What Bitcoin Investors Need to Know About ‘Ordinals’
by James · May 10, 2023
In recent days, the value of transaction fees on the Bitcoin blockchain has skyrocketed – and crypto watchers are taking it as a signal that a new era of Bitcoin may be upon us. Analysts attribute the increase in fees to users minting BRC-20 tokens, new experimental tokens that allow users to create various assets on the Bitcoin network, including Ordinals – a protocol that allows digital content to be stored and traded on the Bitcoin blockchain. That digital content is similar to non-fungible tokens, or NFTs, with some technical differences. Ordinals are the hot new thing in crypto right now, but they’re just one example of how developers can build on Bitcoin the way they build on Ethereum. “Bitcoin Ordinals demonstrate that bitcoin is capable of more than just serving as a store of value and demonstrates the network’s ability to have NFT architecture,” JPMorgan strategist Nikolaos Panigirtzoglou said in a recent note. “In a sense, Bitcoin Ordinals add more diversity and utility to the Bitcoin network, which could elevate the Bitcoin network utility to that of other blockchains, such as Ethereum.” “Ordinals, by increasing network activity, increase the revenue earned by bitcoin miners beyond what they earn from block issuance rewards, which in turn helps secure the network,” he added. Here’s what the recent interest in Ordinals says about the future of Bitcoin: Bitcoin May Be More Than a Cryptocurrency But you value the largest cryptocurrency by market capitalization — as a speculative risk asset, as digital gold, as an alternative to a bank or something else — They most agree that the purpose of the Bitcoin blockchain is to host the bitcoin token. However, there is one population in crypto, who have long believed that the Bitcoin network can and must do more than that. “Everything that’s built on top of Ethereum and in other parts of crypto, we’ve always said, will eventually end up coming back and being built on top of Bitcoin as well, and that’s what you’re seeing right now,” said Alex Miller, CEO CEO of Hiro, a Bitcoin developer tools company. Bitcoin was not designed to build applications, and the “core” bitcoin community has resisted attempts to fund the Bitcoin economy in the way of Ethereum, Gautam Chhugani, an analyst at Bernstein, explained in a note on Tuesday. The blockchain has “severe technical limitations” and “nails [transaction] fees to an unsustainable level, making the network unusable,” as the market witnessed over the weekend. This is where so-called Layer 2 applications come in. “You have these extra layers that sit on top of [Bitcoin] and provides all kinds of additional capacity and functionality, but is ultimately put back to and secured by the Bitcoin chain,” Miller said. Perhaps the best known of these, the Lightning Network is focused on settling payments faster on Bitcoin. Stacks is a Bitcoin smart contract layer that can help maximize Bitcoin’s potential for decentralized finance (DeFi). “In the long run, this could increase user interest in BTC, increase its value and increase utility for everyone,” according to Chhugani. “The ‘ The ‘store of value’ property (digital gold) has been Bitcoin’s clear market positioning so far,” he said. “It’s still early days, but is it the start of the usage phase of Bitcoin?” Better paid miners, better security More activity on Bitcoin could also mean higher fees for miners, who receive a “block reward” as an incentive to mine new bitcoins and keep the network secure in the process. However, over time, this reward declines in value – as designed into Bitcoin code as a way to reduce the bitcoin supply on. This feature has become a market event called “halving”. However, “that means that for miners to be willing to keep doing the same amount of work every four years, the value of bitcoin has to increase or the money has to come from somewhere else — and that somewhere else is transaction fees,” Miller said. In recent days, and for the first time in Bitcoin’s “modern history,” the value of the transaction fee in some blocks was greater than the block reward, Miller said. Binance cited Bitcoin network congestion on Sunday as the reason for pausing withdrawals, and bitcoin fell 7% between then and Monday. The phenomenon is a big deal for the long-term viability of the network. “At some point there will stop being new bitcoin to mine and it will just be the transaction fee,” Miller said. “Congestion, or a lot of demand for the block space, is not only good, it’s a critical thing for the future of Bitcoin,” Miller added. “If people aren’t willing to pay to use it, people won’t be willing to pay to mine on-chain. And if no one is willing to do that, it will allow someone to take over the entire network. ” A sneak peek at Ordinals and spikes in transaction fees is just a glimpse of what could be on the horizon. It is unlikely that the level of demand Bitcoin saw last week will continue unabated, Miller said. In addition, there is a bit of a land grab when it comes to new tokens and coins emerging as the first examples of new applications in an untested landscape. “This is just a sign of things to come,” Miller said. “A year or two from now, you will see that level not only maintained, but exceeded on a continuous basis. It will follow standard technology development cycles, but … This is the start of the next iteration or generation for Bitcoin.” – CNBC’s Michael Bloom contributed reporting
