New Tech & Market Forces will Resolve the Ordinals Controversy
If Ordinals is an attack on Bitcoin, it’s a damned weak one that seeds its own solution
Part 1: The Case against Ordinals
The Ordinals controversy is still simmering and seems set to flare up again soon. Although Ordinals blockspace usage has been trending down since March 23rd, the release of notable collections and a burgeoning mania for BRC-20 tokens may reverse that trend. Should competition for blockspace between Ordinals and monetary transactions increase, so will fees. And should fees climb sufficiently high, the ghastly shades of the blocksize war may rise once more to torment all Bit-kind.
Fees aren’t the only flashpoint. While Bitcoin has certainly had its share of negative headlines over the years, the protocol itself has thus far escaped recrimination. Exchange failures, drug sales, countless scams – these are all things people did with the tech rather than any intrinsic fault of the tech itself. Not so with Ethereum, where sketchy smart contracts are virtually part of the machine. With Ordinals popularizing the integration of Bitcoin’s blockchain will all manner of infamous Ethereum innovations (such as NFTs, tokens, and soon smart contracts), reputational risk to the Bitcoin protocol grows. How long until a token is issued directly on Bitcoin which passes the Howey Test and so falls afoul of the SEC? Further in this regard, Ordinals also greatly lowers the barrier to introducing illicit or classified content into Bitcoin’s blockchain.
As for the loss of user funds due to rugs, bugs, hacks, and takedowns, all these boxes have already been ticked under Ordinals. Most recently, Ordinals Finance pulled a $1m rug, albeit on the Ethereum side of the ledger. Just prior to that, UniSat fumbled the launch of its BRC-20s marketplace, resulting in costly double-spend attacks and a lengthy market halt. Before that, several major marketplaces bowed to legal pressure from Yuga Labs and delisted Ape-related collections. Furthermore, all these “hiccups” occurred against the background of a bug discovered within Ordinals’ all-important indexing system. Finally – and I hate to say this – further problems of this nature are anticipated. Consider that the largest marketplace by users and volume, Ordinals Wallet (and the significant Ordswap marketplace), both keep keys in browser local storage, which runs contrary to recommended security practices (to say the least).
I believe the above paragraphs summarize the case against Ordinals from the perspective of Bitcoin Maximalists – among whose ranks I myself numbered, at least until the Ordinals purity spiral went helter-skelter. While these concerns have merit, there’s one particular complaint which I believe deserves to go unmentioned; that ordinals are a scam. When willing buyers and willing sellers exchange goods with informational symmetry, without any claims made as to future price appreciation, well, that’s the definition of honest business – and that’s the current situation within Ordinals marketplaces. Prove me wrong.
Part 2: In defense of Ordinals
A point in favour of Ordinals is that it’s possible to prune their content from stored blockchain data. Pruning resolves the blockchain filesize bloat issue, which is fairly trivial considering the bloat will be easily outpaced by the growth of affordable data storage. More importantly, pruning ensures that anyone running a full node can opt out of storing any illegal material (which, to be fair, existed on Bitcoin’s blockchain long before Ordinals).
In regards the reputational and legislative risks to Bitcoin arising from Ordinals content stored on the blockchain, these can be mitigated – but not eliminated – by proper communication. The point must be hammered home (and not just for the sake of Ordinals) that Bitcoin’s uncensorable and permissionless structure has certain unavoidable drawbacks which, on balance, are vastly outweighed by its advantages.
On the technical front, it’s possible that post-traumatic stress from the blocksize war is leading some to view Ordinals as a big-blocker-style assault on Bitcoin’s base layer… but as an entirely optional Layer 2, Ordinals have far more in common with the Lightning Network than with Bcash and its ilk. Granted, content insertion into witness data is also occurring but that process is moderated by fees… Fees? Lightning? Let’s not jump ahead to the resolution of this Ordinals controversy!
As for the loss of user funds to cyber bandits or technical gremlins, such losses are likely to remain limited due to the relatively small size of the Ordinals economy. As the estimated total value of all Ordinals collections is currently around 1137 BTC / $33 million [Update: plus about $125 million in illiquid BRC-20 tokens] nothing perhaps something approaching the scale of the infamous fiascos which have plagued crypto is possible at this stage:
So much for playing defense. The fact is that Ordinals is attracting new users, developers, artists, and companies to the Bitcoin space. This will surely have multiple benefits beyond the immediate boost to the value and prestige of the entire ecosystem. Onboarding more users of all kinds is the surest path to accelerating hyperbitcoinization. And if Bitcoin succeeds, the world will be liberated from the death grip of central banking – but let’s put our ruby-quartz visor back on and refocus.
While most early Bitcoiners got onboard due to technical curiosity or ideological motivation, later adoption waves were largely driven by economic factors. Many of these later entrants stuck around because they realized Bitcoin is a revolution disguised as a get-rich-quick scheme. While we await the next bull cycle, Ordinals are attracting a fresh set of users, mostly comprised of young creatives. Should we really turn these hopefuls away, to wander in the shitcoin swamps?
Part 3: The Solution
Ordinals have proven the strong demand for Bitcoin NFTs, tokens, and smart contracts. Although such things have been tried on Bitcoin in the past, through whatever confluence of factors, the time is now demonstrably ripe for them. A quick glance at Inscription count over time (currently nearing 3 million after ~five months) is enough to confirm this. The associated impact on fees has been equally obvious:
Note that the two previous spikes around the start of 2018 and 2021 coincided with the resolution of massive bull markets. From January of this year the markets have been fairly calm, the latest spike is attributable to Ordinals. This raises the question of how horrifically high fees will get if the current Ordinals volume persists into the climax of another bull cycle… In my view, this is the only critical issue presented by Ordinals; a looming problem with the potential to outweigh the benefit of the adoption boost. If fees hit the 600+ sat/vB nosebleed levels last seen in late 2017 / early 2018, Bitcoin might lose as many (or more) users to other chains as it gains from Ordinals.
The solution to high fees back in the day was the SegWit soft fork, which greatly reduced the size and fees of conforming transactions. SegWit also enabled the launch of Lightning Network, a layer atop base Bitcoin designed to process low value transactions. One quirk of Bitcoin is its flat fee and data structure, whereby the cost and blockspace required to send $1 is equal to sending $1 billion. Offloading low value transactions to Lightning frees up blockspace, resulting in lower Bitcoin fees. In combination, these two upgrades ensured that when Bitcoin pushed to its all-time high in 2021, fees remained reasonable.
So, why should the solution to high fees arising from web3 stuff on Bitcoin be any different?
RGB, Taro, Stacks – these are all technologies to shunt web3 transactions and data from the Bitcoin blockchain and onto Layer 2. While the approach seen in Ordinals and Stamps of writing content directly to the base layer offers unrivaled permanence and immutability, even in the current medium-fee environment it’s also extremely costly. For example, an artist I spoke with recently told me that he spent €3,500 to inscribe a collection. Especially in these tough economic times, that’s a lot for a young creative to gamble in an unpredictable market!
Consider that 167 of the collections tracked by OrdinalHub have seen zero all-time volume, as in no sales at all. This figure barely scratches the surface of market failures. Sorting the 1,007 collections on Best in Slot by inverse weekly sales volume reveals about 875 with zero sales. See for yourself how many low value collections on Ordinals Wallet have had zero volume / sales over the last week. Pending a proper analysis, my intuition is that less than 1 in 100 inscriptions listed on a marketplace will turn a profit.
The novelty of Ordinals will fade but the high costs will remain. Given that Layer 2 solutions don’t store data on the blockchain, their creation costs will be orders of magnitude lower. High-end collections, like Asprey Bugatti Eggs, may still inscribe to Ordinals as the perceived luxury and maximum-permanence option, but the vast majority of creators will opt for the inexpensive alternative still linked to Bitcoin, even if indirectly.
Cost isn’t the only factor behind the inevitable migration of most users to Layer 2. The size constraints of Bitcoin blocks make bulky content (like high res images or audio, complex code, and all but the shortest video clips) unaffordable or even impossible to inscribe. With generative AI making it easy to create high res image content – and soon audio and video – how much longer will the average creator be content to pay a relative fortune to inscribe text and small, static images?
Part 4: In Conclusion
The way I see things playing out, Ordinals has proven the market demand for Bitcoin-based NFTs, tokens, DeFi, etc. – as unpalatable as some may find that demand. Regardless, the cost and relative slowness of these assets on the base layer should eventually drive most users to Layer 2 solutions, already nearing completion. The base layer will perhaps become the digital equivalent of The Louvre, housing only the most significant works under the tightest security. Layer 2 will host everything else.
Ordinal antagonists should take note. Twitter screeds denouncing @Ape8002 as an attacker for adding monkey JPEGs to the blockchain only incite hilarity and encourage defiance. A $100 or even $25 inscription fee is a far more effective disincentive, already established and requiring no keyboard bashing. To defuse the looming threat of high fees, the pro-active strategy would be to contribute or donate to the development of L2 solutions.
