Unconventional Ordinals: How They Challenge Bitcoin’s Core Rules and Boost Miner Profits Post-Halving

    It was an unforeseeable achievement. The Bitcoin network is now witnessing a surge of significant developments with the introduction of Ordinals and BRC-20, paving the way for BTCFi – DeFi using Bitcoin as its primary asset. This has brought about new capabilities to a network that was traditionally known for its simplicity in transactions. In fact, the total market capitalization of BRC-20 tokens alone has reached an astounding $2.8 billion. From the perspective of network health, the key takeaway here is that Ordinals inscriptions, in particular, have contributed over $438 million in fees to miners, incentivizing their participation and helping to secure the Bitcoin network.

    Andy Handika is the CEO and Co-Founder of Loka Mining, a platform that allows retail investors to purchase BTC at a lower price than market value by co-investing with Bitcoin miners. This op-ed is part of CoinDesk’s “Future of Bitcoin package,” published to coincide with the Halving event in April 2024.

    The Ordinals protocol has paved the way for the inscription of unique data, such as NFTs, on individual satoshis, the smallest unit of Bitcoin. This innovation has been further enhanced with the launch of BRC-20 tokens, allowing for the tokenization of assets on the Bitcoin network. Before this, DeFi on Bitcoin was considered infeasible.

    Making the most of Bitcoin

    The introduction of more complex products on the network has led to an increase in block space usage, with the competition for this space driving up transaction fees. In fact, during the peak of the initial Ordinals craze in May 2023, transaction fees made up 43% of the total income per block. Later in 2023, when Ordinals demand spiked again, transaction fees skyrocketed to as high as $37, a level not seen in over two years.

    New token standards, such as Runes, which is set to be launched during the halving event (currently expected on April 20), aim to challenge the dominance of BRC-20 and introduce more efficient options for tokenization on Bitcoin.

    This growth has been coupled with the emergence of native decentralized applications and the investment of major cryptocurrency exchanges in inscription services and BTCFi assets, including the launch of Bioniq, a platform for the issuance and trading of Ordinals, along with various BRC-20 initiatives and decentralized mining solutions on the ICP network.

    These advancements have greatly benefited from the development of ckBTC, a digital representation of Bitcoin pegged to BTC at a 1:1 ratio on the ICP network. As a result, the activity for ckBTC has skyrocketed, with over a million transactions recorded in December, amounting to a total value of more than $67 million.

    Another recent development that is boosting the next halving cycle is the approval of several Bitcoin exchange-traded funds (ETFs) in January by the Securities and Exchange Commission (SEC). Not only does this showcase the growing acceptance of institutions towards Bitcoin, but it is also estimated that these approved products alone could yield over $220 billion in the next three years. This is likely to lead to the launch of even more funds in the future. This influx of capital into the space not only has the potential to drive up the spot market price of Bitcoin, but also creates more competition for block space and, in turn, transaction fees.

    Mitigating halving concerns

    The Bitcoin halving is a regular event that occurs every four years, causing a reduction in the mining reward on each block by half. This has turned into a race for miners, vying for a more scarce reward and combating ever-increasing mining difficulties.

    In the past few years, larger publicly-traded mining companies from North America have been able to increase their dominance by receiving funding from retail investors. They can offer shares or sell future hash rates on platforms like Luxor’s Hashrate Forwards.

    However, this year, miners of all sizes from around the world have additional funding options to upgrade their operations. They can utilize Loka’s upcoming permissionless marketplace, connecting miners directly to retail investors looking for BTC at a lower price than market value. This creates a two-sided marketplace, with Bitcoin miners providing future hash rates, and retail investors seeking more cost-efficient access to Bitcoin, supplying liquidity.

    The future of Bitcoin

    All of these developments point towards certain implications for the broader Bitcoin space after the halving event. As transaction fees are meant to eventually become the sole source of compensation for miners, the overall health of the network depends on their continued prosperity over time, making this a positive trend.

    The upcoming halving event, as well as all future ones, present incentives for further development and building upon the existing Bitcoin infrastructure. The gradual reduction of rewards is expected to make the entire network stronger and more diverse, and not the other way around.

    Currently, the outlook is positive, with an ecosystem that is set to continue expanding, and potentially even accelerating, as block rewards decrease. This indicates that Satoshi’s vision of a decentralized asset is on the right track. No matter what, we will find out soon enough.

    Edited by Benjamin Schiller.

    Latest articles

    Related articles

    Leave a reply

    Please enter your comment!
    Please enter your name here