Bitcoin on top of Money stack, against blurry background

BRC-20 and Bitcoin NFTs—A new era for Bitcoin?

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  • NFTs minting on BTC!
  • Over half a million BTC transactions are getting stuck and unconfirmed!
  • Txn fees going up past $40!
  • People in El Salvador and Africa are unable to buy their daily bread!
  • BSV price +30%
  • BTC core developers scrambling to figure out how to censor certain txns from the ‘uncensorable’ blockchain!—All transactions are equal, they say, but some transactions are more equal than others1, it seems.
  • The ‘big block’ narrative, dormant since 2017, seems to be experiencing a revival

Boy, it has been a busy week in Bitcoin, and yes, all of the above happened over the course of days.

How? Why?

How: Thanks to Taproot changes deployed last November, it is possible to embed more than the standard 80bytes of data per txn onto the BTC blockchain (something that has been hotly debated in the BTC dev community as recently as of February this year, while other Bitcoin’s2 have supported since 2017). Some smart folks figured out how to pack encoded data into the txn and create the Ordinals project, which outlines the process by which you could mint NFTs on the BTC blockchain. Almost overnight, the BTC network exploded with activity, and given that BTC had bet its scaling model on layer 2 solutions like Lightning Network, the network performance slowed to a halt, forcing even Binance to halt withdrawals on BTC.

This results in backups of txns that cause confirmations to take longer and longer while the average fee rates climb higher and higher.

Why: All of this is just because the use of the Bitcoin network skyrocketed. Supply of blockspace could not meet the sudden rise in demand, as fee rates hit an all-time high of $80 to process one Bitcoin transaction. BTC experienced its first block in its history where the aggregate txn fees outweighed the total subsidy reward (6.25BTC). While BSV hit this milestone in 2021, BTC has never before earned more in fees than the miner subsidy, which marked a new era in the economic regime of Bitcoin for miners.

Some people, like Michael Saylor, a famous investor in BTC, heralded the change.

Michael Saylor
Michael Saylor seems to be very positive on Ordinals

Many others called this an “attack on the network,” and proposals came from core developers and small block advocates like Luke Dashjr to ban the transactions outright. A group of anonymous folks even took it upon themselves to create a censorship patch (cheekily called Ordisrespector) for BTC nodes, filtering out unwanted transactions or lessor transactions deemed unworthy to be put onto the blockchain. Unfortunately, even while deployed by many home nodes, mining nodes simply ignored them and continued to add these transactions to the blocks filling up the blockchain, resulting in long delays in txn processing latency across the network.

Andrew Poelstra, long-time core dev, lamented on the issue, though clearly also classifying the new use of the BTC as “crap” and “toxic.”

Ordinals Wallet

Hypocrisy?

While people are entitled to hold their own opinions, I find it especially striking that the same people who continuously laud the “censorship-proof” nature of Bitcoin are the same people who are now trying to implement censorship themselves.

Better still, they seem to be persecuting the new users of BTC for crimes that they are guilty of—how does one determine if one kind of use of the blockchain is allowed while another is prohibited? Keep in mind that the users of the new ordinals technology to mint NFTs are not breaking any consensus rules or doing anything illegal to the network. They are even fully paying the higher fees just like everyone else. It is simply due to the sheer number of txns being created and that the broken scaling model of BTC has it such that as more people use the system, the more fees the average user must pay. This is the highly coveted “fee-market” that Greg Maxwell was famously quoted pining for3 when describing the perfect state of the BTC system.

Bitcoin txn
Greg Maxwell loves it when people pay more than $50 to settle a bitcoin txn

So if fee-paying users want to put data onto the chain, using technology that allows them to do so, regardless of what we think of the nature of the data they are inscribing, who are we to judge what is fit or unfit? If people started adopting BTC in droves next month, in a year, or five years, will we need to look to these ‘gurus’ to tell us whether the use of the network was ‘blessed’? Or an attack that should be censored?—This decentralized dream is starting to look like a nightmare.

Time will tell how this unfolds, but for the first time, two power blocks have been put at odds with each other in BTC, the miners and investors (the rich) vs. the network users (the poor). And in the thick of all this is countless accounts of people in El Salvador, where the average daily wage is $50. People are forced to pay $20 fees just to withdraw their $50 of bitcoin. What can be done to help them? This topic has seemingly split the BTC supporters into two camps. Those who want the network to be usable and affordable by all and those who say that “Bitcoin isn’t for people who earn less than $2 a day4”. The difference between 2017 and now is that back then, there weren’t many people who have been promoted Bitcoin in developing countries, such as El Salvador and Kenya. Bitcoin was still just a toy for the first world. But now, it seems that having sold their story to so many of the lower classes, BTC pundits will be forced to make good on their promise of BTC being used as digital cash.

Wasn’t Lightning Networks supposed to fix scaling?

Well, it was marketed as the ‘scaling solution5’ for BTC, but after eight years of always being “18 months away” from being done, it still only handles a tiny fraction of the amount of BTC in circulation. The reason is that there is a massive barrier to entry and exit from the platform. To use LN, you must first lock your BTC into channels6, which are shared accounts between others who lend you liquidity. Normally you connect with large hubs with many other channels7 to other people so that you can relay payments between hops until you hopefully pay the intended party you wish to pay. The trouble is that if the person you want to pay isn’t connected directly or indirectly to you, or the channels connecting you don’t have enough liquidity, you will have to open a new channel directly with them. Any time a channel is opened, you must create a real BTC transaction, which means waiting 10min and paying the normal BTC network fee.

Similarly, anytime you want to cash out of LN (sometimes forcefully if your counterparty is trying to steal from your channel), you have to also publish a real BTC transaction.

Spot the issue? When the real BTC network is congested, open/closing channel txns are backed up, and the LN network liquidity channels are effectively frozen, unable to change or remap themselves. You can only pay who you already have a connection with, and then only up to the amount you have remaining in the channels. If this sounds horribly complex and a nightmare of a system to try to manage and use…you are not alone. Researchers from the University of Illinois have formally documented the flaws of LN, which are only exacerbated when the base network is congested. This seems likely to be the reason that even after years of being released, it has seen only lukewarm adoption from the public non-advocate crowd.

The irony is that this rush of NFT minting usage on BTC is driven by greed. The standard greed of all players in ICOs or NFTs or DeFi. The rush to try to grab ‘rare digital assets’ and get in earlier than everyone else so that you can flip them quickly for profit or buy and hold them long term and wait for appreciation as a store of value. Sound familiar? This is exactly what the stalwart BTC supporters have always advocated for. But as soon as the speculation and focus are on something other than “BTC,” even if it uses the same BTC blockchain, they won’t stand for it. It is toxic data, a DDoS attack. This is indicative of either a grievous lack of understanding or self-awareness.

Maybe both.

Will update more as this story unfolds.

Jerry Chan
WallStreetTechnologist

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NOTES:
[1] —Samson Mow famously derides poor people for being too poor to use bitcoin.
[2] As much as walking is a scaling solution to not having a car.
[3] If this sounds a lot like a pegged sidechain to you…you aren’t alone. But you best keep quiet; otherwise, you will be dogpiled by the LN fanatics.
[4] If this sounds a lot like a bank to you… you aren’t alone. But shhh, don’t tell anyone.
[5] Yes, this is a quote from marxist leninist communism.
[6] BSV and BCH have been embedding full images in txns since 2019.
[7] and he famously popped a champagne on the roof of the Blockstream offices for when the fees rose above $50 in 2017.

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