Main Takeaways
In this blog series, we summarize our research team’s findings, inviting you to dive deeper into the original reports.
This article previews the Binance Research report from April 2023, discussing recent developments in Bitcoin up to the emergence of ordinals and inscriptions.
While Bitcoin has long been the most prominent blockchain network, there have been persistent concerns regarding its long-term sustainability.
Some of the recent innovations could potentially offer some resolution to these concerns, as demonstrated by Bitcoin’s on-chain metrics.
Thanks to Binance Research, you can take advantage of industry-grade analysis of the processes that shape Web3. By sharing these insights, we hope to empower our community with the latest knowledge from the field of crypto research. For a deeper dive, the full reports are available on the Binance Research website.
Despite BTC’s continued position as the top cryptocurrency by market capitalization, the sustainability of Bitcoin’s ecosystem has long been a pressing concern. With block rewards halved every four years, the diminishing incentives for miners to secure the network could impact its security model. While Bitcoin has maintained its lead until now, how will this continue in the future?
With the emergence of ordinals and inscriptions in early 2023, perhaps a resolution to these issues is starting to emerge. Not only have we seen the rise of so-called “Bitcoin NFTs,” we have also witnessed a resurgence in excitement across the entire Bitcoin ecosystem, though not all are in favor of these innovations. With increased activity and new use cases for Bitcoin, it will be instrumental to observe their impacts.
Today, we will explore this next phase in the evolution of Bitcoin. We will discuss the current state of the Bitcoin ecosystem, including on-chain metrics and technical upgrades, as well as ordinals and inscriptions. Note that this article has been adapted from a Binance Research report published on April 1, 2023. As such, numbers and data beyond this date are not covered in this blog.
Bitcoin’s Prominence
While smart contract platforms like Ethereum and BNB Chain continue to make headlines, Bitcoin still remains the clear leader in terms of market capitalization. Though BTC’s dominance has decreased from 60–70% in 2020 and 2021, the original cryptocurrency still accounts for the majority of the market.
Bitcoin accounts for over 50% of total crypto market cap
Considering the relative lack of smart contract functionality on Bitcoin’s layer-1 (L1) blockchain, this dominance is a testament to the belief that holders have in the asset. It could also indicate that bitcoin is more likely to be held for its original purpose – as a form of hard money – than for non-monetary use cases, given the relative lack of infrastructure.
While Bitcoin has seen some level of innovation, it is far less than that of smart contract behemoths like Ethereum and BNB Chain. This is largely by design and due to the slow, cautious nature of the Bitcoin network, which is a strength for those who prefer it as a form of hard money. Nevertheless, it is concerning for those who question the sustainability of Bitcoin’s security model.
Bitcoin incentivizes miners to secure the network through two economic resources: block rewards and transaction fees. Block rewards are halved roughly every four years and will ultimately diminish to zero. Thus, transaction fees will eventually be the sole compensation for miners, i.e., the security budget of the L1 blockchain. However, given the limited range of Bitcoin’s use cases (primarily for asset transfer), these fees have historically been a small percentage of miner revenues and a point of concern for the long term.
Bitcoin’s annual security budget (block rewards + transaction fees) is currently largely composed of block rewards that are halved every four years and will eventually reach zero
Source: Dune Analytics, Binance Research (March 30, 2023)
In January this year, the Ordinals protocol went live. Ordinals enable arbitrary data (images, video, text, etc.) to be inscribed on the Bitcoin blockchain, creating “inscriptions,” which are digital artifacts similar to NFTs.
Total inscriptions have almost reached 15M as of July 6, 2023, and are growing fast. This change has brought a renewed level of activity in Bitcoin, with increased focus on projects building around the network. Not only has Bitcoin seen an impact through its mempool, transaction fees, and block sizes, there has also been a cultural shift with how Bitcoin is being looked at. Existing projects are getting more attention, while new builders flock to the ecosystem. There is suddenly a surge in organic demand for Bitcoin blockspace.
Recent Developments in the Bitcoin Network
Let’s briefly examine two key areas: on-chain metrics and technical upgrades. While we will only discuss them in general terms, this will help our exploration of Bitcoin’s evolution.
On-chain metrics
While 2021 was a considerable year, with highs of over 300K transactions per day, 2022 was more moderate, with activity staying around the 250K mark for most of the year. This trend changed recently in 2023 as the number of daily transactions rose again to over 300K.
Bitcoin’s daily transactions have been on the rise in 2023 after a stable 2022
In a similar vein, daily active addresses on Bitcoin fell substantially from the highs of 2021, where they peaked around 1.2M. Having spent 2022 around the 900K mark, Bitcoin’s daily active addresses have slightly increased this year to around 1M per day.
Number of active Bitcoin addresses
Source: Glassnode, Binance Research (March 22, 2023)
These charts show that Bitcoin maintained stable network activity throughout 2022. While such stability during a generally challenging year is commendable, it is notable that Bitcoin’s daily transactions are similar to levels observed in 2017. Nevertheless, both daily transactions and active addresses are up since January 2023.
Technical upgrades
In the last six years, Bitcoin has gone through two major technical upgrades: Segregated Witness (SegWit) in 2017 and Taproot in 2021.
SegWit was a Bitcoin soft fork in 2017. SegWit separated Bitcoin’s transaction structure into two parts: transaction data and witness data, with the weight of witness data being only 25% of that of transaction data. This made it easier and cheaper to store information in the witness data of a transaction. Essentially, SegWit allowed Bitcoin’s maximum block size to increase a substantial amount.
Taproot was a soft fork in 2021 consisting of three distinct Bitcoin Improvement Proposals (BIPs): BIP 340, BIP 341, and BIP 342. Each brought more privacy, scalability, and composability to the blockchain. Two major effects that Taproot had was allowing advanced scripting in the witness section of a block, as well as removing the data limits between the witness and transaction sections.
Taproot adoption began sluggish but has steadily risen, with ordinals causing a jump
Source: Glassnode, Binance Research (March 22, 2023)
Ordinals and Inscriptions
ORD is an open-source software that can run on top of any Bitcoin full node, enabling the tracking of individual satoshis based on what founder Casey Rodarmor termed Ordinal theory. Satoshis (sats) are the smallest unit of the Bitcoin network, and 1 BTC equals 100M sats.
Ordinal theory ascribes a unique identifier to every sat on Bitcoin. Furthermore, each individual sat can be “inscribed” with arbitrary content (text, images, video, etc.) to create an “inscription,” i.e., a Bitcoin-native digital artifact that could be considered an NFT. The first inscription was minted on December 14, 2022, and the total number of inscriptions has since surpassed 12M.
The first inscription to be minted on Bitcoin: Inscription 0
Source: ordinals.com
Thus, SegWit allowed for cheaper data to be put into the witness section of a transaction and effectively increased block size, while Taproot allowed for advanced scripting in the witness section. Combined, these two updates were critical for inscriptions as they allowed for more arbitrary data storage in the witness section of any Bitcoin block.
Inscriptions vs. NFTs
While ordinal inscriptions are often referred to as “Bitcoin NFTs,” there are some key differences between them and the smart contract-based NFTs we are used to.
Fully on-chain: Inscriptions are stored directly on the Bitcoin L1 chain. A common criticism of some popular types of NFTs is that their metadata is stored off-chain. This off-chain storage may depend on external factors to function. On the other hand, inscriptions have an added layer of permanence as they will essentially exist as long as Bitcoin exists.
Immutable: Being stored directly on-chain, inscriptions are more likely to be completely immutable. While many NFTs are already immutable, a lot of them can also be modified or deleted by the contract owner. This is simply not possible with inscriptions, adding to their permanence.
Ordering: Given that inscriptions are etched onto individual sats consistent with Ordinal theory, each of them is ordered. There is a 500th inscription, a 9999th one, and so on. This is a unique feature to most current types of NFTs that adds a different level of value in terms of rarity and collectibility.
Scarcity: Through the combination of SegWit and Taproot, Bitcoin blocks can store considerably more data. However, this has also created an effective upper bound to both the size and number of inscriptions that can be minted on Bitcoin overall. There is no such upper limit for most general smart-contract based NFTs, an unlimited number of which could theoretically exist.
Effects on Bitcoin Metrics
As mentioned before, Taproot adoption picked up earlier this year as ordinals and inscriptions started becoming more popular.
Average block size
Ordinals and inscriptions have ignited new highs in demand for Bitcoin blockspace. This can be seen in the sharp spike in average block size around early February 2023 in the figure below.
Average Bitcoin block size has spiked significantly since Feb-23
Source: Blockchain.com, Binance Research (March 22, 2023)
Mempool growth
We can see a similar pattern for Bitcoin’s mempool, which is essentially a waiting room for unconfirmed transactions. Bitcoin’s total number of unconfirmed transactions and correlated mempool transaction count has been on the rise in early 2023.
Apart from two spikes last year, the majority of 2022 saw mempool transactions stay around 5K on average. This number steadily increased throughout February and March.
The total number of unconfirmed transactions in Bitcoin’s mempool is rising
Source: Blockchain.com, Binance Research (March 22, 2023)
Transaction fees
Bitcoin’s relatively low transaction fees have been a long-term concern given the decline in block rewards roughly every four years. Ordinals and inscriptions have increased Bitcoin’s transaction fees. As seen in the figure below, ordinal-related fees have been steadily increasing throughout the year alongside general transaction fees.
There are many in the Bitcoin community who favor Bitcoin’s original use case as hard money and may oppose this increase in transaction fees. Nevertheless, it could create a sustainable demand for Bitcoin block space and allow Bitcoin miners to be less reliant on just block rewards.
Ordinal fees have been strengthening miner revenues since the start of the year
Source: Dune Analytics, Binance Research (March 26, 2023)
Full node runners
The ORD software is required to enable the tracking of individual sats through Ordinal theory. While solutions like marketplaces have emerged for casual users, inscriptions require the running of a full Bitcoin node. This has been a significant factor behind the recent surge in reachable Bitcoin nodes.
The more active full nodes, the more decentralized the network becomes. While this might be a one-time bump, the upward move is generally positive for the Bitcoin network as a whole.
The total number of reachable Bitcoin nodes has been increasing throughout 2023
Source: bitnodes.io, Binance Research (March 22, 2023)
Ecosystem innovation
The pace of innovation and improvement in Bitcoin infrastructure DApps since the launch of ordinals has been notable. Bitcoin wallets have been quick to add support for ordinals, and we have seen the release of numerous ordinal-related products.
While many oppose the excitement around ordinals due to the increase in transaction fees, there are also those who see these as positive for the long-term sustainability of Bitcoin. As transaction fees increase, there could be more incentive for miners to maintain the security of the blockchain.
Regardless of these cultural shifts in the Bitcoin community, it will be key to continue watching this space.
Binance Research
The Binance Research team is committed to delivering objective, independent, and comprehensive analyses of the crypto space. They publish insightful takes on Web3 topics, including but not limited to the crypto ecosystem, blockchain applications, and the latest market developments.
This article is only a snapshot of the full report, which features a deeper exploration of on-chain metrics, the debate around ordinals, layer-2 (L2) solutions, and the future of Bitcoin. With so much rich content, you won’t want to miss these exclusive insights.
To read the full version of the report, click here. You can find other in-depth Web3 reports on the Insights & Analysis page of the Binance Research website. Don’t miss the opportunity to empower yourself with the latest insights from the field of crypto research!
Further Reading
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