All Eyes On Ordinals: Addressing Bitcoin Decentralization & Block Space Concerns
Bitcoin inscriptions have been out for a few more weeks, so we follow up on the fee market and block usage to observe what’s changed after 100,000 inscriptions and our last update.
Relevant Past Articles:
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Addressing Bitcoin Decentralization & Block Space Concerns
Two weeks ago, we addressed the new trend of using Bitcoin’s blockchain for storing arbitrary data in “Fee Market Competition: Bitcoin Ordinals And Inscriptions.” New users flocked to Bitcoin to create what are known as inscriptions — often called NFTs (non-fungible tokens) on other blockchains. These mostly image files were increasing demand for Bitcoin block space, which caused some network participants to worry about Bitcoin’s future decentralization. If the cost to run a full node increases substantially due to users needing the storage space and bandwidth to download all this data that is unrelated to monetary transactions, fewer people might run full archival nodes, centralizing Bitcoin’s ledger.
When we last examined the usage of Bitcoin’s block space, inscriptions were taking up 50% of the available 4 MB per block, which increased to 59% five days later.
Source: Pierre Rochard
The amount of cumulative storage used by inscriptions continues to climb with almost 3 GB of storage specifically related to inscriptions at the time of writing.
Source: Data Always
Should the block space consistently be used to its full extent of 4 MB, it will add approximately 210.24 GB of data to the chain each year, which isn’t a major cost hindrance for running a full node but can still be considered pricey in places where technology isn’t as cheaply available. There is the ability to run a pruned node which does not require storage of any of this witness data and only keeps track of Bitcoin’s monetary transaction data. However, in order to create a pruned node, users still must download all of the data initially. This is where the concerns for insufficient bandwidth come into play. In areas of the world where there isn’t access to high-speed internet, the initial block download might take so long that it won’t be possible to sync to the chaintip.
We can see in the chart below that the average block size has significantly increased after inscriptions made their way to Bitcoin on January 21.
That being said, the expectation for Bitcoin’s block space was always that it would be full at some point, which is partially why there is a cap on the block size. This cap was raised during the SegWit soft fork and included the fee discount for witness data — like inscriptions — that is unrelated to Bitcoin’s financial ledger and its unspent transaction output (UTXO) set.
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Using data from Bitnodes, there hasn’t been a reduction in the number of full nodes since the launch of inscriptions in late January. In fact, there has been an 8.3% increase of 1,179 reachable full nodes since that time. This is likely due to the necessity of users running a full node if they want to create their own inscriptions without using a third party.
It remains to be seen if the unexpected growth in block size will have an effect on full node count in the long run. We will also leave the debate about the legitimacy of inscriptions on Bitcoin for other arenas. Since this publication focuses on on-chain data and bitcoin analysis, we are more interested in studying the effects that inscriptions have on the Bitcoin network fee market as opposed to the social and cultural implications of non-monetary transactions on the base layer.
“Bitcoin’s fee market is a constantly changing landscape. Fees rise when demand to transact on-chain is high and users want to get their transaction included in the next block. Inversely, the fee rate drops when demand is low and users don’t need their transactions confirmed in a timely manner.” — Fee Market Competition: Bitcoin Ordinals And Inscriptions
In the previous article, we observed transaction fees at the time and determined there wasn’t a significant increase in the fee rate. Even though the backlog of transactions in the mempool was nearly 50 blocks deep, people were either not interested in paying higher fees to get their inscription transactions confirmed quickly or it’s possible they didn’t quite understand Bitcoin’s transaction fee structure.
Looking at the fee rates broken down by sat/vByte ranges, we saw an increase in fee rate from two weeks ago to today. Whereas most transaction fees were set below 5 sats/vByte before February 5, there has been a noticeable bump in fees above that rate since then.
The rest of this article is open to paying members only. Here’s what’s behind the paywall 🔏:
What’s changed since the 100,000th inscription. 🚧
The state of Bitcoin’s memory pool of pending transactions. ⏹️
A new thesis for when inscribers might use Bitcoin. 🕰️
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