Ordinals use Bitcoin, but high fees will make them switch to Layer 2

This is an opinion editorial written by Steven Hay, who is a writer, former trader, and art dealer.

The controversy surrounding Ordinals is still ongoing and appears likely to resurface soon. Although the usage of block space by Ordinals had been decreasing since March 23, 2023, the trend seems to have reversed due to the release of notable collections and a growing craze for BRC-20 tokens.

If the competition for block space between Ordinals, BRC-20 tokens, and purely monetary transactions remains high, fees will remain high. If fees climb high enough, the ghastly specter of the blocksize war may once again haunt all of Bit-kind.

The Case Against Ordinals

Fees are not the only issue. Although Bitcoin has had its fair share of negative publicity over the years, the protocol itself has thus far avoided the same level of criticism. Exchange failures, drug sales, and numerous scams are all things that people have done with the technology rather than any intrinsic flaw in the technology itself. This is not the case with Ethereum, where questionable smart contracts are an integral part of the system.

Ordinals popularize the integration of Bitcoin’s blockchain with a variety of infamous Ethereum innovations such as NFTs, tokens, and perhaps soon smart contracts, increasing the reputational risk to the Bitcoin protocol. How long will it be until a token is directly issued on Bitcoin that passes the Howey Test and falls afoul of the U.S. Securities and Exchange Commission?

Furthermore, Ordinals significantly lower the barrier to introducing illicit or classified content into Bitcoin’s blockchain.

Source (modified by author).

All of the boxes have already been checked under Ordinals for the loss of user funds due to rug pulls, bugs, hacks, and takedowns. Most recently, Ordinals Finance pulled a $1 million rug, although on the Ethereum side of the ledger. Just before that, UniSat botched the launch of its BRC-20s marketplace, resulting in costly double-spend attacks and a lengthy market halt. Before that, several major marketplaces bowed to legal pressure from Yuga Labs and delisted ape-related collections.

Moreover, all of these “hiccups” occurred against the backdrop of a bug discovered within Ordinals’ all-important indexing system. Finally, and unfortunately, further issues of this nature are expected. Consider that one of the largest marketplaces by users and volume, Ordinals Wallet, as well as the significant Ordswap marketplace, both keep keys in browser local storage, according to what I’ve heard on Discord, which runs contrary to recommended security practices (to say the least).

I believe that the above paragraphs summarize the case against Ordinals from the perspective of many Bitcoin Maximalists, including myself, at least until the Ordinals purity spiral went helter-skelter. While these concerns are valid, there is one particular complaint that I believe should not be mentioned: that Ordinals are a scam.

When willing buyers and sellers exchange goods with informational symmetry, without any claims made about future price appreciation, that is the definition of honest business, and that is the current situation within Ordinals marketplaces. Prove me wrong.

In Defense Of Ordinals

One point in favor of Ordinals is that their content can be pruned from stored blockchain data. Pruning resolves the blockchain file size bloat issue, which is relatively minor considering that I expect the bloat to be easily outpaced by the growth of affordable data storage. More importantly, pruning ensures that anyone running a full node can opt out of storing any illegal material (which, to be fair, existed on Bitcoin’s blockchain long before Ordinals).

Regarding the reputational and legislative risks to Bitcoin arising from Ordinals content stored on the blockchain, these can be mitigated, but not eliminated, through proper communication. The point must be hammered home (and not just for the sake of Ordinals) that Bitcoin’s uncensorable and permissionless structure has certain unavoidable drawbacks which, on balance, are vastly outweighed by its advantages.

On the technical front, it is possible that post-traumatic stress from the blocksize war is causing some to view Ordinals as a big-blocker-style assault on Bitcoin’s base layer. However, as an entirely optional Layer 2, Ordinals have far more in common with the Lightning Network than with Bcash and its ilk. Granted, content insertion into witness data is also occurring, but that process is moderated by fees…

This article discusses the controversy surrounding the use of Ordinals on the Bitcoin blockchain. While there are concerns about the potential loss of user funds to cyber attacks or technical issues, the relatively small size of the Ordinals economy makes such losses limited in scope. In fact, the adoption of Ordinals is attracting new users, developers, artists and companies to the Bitcoin space, which could have multiple benefits for the ecosystem. However, the article also acknowledges the issue of high fees associated with Ordinals and suggests that offloading low-value transactions to Lightning and Layer 2 technologies like RGB, Taro, and Stacks could be a solution.

As of now, 200 collections tracked by OrdinalHub have had zero sales ever. This is just the tip of the iceberg of market failures. When you sort the 1,000+ collections on Best In Slot by inverse weekly sales volume, you’ll find hundreds with no sales. You can check for yourself how many low-value collections on Ordinals Wallet have had zero volume or sales over the last week. Pending a proper analysis, I feel that less than 1 out of 100 inscriptions listed on a marketplace will be profitable.

While the novelty of Ordinals may fade, the high costs will stay. Layer 2 solutions don’t store data on the blockchain, so their creation costs will be significantly lower. High-end collections like Asprey Bugatti Eggs may still choose Ordinals for their perceived luxury and maximum-permanence option, but the majority of creators will prefer the inexpensive alternatives still connected to Bitcoin, even if indirectly.

Cost is not the only factor behind the migration of most users to Layer 2. The size constraints of Bitcoin blocks make bulky content (like high-resolution images or audio, complex code, and all but the shortest video clips) unaffordable or even impossible to inscribe. With generative AI making it easy to create high-resolution image content – and soon audio and video content too – how much longer will the average creator be content to pay a relative fortune to inscribe text and small, static images?

Base Layer To Layer 2

In my view, Ordinals has demonstrated the market demand for Bitcoin-based NFTs, tokens, DeFi, etc. – however unpalatable some may find that demand. In any case, the cost and relative slowness of these assets on the base layer should eventually drive most users to Layer 2 solutions, which are already nearing completion. The base layer will likely become the digital equivalent of the Louvre, housing only the most significant works under the tightest security. Layer 2 will host everything else.

Those who oppose Ordinals should take note. Twitter rants condemning inscribers as attackers for adding monkey JPEGs to the blockchain only incite hilarity and encourage defiance. A $100 or even a $25 inscription fee is a far more effective disincentive, already established and requiring no keyboard bashing. To defuse the looming threat of high fees, the proactive strategy would be to contribute or donate to the development of Layer 2 solutions.

This is a guest post by Steven Hay. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.