The sudden appearance of the inscribed Bitcoin blockchain has been met with criticism, but it offers a glimpse of how the Bitcoin blockchain will evolve.
This is an opinion editorial by Zack Voell, bitcoin mining and market researcher.
A specter haunts the Bitcoin blockchain: the specter of JPEG.
By using the data storage features of the Bitcoin network introduced by the Segregated Witness (SegWit) upgrade in 2017 and the Taproot upgrade in 2021, Bitcoin node operators upload images, GIFs and other media files to the Bitcoin block. In fact, one of these Bitcoin memes included the largest single block and largest transaction in Bitcoin history last week. This now famous block and transaction was mined by Luxor Technologies in the midst of the mini Bitcoin NFT craze, which has been central to the NFT project Ordinals.
To say that writing memes in Bitcoin has divided the community is an understatement. But this practice has also resurfaced a conversation of great importance: miner extractable value (MEV) in Bitcoin. Readers will recall an article from June 2022 on this topic by this author. Ordinal is a Bitcoin data inscription that gives miners a glimpse of what Bitcoin MEV will do. This article reviews Bitcoin MEV in the context of the latest controversy related to JPEG transactions.
Background On Bitcoin MEV
The Bitcoin network isn’t a total MEV wasteland right now – but it’s still very early days.
“There is more MEV in Bitcoin than Bitcoiners like to admit,” Robert Miller, product lead at FlashBots, said in a live stream about MEV. “And there’s some MEV in Bitcoin that miners aren’t doing right now,” he said.
For example, Lisa Neigut, Lightning Network engineer at Blockstream, expanded the Bitcoin overton window on MEV with an article about Lightning Network MEV. Neigut theorized about the opportunities for searchers and miners from the use of the Lightning Network, and he considered how searchers in Bitcoin could lead to on-chain transactions for the Lightning Network channel.
Currently, most of the MEV chatter revolves around non-Bitcoin networks like Ethereum. But the powerful decentralized financial ecosystem built on Bitcoin could change that quickly. Conditions associated with persistent NFTs can have similar effects. For example, one of the well-known examples of NFT MEV (on Ethereum) happened when a searcher paid $7 million to buy each Cryptopunk NFT at the floor price.
Unwrapping the Bitcoin NFT Craze
Bitcoin historians know that collections and art on the chain come from Bitcoin. In December 2012, Meni Rosenfeld published “An Overview of Colored Coins,” which explained that “it is possible to color a set of coins to distinguish them from others.” And NFTs were born.
Casey Rodarmor started the modern era of Bitcoin NFTs with the ordinals.com inscription project. In a blog post explaining Inscription, Rodarmor explained that, “Inscription is a native digital artifact of the Bitcoin blockchain… It does not require a separate token, side chain, or exchange for Bitcoin.”
Images, audio, video, HTML, SVG, JS, CSS – anything can be an inscription transaction. Some node operators even written seed phrase in the blockchain. (Listening to Rodarmor interview on the Galaxy Digital podcast for more information on our journey to launch Ordinals.)
Taproot – the highly anticipated Bitcoin upgrade alive three days after Bitcoin notched an all-time high price of $69,000 – here in general credited with the explosion in on-chain NFT activity in Bitcoin. But components of the SegWit protocol upgrade a few years earlier created a landscape for excess data to be fed into the Bitcoin block. Frankly speaking, Eric Wall write on Twitter that the whole craze “mainly works by accident.”
But some data points make it clear that this is a valid trend:
- data together by Arceris, a pseudonymous Bitcoin researcher, showed the first 435 “errors” NFT in Bitcoin paid 15.3 million sats in fees and used 18.7 million bytes of space, which equates to approximately 218 blocks.
- At the end of one week, again, the inscription pushed average cost per vbyte from 1 satoshi to 15.
- On-chain data compiled by another pseudonymous crypto researcher, Dataalways, estimates that more than 2,000 ordinals have been “printed” in Bitcoin so far.
On a relative basis, the spike in fees generally comes from the fact that no one is trying hard to compress the size of the inscription because of the low cost of Bitcoin transactions. But Rodarmor noted on Twitter that “rich formatting, compression, and recursion/composition all mean that useful inscription content can be very small!”
Excitement and controversy about Ordinals increased after Luxor Technologies mined the largest block in Bitcoin history containing the largest transaction in Bitcoin history: Ordinal. In conjunction with crypto investor and consultant Udi Wertheimer, Luxor included a 3.94 megabyte transaction 0301e0480b374b32851a9462db29dc19fe830a7f7d7a88b81612b9d42099c0.9 million that blocked 79.9 million units. (The Bitcoin protocol limits block weight to 4 million weight units.)
What did Luxor write? A modified version of the Internet money magic Bitcoin Wizard created around 2013 in Microsoft Paint. The Wizard of Luxor, however, preaches Taproot and the “magical internet JPEG” in Bitcoin. In a blog post about Bitcoin NFTs and mining, Luxor’s head of research Colin Harper said, “Ordinal NFTs are not going away. It’s just about how influential they are.
Criticism of Bitcoin Ordinals
For every person who thinks the Ordinals project is fun and exciting, there is at least one Bitcoin fan who opposes the idea. Many leading voices from the Twitter-based Bitcoin community aren’t pulling punches that show JPEGs showing up to Bitcoin blocks.
For example, the well-known Bitcoin polemicist who uses the pseudonym Mr. Hodl expresses his disagreement with Ordinals by said, “I will censor the shit out of whoever is stuck up the chain.” Blockstream CEO Adam Back also warned followers on a now-deleted tweet that these Bitcoin-embedded NFTs are “fair game for miners to censor nonsense as a form of discouragement.” Twitter’s personal Bitcoin Pierre Rochard join the commotion by suggest with the obvious snark that node operators who write NFTs in Bitcoin should “apologize to your nodes and don’t do it again.” Jimmy Song, former partner at crypto fund Blockchain Capital and ex advisor at now closed crypto exchange LVL, only tweeted“Luxor will be punished by the market.”
Alex de Vries, a long-time Bitcoin cynic and considered an environmentalist, joined these pro-Bitcoin personalities in his harsh criticism of Ordinals. Taking to LinkedIn, de Vries claimed that the “carbon footprint” of the famous block mined by Luxor “is the same as the carbon footprint of every passenger taking a plane from New York to Tokyo and back 446 times.” (It should be noted that de Vries is unknown for his intellectual strength.)
On a slightly more technical level, Luke Dashjr, creator of the Bitcoin Knots client and outspoken Ordinal critic, write on Twitter that Ordinals only work because Bitcoin users “cheat” and “cheat code.” Bob McElrath, a long-time Bitcoin consultant and blockchain developer, also suggested that inscriptions compromise Bitcoin’s censor-proof quality when he slammed Luxor to “use [Bitcoin] as a bathroom wall.” As more excitement surrounds the Ordinals, so does Rochard expressed the desire to change to Bitcoin consensus by changing the rules of validation such inscriptions will again be possible.
Bitcoin core contributor pseudonymous 1440000bytes summarizes Ordinals criticism by tweeting“It seems that some bitcoiners just discovered that bitcoin can also be used by people they don’t like.”
The Future of Bitcoin MEV
Okay, so how does the NFT polarization from the Taproot “crash” affect MEV? Good question, intelligent reader.
The size and type of revenue for miners of any block grows as the demand for block space increases and the number of applications with real users increases. Currently, the Bitcoin block space is claimed by users using UTXO. But Ordinals provide a glimpse of the future where other Bitcoin users introduce creative reasons to demand the same space, which forces these competing users to meet in the fee market for a limited space inside the block.
Ordinal’s critics apparently, inadvertently highlighted this benefit to miners. Inscribers “have to bribe me to mine (the transaction),” said Mr. Hodl in a tweet. These “bribes” (commonly called “transaction fees”) can be paid in various ways. Of course, the inscriber can charge a higher fee for the transaction, thus incentivizing miners to include it in the block. Or out-of-band payments – fees paid outside of the network’s typical process to collect fees – can be coordinated between the transactor and building blocks.
Rochard, which is indirect fired Ordinals are an immoral waste of resources, later said Ordinal creators must “pay up or shut up.” And they – paid, at least. Since Ordinal appeared on the Bitcoin scene, subscribers have paid handsomely for the data that coincides with the new block. For example, one Bitcoin user paid $200 to write a GIF of a real cat. And as apart The Ordinal NFT Project is launched in Bitcoin, the value that can be extracted for miners from this on-chain activity is sure to increase.
Bitcoin Don’t Care
Bitcoin Ordinals generate a wave of creativity and controversy that can last indefinitely. This digital collection marks “the latest fault line in re-envisioning what Bitcoin philosophy can and should be,” said CoinDesk TV host Zack Seward. Many Bitcoin users hate Ordinal – even more love it. In the end, Bitcoin doesn’t care. But in the depths of the turbulent bear market, the use of objective-intriguing alternatives to the Bitcoin blockchain, the creativity surrounding this use case, and the opportunity for extractable value of these miners should not be ignored. Everyone does not need to be an inscriber, but they should pay attention.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.