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Ordinals Protocol and BRC20: A New Era for Bitcoin?

May 1**, 2023**

Author: CryptoSherry

The Bitcoin network has long been associated with its ability to transfer value without the need for intermediaries. But what if Bitcoin could be used to transfer more than just monetary value? What if it could be used to link digital files to unique numbers, allowing them to be transferred and verified on the blockchain? This is where the Ordinals Protocol comes in.

Ordinals Protocol sets inscriptions record on Bitcoin, but raises concerns.

The Ordinals Protocol is a new method for assigning unique numbers to individual satoshis, which can be used to link them to digital files and broadcast them to the Bitcoin blockchain. This protocol uses a loophole created by the Taproot upgrade and does not require a separate token or blockchain. The process of adding digital assets is called inscription, and users can explore, transfer, and receive inscribed satoshis. However, the protocol imposes a limit of roughly 4MB for added information, which includes actual files such as images and videos that become permanent parts of the Bitcoin blockchain. Miners must decide how to prioritize ordinal transactions among other transactions in the mempool when creating a new block. According to Dune Analytics, Bitcoin Ordinals reached 2,991,101 total inscriptions to date, surpassing the previous all-time record of 756,746 on April 2, representing an 395.26% growth.

While the potential use cases for ordinals and NFTs on the bitcoin network are significant, there are concerns about the competition for block space and potential taint on satoshis. If ordinal NFTs generate massive speculation and require consistent transfers, they could price out standard transactions, driving up fees for on-chain transfers and the creation or closing of Lightning channels. In fact, the current cumulative fees paid for Ordinals Inscriptions minting have exceeded 150 BTC. Should Ordinals experience further adoption, it could establish a lasting need for Bitcoin block space, potentially reducing Bitcoin miners' dependence on block rewards by diversifying their revenue streams.

Additionally, if an NFT containing illegal or objectionable content is inscribed on a satoshi, it could lead to the entire satoshi becoming tainted and unusable, affecting any subsequent transactions involving that satoshi.

BRC-20 Token Standard Creates Buzz, Raises Concerns

On the base of Ordinals Protocol, the recently introduced BRC-20 token standard on the Bitcoin network has created a significant buzz, leading to a surge in the number of inscriptions of Bitcoin Ordinals to ATH levels. The first BRC-20 token, $ordi, has risen from about $0.01 to about $3.93, an increase of more than 393 times, with a market value of over $82 million. However, most BRC-20 transfers are completed through over-the-counter transactions (OTC), and there are concerns about the speculative nature of BRC20 tokens and their potential to attract scams.

BRC20 does not create smart contracts that manage token standards and rules but simply stores a script file in bitcoin and uses that file to attribute tokens to satoshis and allow them to move from one user to another. The BRC20 token might not be a practical long-term solution for any problems we have today or in the future, but it could drive demand for bitcoin to pay for fees and take up block space. Another smart contract chain, Bitgert BRC20, also uses the BRC20 naming convention, but it should not be confused with the token standard created on a different forked chain.

In conclusion, the Ordinals Protocol and BRC20 offer promising new possibilities for the Bitcoin network, but there are concerns about their implementation and effects on the network. The potential drawbacks of these protocols, including the impact on transaction fees and taint on satoshis, need to be taken seriously, and experts are warning against investing in BRC20 tokens without careful consideration. As the crypto market continues to evolve, it remains to be seen how these protocols will affect the Bitcoin network in the long term.

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