Despite concerns that Bitcoin Ordinals are clogging the network, there is little evidence to suggest inscriptions are taking blockspace away from higher-value Bitcoin monetary transfers. On September 25, on-chain analytics firm Glassnode released “The Week On-chain” report, explaining minimal evidence of inscriptions displacing monetary transfers.
The Rise Of Inscriptions In Bitcoin
Since their introduction in February 2023, inscriptions have been a significant consumer of Bitcoin blockspace. Inscriptions can be considered a ‘packing filler,’ filling up any remaining space in blocks after higher-value monetary transfers are included.
While fees and volume analysis typically consider the BTC volume being transferred and held, it’s essential to note that inscriptions may have a higher perceived ‘value’ beyond just their volume.
Despite the increase in fee revenue for miners due to inscriptions, the upcoming halving event may put significant income stress on miners unless Bitcoin prices substantially increase.
Introducing inscriptions in February 2023 marked a turning point in on-chain activity, mempool dynamics, and miner revenues. The mempool, a cloud of unconfirmed transactions awaiting inclusion in blocks, has experienced a surge in demand since February, coinciding with the release of Ordinals and Inscriptions.
The rise in text-based inscriptions, particularly due to the emergence of the BRC-20 token, has significantly contributed to the increased demand for blockspace. Inscriptions leverage the SegWit split data structure to fit more transactions into blocks, resulting in a daily confirmed transaction count exceeding 550,000.
Text-based inscriptions now make up a substantial portion of all transactions, accounting for 40% to 60% since May, surpassing image-based inscriptions. This surge has also led to a rapid expansion of the Unspent Transaction Output (UTXO) set.
While inscriptions have a significant presence in block space, they tend to pay relatively lower fees per byte, making them sensitive to absolute fee levels. They are readily displaced by more urgent monetary transfers, which pay higher fees.
The dominance of inscriptions has led to a collapse in the median transfer volume, with smaller investors and inscription users transferring smaller amounts. This trend has also resulted in higher fee rates relative to transaction value.
While miners’ revenues have been boosted due to increased block space demand, the competition among miners has also grown substantially. Hashrates have increased by 50% since February, putting downward pressure on the hash price, the BTC or USD reward earned per Exahash. Miners are facing increased income stress, with profitability at risk, especially with the impending halving event.
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