Back in May, fans of Bitcoin ordinals (or bitcoin NFTs) believed that transaction fees from users would permanently increase miners’ revenue. Somehow, ordinals and their associated inscriptions — data-intensive Taproot transactions mostly used to store pictures on Bitcoin’s blockchain — would generously compensate Bitcoin miners in perpetuity.
Within 200 days of the ordinals launch, users created over one million image-based inscriptions. On this measure, ordinals grew faster from launch than NFTs grew on either Ethereum, Solana, or Polygon. Fans envisioned a future where ordinals would finally solve Bitcoin’s security budget problem, ensuring well-paid miners for many halvenings to come.
Unfortunately, that hasn’t happened. Ordinals’ contribution of transaction fees continue to drop from their May peak. Nowadays, most higher-than-average transaction fees in each block are not associated with ordinals-related transactions, despite ordinals taking up a significant percentage of space in each block.
Put simply, ordinals users have become more savvy — consolidating inscription processes into fewer transactions. And users are now more willing to wait for their transactions to be mined at cheaper rates.
The speculative frenzy subdued
Bitcoin is secured by miners who expend electricity and computation to provably hash large number sets which protect the ledger. Bitcoin’s security budget — the total value of fees going to Bitcoin miners, calculated as transaction fees plus coinbase rewards — depends on consistent demand for data storage on Bitcoin’s ledger.
If miners cannot earn enough money to cover the cost of equipment, maintenance, electricity, and labor, they will soon turn their mining rigs off. Even with subsidies like payments from the Electric Reliability Council of Texas to reduce electricity consumption during heat waves, next year’s coinbase halving threatens Bitcoin’s security budget.
Digital assets that use Bitcoin’s proof of work algorithm but command significantly lower hashrates than Bitcoin are often vulnerable to 51% attacks that split the chain and introduce the possibility of double-spend attacks. Bitcoin Cash, Ethereum Classic, Bitcoin SV, and Bitcoin Gold previously experienced 51% attacks because miners couldn’t exert enough computational power to fend off attackers.
Ordinals contribute, slightly, to Bitcoin’s security budget
Unfortunately, ordinals don’t seem to ensure enough demand to consistently fill up four megabytes in block space.
Despite this shortcoming, many fans of ordinals remain. According to Udi Wertheimer and Eric Wall, ordinals are an important part of Bitcoin’s security plan. “Literally everyone wins,” Wertheimer wrote on X (formerly Twitter) in February, but failed to point out that ‘everyone’ doesn’t include inscription investors.
Despite an impressive start with Inscriptions and BRC-20 tokens, the protocol’s activity levels seem to not be enough to boost Bitcoin’s security budget in the long run. Bitcoin users must pay to fill up blocks with data to keep the entire ledger secure from 51% attacks.