed to BRC-20, a token standard that was recently released and allows tokens to be attached to the Bitcoin network. Miners naturally prioritize Bitcoin (BTC) transactions with greater fees to maximize their earnings.
Related article: A complete guide to Ordinals (Bitcoin NFTs)
As a result, users have been forced to pay ever-increasing fees to guarantee the speed of their transactions. Binance even had to stop Bitcoin withdrawals twice for some time because of the rising fees, which is why it wants to adopt the Lightning Network.
Reportedly, over 2.7 million inscriptions have been added in just a few days, doubling from the total of 2.5 million inscriptions created up to date. There are now around 5.2 million inscriptions according to Dune.
Ordinals inscriptions daily (green) and total (black), source: dune.com
Many users on Crypto Twitter (CT) appear to disagree with the idea that Ordinals and BRC-20 can secure Bitcoin’s fee market and have labeled the recent increase in transaction volume a “DoS attack.”
Miners thrive in Ordinals chaos
Some Bitcoin miners have been paid more for processing transactions on the blockchain than they have been compensated for creating new BTC for the first time since 2017. This could be seen as a positive development given the beating the industry has taken in 2022. To understand the scope of the situation with the transaction fees, just look at the chart below.
Bitcoin Daily Transaction Fees, source: twitter.com
However, people that want to transact Bitcoin are not happy. But let’s clear out how miners operate first. There are two basic ways for Bitcoin miners to make money: creating new bitcoins through computational effort, and verifying transactions on the network.
By design, the profitability should decrease over time, with reductions in reward of 50% every four years called halving. There will be another decrease in that payment next year, from the present 6.25 BTC to 3.125 BTC.
As a result, the long-term viability of mining faces a potentially existential threat: the mining reward could become quite modest and would ultimately disappear. It is estimated to happen approximately one hundred years from now when all BTC would have been mined.
Given the severe bankruptcies that have befallen the mining business during the crypto winter, the recent increase in income from processing transactions may be a welcome development. Mining pools like Luxor Technologies and AntPool reportedly received more in transaction fees from freshly added blocks than the standard 6.25 BTC mining payout. This is very rare and unusual.
What does this all mean for Bitcoin?
In the last few days, Bitcoin transaction fees skyrocketed with the inscriptions of Bitcoin Ordinals. While this is great for BTC miners, crypto exchanges and investors find it harder to use or send bitcoins due to these unusually high fees.
This may result in people reserving from using Bitcoin and actually jumping into alternatives, probably altcoins. In fact, while Bitcoin jumped around 80% from its bottom in November 2022, most altcoins are still down, which may signal a potential altseason.
However, this is the third time in history that transaction fees are this high, and it signaled a Bitcoin top in each case. Is it the same case this time as well? We’ll see.