Analyzing the state of the Ordinals and their consequences for both Bitcoin and the larger crypto space.
This spring, the number of daily Bitcoin transactions doubled abruptly, as the newly released Ordinals protocol kindled people’s curiosity and a spirit of experimentation. Half a year later, when the initial hype should have settled, both Bitcoin transactions and the Ordinals inscriptions are at an all-time high.
The Ordinals, despite often being dismissed by the larger Bitcoin community as futile and superficial, refuse to go away and start to influence not only Bitcoin itself but also the larger crypto ecosystem.
For Bitcoin, the Ordinals’ impact includes network congestion, sometimes leading to halts and costly accidents for users trying to push their unconfirmed transactions through. Transaction fees are rising accordingly, threatening to change the ecosystem’s economics.
However, while the Ordinals are undoubtedly disrupting Bitcoin, they are also giving it the possibility to address the technical issues related to its throughput. As to the increased demand for the block space, it could be advantageous not only for the miners but also for the BTC price itself.
For the larger crypto space, the Ordinals could prove beneficial too by stimulating the NFT market.
Let’s look closer at the current state of the Ordinals and the processes they trigger.
The Ordinals are pieces of arbitrary data inscribed into the “witness” part of a Bitcoin transaction, attributing special qualities to satoshis, Bitcoin’s smallest units.
In the beginning, the Ordinals inscriptions were known mostly as “Bitcoin NFTs” and contained mostly images. Soon, however, people started to inscribe fungible tokens, dubbed “BRC-20”, as an analogy with Ethereum’s popular ERC-20 standard.
The Ordinals ecosystem is developing fast: barely weeks after the protocol release, there were already wallets (Hiro, Xverse, and the Ordinals Wallet) and marketplaces (ordinals.market) allowing to mint, transfer, and trade the new tokens.
However, what is still missing in the space are strong use cases. For the moment, most non-fungible Ordinals mimic the existing collection initially minted on Ethereum. All sorts of Bitcoin Punks, Bitcoin Frogs, and Bitcoin Rocks are being actively traded now, reminding of the initial hype surrounding the Ethereum-based collections in 2021. A Bitcoin Rock inscription, for example, has been recently sold for 3.5 BTC ($130,000), while the Taproot Wizards collection announced a $7.5 million seed round on November 17th.
In the fungible Ordinals domain, the most popular coin $ORDI was conceived as a token facilitating payments on the Ordinals Wallet marketplace. With a market cap of $447 million, $ORDI now represents 70% of the nascent BRC-20 sector. ORDI’s listing on Binance on November 7 fuelled a significant wave of buying activity, contributing to a 50% price jump on the day.
This activity, however, puts the Bitcoin network to a considerable test, which it does not always succeed.
Because of the Ordinals, the number of transactions waiting in the mempool has soared from the usual 10k at the beginning of the year to over 700k in September and November. At the time of writing, mempool.space shows 226k unconfirmed transactions. This leads to some transactions being left behind, and the increase in the accidents involving users trying to jam them out.
Like that recent case of 83.7 BTC accidentally paid as a transaction fee. This $3,000,000 mistake is likely to be a botched Child Pays For Parent (CPFP) attempt, where a user spends an output from a low-fee unconfirmed transaction in a child transaction with a high fee to encourage the miners to include both in the next block. Read more about the inputs and outputs of a Bitcoin transaction. In the case of this user, something went very wrong with their software, and they are now at the mercy of Antpool, the miner who mined that block.
Of course, the increased demand also leads to spiking fees. In fact, Bitcoin fees have risen so high recently, that they even flipped Ethereum fees, known as the industry’s highest. In mid-November, the average Bitcoin fee exceeded $18, which is 9 times higher than the yearly average of around $2 (source: bitinfocharts). The fees have since fallen back to under $6.
Following the logic of the crypto market cycles, after the awakening of Bitcoin and, consequently, altcoins, there must come the time of NFTs. As the first two phases seem to have already started, we turn our eyes to the NFT metrics and see that in November, monthly NFT trade volume has almost tripled (source: The Block).
However, a closer look at the graph shows that most of the transactions took place on Bitcoin. These are the Ordinals, and they may very well be the phenomenon that will pull the NFT market out of its slumber and onto the new growth cycle.
It is surely interesting to watch the space getting all excited about the Ordinals and all the new opportunities they bring to the table. However, despite being inscribed into the world’s most decentralized and secure blockchain, the crushing majority of today’s Ordinals are collectibles and platform tokens without much utility. In other words, the same jpegs and shitcoins that Bitcoiners have been so righteously fighting since the beginning of web3.
So, it will all come down to the issue of utility. In the meantime, by forcing the Bitcoin network to process an unprecedented amount of transactions, the Ordinals are creating real-life conditions for the community to improve Bitcoin software, and – why not – the Bitcoin protocol.