Bitcoin Miners Earned $600,000 from a NFT Scheme Named Ordinals
In the past two months, Bitcoin miners have earned almost $600,000 from a highly contentious nonfungible token (NFT) scheme called Ordinals, which has caused a spike in user engagement.
What is Bitcoin Ordinals?
Ordinals enable users to store information in pictures and other forms of media in newly generated blocks on the blockchain, which is mostly used for peer-to-peer (P2P) financial transactions.
Since its launch in mid-December 2022, Ordinals has had users inscribe almost 74,000 NFTs into the Bitcoin blockchain, resulting in miners receiving a total of $574,000 worth of BTC fees to date, according to figures from Dune Analytics.
These NFTs feature “digital items” derived from replicas of projects such as CryptoPunks and the Bored Ape Yacht Club series.
Increased Requirement for Bitcoin block Size
Segregated Witness (SegWit) and Taproot, Bitcoin’s network soft fork upgrades from 2017 and 2021 respectively, enabled the development of the Ordinals protocol.
An example of this is the SegWit upgrade, which raised Bitcoin’s block capacity to a maximum of 4 megabytes.
Likewise, the Taproot update makes it possible to group and authenticate a number of transactions so long as they do not exceed 4 MB. This feature permits the inclusion of data like photos and videos in Bitcoin blocks.
The emergence of Ordinals has coincided with Bitcoin’s mean block size increasing from its usual average of 1.5-2 MB to between three and 3.5 MB in the beginning of February.
At the same time, the quantity of unconfirmed SegWit and non-SegWit blocks in the Bitcoin mempool has also grown substantially — reaching its most elevated point since the FTX collapse, as seen in the image below.
At times, figures from Ordinals have taken up more than half of the Bitcoin block capacity, as reported by BitMEX Research.
“This describes a growth in the user base and an upwards pressure on the fee market from usage beyond the typical investment and monetary transfer use cases. Ordinals are a new frontier […] to observe how it affects and manifests in both on-chain network and investor behavior.”– Glassnode
Could BTC miners generate additional income from ordinals?
Bitcoin miners chiefly gain income from the block subsidies of the network, meaning, they find new blocks by “mining”. The contribution of transaction fees to their earnings is only around 3%. At present, every block is rewarded with 6.25 BTC. Come spring 2024 though, this subsidy will be reduced by half to 3.125 BTC due to a halving event that recurs every four years. Therefore, it can be predicted that as block rewards reduce in value over time, the proportion of miners’ income made up of transaction fees will increase.
Ordinals bring about something called miner extractable value (MEV), which has been linked with Ethereum mining. In simple terms, MEV is the biggest amount of value that miners can get from creating new blocks, apart from block rewards and transaction fees.
Critics contend that Ordinals will lead to an inflated cost of legitimate transactions, thus damaging the reputation of Bitcoin as a dependable peer-to-peer payment system.
“Bitcoin is designed to be censor resistant, it doesn’t stop us mildly commenting on the sheer waste and stupidity of an encoding. At least do something efficient. Otherwise, it’s another proof of consumption of block-space thingy”– Adam Back, co-founder and CEO of Blockstream