Bitcoin NFT hype creates high fees as unverified transactions skyrocket

The BitcoinBTC network’s transaction fees are skyrocketing to about $19, according to bitinfocharts.com, fueled by bitcoin NFTs created with the Ordinals protocol, created by software developer Casey Rodarmor. Ordinals enabled an NFT-like function for Bitcoin’s blockchain, fueling a huge hype with some inscriptions selling for more than $214,000. The increased demand for Bitcoin’s block space led to the corresponding increase in bitcoin transaction fees. The blockchain backlog became so congested that the crypto exchange Binance stopped withdrawals for almost two hours on Saturday 6 May. And this may just be the beginning.

There are now more than 4.6 million inscriptions in the Bitcoin blockchain, according to data shared via the analytics platform Dune, and there is even a new standard for creating this type of digital artifact called BRC-20. For veteran crypto technologist Eric Wall, one of the industry’s most vocal Ordinals advocates, entering his first bitcoin NFT, based on an Ethereum-based NFT he already owned, was a life-changing experience. Much of his work is now focused on Ordinals.

“After I entered this 360 kb trump card for $20, shit just went parabolic,” Wall told me in an interview via direct Twitter messaging.

Subsequently, Wall teamed up with other bitcoin industry experts such as Udi Weirthmeither and Dan Held, former head of marketing at Kraken crypto exchange, to launch the Taproot Wizards Ordinals project. Their aim is to make using bitcoin “fun”. Ordinals have sparked the most significant use of the Bitcoin network’s Taproot update since its activation in 2021. Aside from NFT fans, bitcoin miners are another group of ecosystem players who benefit greatly from Ordinals.

“Ordinals are good; it forces the infrastructure of Bitcoin to mature, forces the scaling debate, solves the security budget issue, brings BTC back as a unit of account,” Wall said.

Bitcoin miners make money from increased transaction fees

Charlie Spears, head of strategy for startup OrdinalHub told me in an interview that even miners who dislike NFTs are happy to process related transactions for a fee. So far, Ordinals has generated more than $21 million in fees.

“In the long term, this new use of Bitcoin’s block space could play a major role in Bitcoin’s security budget, which we all care deeply about,” Spears said.

The transaction fees have exceeded the regular mining allowance, which miners see as a positive side effect, especially with the next Bitcoin halving so close. Halving is an automatic process that happens every 210,000 blocks and reduces the block reward that bitcoin miners earn by 50% every few years. This makes it harder to mine bitcoin as the total supply approaches the 21 million bitcoins the protocol limits bitcoin’s total supply to. The next halving, which continues to cyclically reduce the rewards earned by bitcoin miners, is expected to occur in 2024.

Ordinal critics and network congestion

On the other hand, there are many bitcoin users who call this an attack against the network. The main criticism of Bitcoin NFTs is that Bitcoin is supposed to be a monetary network, not a tool for distributing and recording digital artwork. Critics see bitcoin NFTs as a new kind of graffiti movement, destroying the peer-to-peer financial network enabled by the Bitcoin blockchain.

Rising transaction fees and longer waiting times for confirmation actually make it harder to use bitcoin for small transactions. According to mempool.space, the number of unconfirmed bitcoin transactions is now at an all-time high, with more than 465,000 transactions waiting to be processed, and fees reaching more than $20. All of this is at least true for users who prefer the Bitcoin blockchain instead of Lightning Network’s bitcoin scaling solution.

This network environment allegedly creates the Bitcoin network too expensive for most people to use in El Salvador. For example, these high fees make El Salvador’s Chivo ATM system almost unusable for average Salvadorans.

Meanwhile, bitcoin technologists are working on Ordinal filters and considering other more radical solutions, like a soft fork of the entire network. Currently, most experienced bitcoin users know to use the Lightning Network, a second layer built on top of Bitcoin, for situations like this.

Lightning allows people to trade with much lower fees and without waiting for confirmation on the underlying blockchain. Lightning users can settle their bitcoin transactions to the underlying bitcoin foundation whenever they want, allowing users to wait for an appropriate time without congestion and high fees. After temporarily disabling withdrawals, even Binance is considering adding Lightning functions. Other crypto exchanges such as Kraken, OKX and Bitfinex already support Lightning transactions.

Only time will tell if this increase in bitcoin transaction fees will inspire more companies and individual users to join the Lightning Network. So far, data from analytics site 1ML.com indicates that the number of Lightning nodes and channels has actually decreased, not increased, over the past month while the price of regular bitcoin transactions continues to rise.

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