The Bitcoin blockchain is at the center of an ongoing craze for on-chain collectibles that usually sit on other networks beyond Bitcoin. Called inscriptions, these bits of embedded text, audio, images and other data types exploded in popularity after the Ordinals project launched in January 2023.
This nascent variation of traditional on-chain activity has faced harsh criticisms from some corners of the Bitcoin community. But the innovative form of demand for block space and transaction confirmations introduces some novel possibilities for revolutionizing the landscape of mining revenue. This article is a mostly theoretical overview of how mining revenue could change soon based on the assumption that Bitcoin inscription activity is not a short-lived fad and will continue to grow in volume and complexity.
What exactly are inscriptions?
Instead of paraphrasing what Bitcoin inscriptions are, here’s a concise excerpt from the Bitcoin Ordinals inscription project documentation.
Inscriptions inscribe sats with arbitrary content, creating bitcoin-native digital artifacts, more commonly known as NFTs. Inscriptions do not require a sidechain or separate token.
These inscribed sats can then be transferred using bitcoin transactions, sent to bitcoin addresses, and held in bitcoin UTXOs. These transactions, addresses, and UTXOs are normal bitcoin transactions, addresses, and UTXOS in all respects, with the exception that in order to send individual sats, transactions must control the order and value of inputs and outputs according to ordinal theory.
How could inscriptions change mining revenue?
A volume increase for out-of-band payments by transactors to block builders is one of the most obvious potential changes to mining revenue. Out-of-band payments are sent to miners outside of a network’s typical process for collecting transaction fees into new blocks.
Several instances of early Ordinals Inscriptions have been publicly documented as being financed by out-of-band payments, and if the trend continues, this form of payment should continue to grow too. Although it presents certain advantages and drawbacks to the normal way transactions are paid for, these payments also are a strong signal that users want their data on the network–and they are often willing to pay far above (or below) market prices to make it happen.
Assuming that out-of-band payments continue to represent a minority of inscriber revenue, which is almost certain, the effect of fee revenue and general economics of block space demand will notably improve. A long-standing debate between Bitcoin advocates and critics focuses on the uncertainty of sustainable fee revenue to replace the mining subsidy as subsidies steadily decrease with each halving. But the introduction of fees from inscribers opens a multitude of new possibilities for users who will compete in the free “fee market” to stuff their transactions into new blocks. This could be a significant piece to the puzzle of creating sustainable fee revenue to secure the Bitcoin network.
Assuming the worst case scenario for many inscription critics, transactions that embed data on the network could theoretically become so numerous that “real” transactions of a pure financial nature are crowded out of new blocks to such an extent that using Bitcoin for “payments” is much more difficult. Fortunately, the Lightning Network exists. And this (unlikely but possible) scenario could push far more transaction activity to Lightning, which increases the possibility of Lightning-related miner extractable value (MEV) coming to Bitcoin.
Lisa Neigut, a Lightning Network engineer at Blockstream, broadened the Bitcoin Overton window on MEV with an article about Lightning Network MEV. Neigut theorized about opportunities for searchers and miners from Lightning Network use, and she considered how searchers on Bitcoin may impact on-chain transactions for Lightning Network channels. And if inscriptions make normal transactions on Bitcoin’s base layer too difficult, Lightning Network adoption could grow significantly–along with MEV opportunities from those transactions settling between Layer 1 and Layer 2 Bitcoin protocols.
NFT-related on-chain activity creates significant profitable opportunities for miners and searchers working in the MEV business on other chains, and Bitcoin could see similar developments if inscriptions grow in popularity. One fairly well-known instance of NFT MEV (on Ethereum) occurred when a searcher paid $7 million to buy every Cryptopunk NFT at their floor prices. On-chain marketplaces for Bitcoin inscriptions could see similar MEV opportunities pop up.
One fairly peculiar effect of sustained interest in inscriptions could be the monetization of Bitcoin attributes that no one really cared about before. Mundane parts of the network could carry a significant premium among inscriptions, including block numbers. No one really cares if their spend transaction is included in block 777,777 or 777,778. But that difference could matter a lot for the aesthetics of a particular set of on-chain art. Block around historical milestones like Bitcoin anniversary dates, halvings, and other events could be prized by inscribers as well. The possibilities are endless and unknown.
Some of the art etched into Bitcoin objectively sucks. Many people who like Bitcoin still have no idea what inscriptions are. And this fad could fade quickly–nobody knows. But the possibilities presented by this new type of Bitcoin user are exciting and impossible to ignore. Inscriptions matter because creatively using Bitcoin within existing protocol constraints is the point of a permissionless public network.
Everything is good for Bitcoin, even inscriptions.
Image via Taproot Wizards