Make Kitco Your Homepage

Why ordinals is good news for the future of bitcoin mining

Commentaries & Views

In the past few weeks, the crypto community has been going wild over Ordinals, a protocol that enables users to mint NFT-like assets called inscriptions directly onto Bitcoin. Withnearly 12 million inscriptions created on top of the BTC blockchain, the hype around this new tech has led to a surge in demand for computing power.

As the latter is required to validate transactions in the Bitcoin network, this sudden increase in demand has significantly raised transaction fees as miners are competing for available resources. Now, let's take a closer look at how this trend may affect the BTC mining industry in the long run.

The Hype Around Ordinals and Its Impact on Bitcoin Mining

In the simplest terms, Ordinals Inscriptions are basically non-fungible tokens (NFTs) that are minted onto the Bitcoin blockchain. But instead of generating them via a marketplace like OpenSea using a standard like ERC-721 or ERC-1155, each Ordinal refers to a satoshi (or sat), the smallest unit of BTC, which has been inscribed with data.

A major difference between NFTs and Ordinals is that the prior often requires off-chain data to update metadata. One of the reasons why this might be necessary is to improve the image quality of individual non-fungible tokens. On the other hand, all Ordinals' data are inscribed directly on-chain without the need to update their metadata from external sources outside blockchain networks.

Moreover, NFTs enable creators to charge royalties when someone sells their work on a marketplace. However, Ordinals have no royalties or other enforceable royalty solutions that would automatically reward artists with a percentage of secondary sales.

As I see it, the main hype around Ordinals is due to multiple reasons. First, it's safe to say that Bitcoin has one of the most powerful brands in the crypto industry. While BTC is still the largest cryptocurrency by market capitalization, Bitcoin has the most extensive history among all blockchains. For that reason, it shouldn't be surprising that so many users were attracted to Ordinals when it finally became possible to launch NFT-like assets in the network.

Since inscriptions only utilize on-chain data, they can operate more transparently than NFTs that rely on off-chain records. At the same time, Ordinals' lack of royalties may deprive creators of an important revenue source. However, it could also create a more decentralized NFT market that is centered more around users than marketplaces that have been operating on a centralized basis.

For miners, the rising popularity of Ordinals is definitely great news. With Bitcoin's scalability limited to around seven transactions per second (TPS), a sudden increase in demand for computing power often translates to higher fees. As the halving reduces block rewards – validators' primary source of revenue – by 50% every four years, this trend is something that can actually be welcomed by many miners. And in the long run, transaction fees will likely account for a greater share of their revenue.

Is it 2017 Again?

For a long time, 2017's bull market was the last time when Bitcoin transaction fees surpassed block rewards for miners. Thischanged in May 2023, when multiple mining pools mined blocks were fees exceeded the 6.25 BTC block subsidy.

At first glance, the market may seem to be in a similar situation now as in 2017, but that's definitely not the case. Back then Bitcoin transaction fees were higher than block subsidies due to the overall hype of the crypto market and the massive bull run that significantly increased demand for regular transfers. Since then, several improvements have been made to the Bitcoin protocol to enhance its TPS capacities, such as SegWit, transaction batching, and intra-exchange transactions.

Now, for the second time in history, we saw that miners are not fully dependent on block rewards. Most importantly, the current period of high transaction fees changed the perception of the sustainability of Bitcoin mining. Practically speaking, it has become highly possible that transaction fees will be the main source of revenue in the future's mining industry. And as Bitcoin's adoption and usability increase, miners are expected to earn more from commissions than via block rewards.

The Future of Bitcoin Mining

The hype around Bitcoin Ordinals came with a number of changes miners will need to adapt to in order to remain profitable.

I believe that more applications will be written on top of the Bitcoin protocol in the future. At the same time, we will see more use cases and a boost in adoption in the next couple of years. There's also a chance Ordinals might fuel a new wave of hype around the BTC blockchain, attracting many crypto users from other networks.

Compared to current rates, I expect transaction fees to steadily grow higher. Over time, miners will be generating most of their profits from commissions instead of relying on block rewards that are set to decrease by 50% after each halving.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.