The Impact of Ordinal Inscriptions on Bitcoin's Block Space in '24

Bitcoin, the world’s first and most popular cryptocurrency, operates on the blockchain protocol. The Bitcoin blockchain network, and its block space that houses the data, has traditionally been used as a decentralized, peer-to-peer (P2P) network for financial transactions.

However, the emergence of ordinal inscriptions/bitcoin NFTs and ordinals protocol has expanded the use case of this permissionless blockchain, and is straining its block space. That’s because previously, many blocks in Bitcoin’s block space only housed financial data. But ordinals protocol now allows it to store video games, books, and other digital artifacts. This development could crowd out financial users of Bitcoin.

This article will explore what bitcoin block space is, and whether bitcoin ordinals can affect the actual block sizes.

What is Bitcoin’s block space?

The Bitcoin block space is the finite capacity of each block on the Bitcoin blockchain for data storage.

The Bitcoin protocol dictates that each block, which acts as a ledger holding the data of financial transactions, can only accommodate a certain total number of transactions.

Once a block size limit is capped, no more transactions can be added to it. So, a new block will be created and added to the long “chain” of existing blocks– hence the name blockchain –thanks to a block header.

What is the Bitcoin block size limit?

The explicit block size limit historically hovered around 0.8-1.4MB¹ (MB) (Figure 1). Since the introduction of ordinal inscriptions, the average block amount limit has significantly increased, reaching 2.5MB at one point recently.

The stretching has been enabled by SegWit and Taproot upgrades tweaking the block weight: Some data is now stored as “witness data” and has a lower weight. This allows the block size to increase. Lightning network has also allowed side-chains to hold transactional data and lower the load on the main chain.

In short, creating blocks larger than 1MB has been possible since 2019. It’s not something new. But it wasn’t realized at scale until the Ordinals protocol was introduced. One reason why it took so long to expand Bitcoin’s block size was there might not have been any real need to do so, as long as transaction times and costs were consistent and no network overflow was observed.

Why does the explicit block size limit matter?

Bitcoin’s block size limit has direct implications for users in terms of transaction times, transaction costs, and network scalability issues.

1. Transaction times: Once a Bitcoin’s block size limit is capped, new bitcoin transactions have to wait for new blocks to be mined to get on. During periods of network congestion, unconfirmed transactions can accumulate in the mempool, further exacerbating delays.
2. Transaction costs: When block space demand is high, users offer higher transaction fees to have their transactions included in the next block. This inflates transaction fees, especially during busy periods.
3. Scalability issues: The previous two points, longer transaction times and higher transaction costs, that stem from Bitcoin’s block size limit undermine the network’s scalability to handle large numbers of transactions, especially as the network grows.

How are ordinal inscriptions affecting Bitcoin’s block size limit?

Ordinal inscriptions, or Bitcoin Ordinals, allow metadata data of any kind to be inscribed on individual satoshis and stored on the Bitcoin network. Ordinals have many benefits, perhaps the biggest being bringing NFTs to Bitcoin and expanding its use case. Low-code and UI friendly tools have made it easy for users to create Bitcoin NFTs and start trading them.

Ordinals have quickly become popular and mainstream, with 4M² inscriptions in text, image, video, and application forms having been created in less than 5 months (Figure 2).

As users anticipated, Ordinals brought more users to the Bitcoin network. By February, only a month after introduction, they’d already consumed 50%³ of each block size (Figure 3).

And as time went on, their rise correlated with increased transaction fees⁴ (Figure 4) and confirmation times⁵ (Figure 5).

Are ordinals hurting Bitcoin?

Ordinals can be seen as competing with the “pure” financial transactions, to the detriment of the Bitcoin community, in the shape of longer transaction times, but more importantly, higher transaction fees.

But higher transaction fees aren’t necessarily a bad thing for Bitcoin in the long run. The reasons are:

1. More incentives for miners: Miners are rewarded with transaction fees for mining each additional block. Higher fees incentivize miners to continue mining even as the block reward (newly minted Bitcoins) decreases over time due by halving. In the distant future when the last Bitcoin has been mined, transaction fees will be the only reward for miners. High transaction fees can therefore help ensure the long-term sustainability of the network.
2. Transaction prioritization: When the network is congested, miners generally prioritize transactions with higher fees. This can be seen as a market mechanism for users who need their transactions processed more quickly, as they can choose to pay a higher fee for faster confirmation.
3. Network security: Higher transaction fees contribute to the overall value (in terms of the Bitcoin reward) of mining a block. This, in turn, makes it more costly for any malicious entity to carry out a 51% attack (where an entity controls over half of the total mining hash rate and can disrupt the network), thereby enhancing the security of the Bitcoin network.

For more on Ordinals

To learn more about ordinal inscriptions, read:

• Ordinal Inscriptions History: How Bitcoin NFTs Came to Be In ‘23
• Top 5 Differences Between Ordinal Inscriptions vs NFTs in 2023
• What are NFT Royalties & How Bitcoin Ordinals Can Help

External Links

• 1. “Average Block Size.” Blockchain.com. Retrieved on May 19, 2023.
• 2. “Bitcoin’s Ordinals Analysis.” Dune. Retrieved on May 19, 2023.
• 3. “BREAKING: ordinal inscriptions are consuming 50% of Bitcoin’s block space.” Twitter. February 7, 2023. Retrieved on May 19, 2023.
• 4. “Total Transaction Fees.” Blockchain.com. Retrieved on May 19, 2023.
• 5. “Average Confirmation Time.” Blockchain.com. Retrieved on May 19, 2023.