Behind the “Inscription” Game Stands a Hungry Bitcoin Ecosystem

"It is not necessary to eliminate all inscriptions to benefit Bitcoin." In the early morning of December 7, Luke Dashjr seemed to leave some room for the survival of inscriptions when replying to netizens.

On December 6, the core developer of Bitcoin Core launched a blast on X against the recently popular Bitcoin inscriptions, believing that those inscriptions that encode and burn data for the smallest unit of Bitcoin, "Sat", "are exploiting Bitcoin Core vulnerabilities to send spam to the blockchain network" and are a "scam" that will affect the adoption of Bitcoin and indirectly damage the value of BTC.

Bitcoin Core is the software system of the Bitcoin network. In a subsequent reply to netizens, Luke said that the vulnerability will be fixed before next year's V27 version, which means that the inscription will no longer exist in the Bitcoin network.

Luke's comments and responses immediately caused a stir. First, the price of ORDI, the hottest token in the inscription market, fluctuated greatly, falling from around $60 to $40.

The debate over whether Bitcoin Core should and has the power to remove the inscription has not only brought out the confrontation between Bitcoin miners and core developers, but has even triggered concerns about a Bitcoin hard fork. Memories of the “2017 fork incident” have attacked many veterans in the cryptocurrency circle.

It should be noted that the encoding of Sats and the issuance of encrypted assets on the Bitcoin network using the BRC-20 method due to the Ordinals protocol have created a trillion-dollar market from the beginning of the year to date, with tens of millions of inscriptions circulating in it and held by hundreds of thousands of people. It has also brought huge transaction fee income to the miner group due to the congestion of the Bitcoin network.

The inscription participants and some miners naturally stood together to oppose Bitcoin Core represented by Luke's rash repair of the "so-called vulnerability."

The controversy subsided with Luke’s speech in the early morning of December 7, and more solutions to the inscription quickly emerged. Bitcoin inscriptions have once again become popular with this “gaming drama”, and behind it is a Bitcoin ecosystem that is hungry for food and desires diversity.

The “junk information” theory caused the life and death crisis of Mingwen

On the morning of December 6, when the price of ORDI surged and then fell, Luke Dashjr's attack began.

“Inscriptions are spamming the blockchain using a vulnerability in Bitcoin Core. Since 2013, Bitcoin Core has allowed users to set an additional data size limit ('-datacarriersize') when forwarding or mining transactions. Inscriptions bypass this limit by disguising their data as program code.”

This speech by Luke, a core developer of Bitcoin Core, at X quickly attracted the attention of the Web3 world. He said that although the vulnerability was fixed in the recent Knots v25.1, it was not complete. He hoped to finally fix the vulnerability before next year's v27 version.

In this regard, a user asked him: If the "loophole" is fixed, will Ordinals and BRC-20 tokens no longer exist? Luke answered "yes", and added, "Ordinals should not exist. It was a 'scam' from the beginning."

The "inscriptions" that Luke said should not exist have actually been around for almost a year, and have now brought about a trillion-dollar inscription token speculation market. Tens of millions of inscriptions are numbered in chronological order and contain metadata such as text/images/audio/video information. They are recorded on the smallest divisible unit of Bitcoin, Sat (Satoshi), and packaged into the Bitcoin blockchain network.

There are hundreds of thousands, if not millions, of users holding these inscription tokens, not to mention that inscriptions also bring huge profits to the Bitcoin miners who package them.

Why is such a thing opposed by Bitcoin core developers today?

In fact, in May of this year, the congestion of the Bitcoin network and the surge in transaction fees caused by the inscription attracted the attention of the developer community.

On May 7, an email titled “As developers, should we reject non-standard Taproot transactions from full nodes?” sparked a discussion on the Bitcoin developer mailing list.

Taproot is part of the Bitcoin network upgrade, implemented on November 14, 2021, with the goal of changing the way Bitcoin scripts operate to improve privacy, scalability, and security, and even improve the Bitcoin network's ability to handle smart contracts.

Email from developers regarding BRC-20 in May this year

The sender, Ali Sherief, believes that side projects like BRC-20 are “worthless” as its creator says, and threaten the normal use of the Bitcoin network as a “peer-to-peer digital currency payment system,” causing network congestion and rising transaction fees.

Ali raised the question of whether action should be taken to patch the vulnerability in BIP 342, which defines the Tapoot script, or to strongly censor and remove all non-standard Taproot transactions at the node level.

In response to this email, Michael Folkson, organizer of the London Bitcoin Development Meetup Group, said that Bitcoin should remain as it is because "the consensus rules have been established and the rest is up to the market." Michael pointed out, "You may not like this use case, but if you start playing whack-a-mole, what can prevent a group of people from declaring opposition to your use case within a year?"

Luke Dashjr, who criticized BRC-20, said in the email at the time, "Action should have been taken months ago," he said, "Spam filtering has been a standard part of Bitcoin Core since day one."

In fact, Luke created a patch filter called "Ordisrespector" in February this year, which can detect and reject Ordinals inscription transactions, which he regards as spam. But judging from the results of the inscriptions flooding the market, this patch has not worked.

As Ali mentioned in the subject email, if this non-standard Taproot issue is resolved, it will inevitably affect the interests of the miners in the Bitcoin community. This time, Luke launched a public "crusade" against the inscription, and the first to stand out were the opinion leaders in the mining circle.

“Bitcoin is not Ethereum, and the developers don’t have the final say.” Shenyu, co-founder of F2Pool, the third largest Bitcoin mining pool operator, was the first to speak out after Luke’s speech.

The conflict between developers and miners quickly gave rise to new concerns: Will the Bitcoin network experience another hard fork due to different consensus?

The last time, the two sides’ consensus dispute over the size of Bitcoin blocks lasted for two years starting in 2015. It finally ended with a miner-led hard fork in August 2017, giving birth to the Bitcoin Chash chain that insisted on large blocks, which diverted a lot of Bitcoin miners for a time.

Miners will more or less maintain the inscription market for profit reasons. Other supporters of inscriptions believe that if Bitcoin Core adopts Luke's approach and deletes inscriptions from the Bitcoin network, this will directly violate Bitcoin's "resistance to censorship" and "decentralization", and is tantamount to denying the last Taproot upgrade based on consensus.

The debate over the life and death of inscriptions lasted for a day. On December 7, a user was still asking, "As long as there is one miner who does not choose to withdraw, can the miner still process inscription transactions on the blockchain?" Luke, who triggered this "war", said, "We don't have to eliminate all inscriptions to benefit Bitcoin."

This expression finally calmed the controversy temporarily. So, is there a better way for inscriptions to exist on the Bitcoin network? This should start from the emergence of inscriptions.

The surge in inscriptions caused congestion on the Bitcoin network

The concept of "inscription" originated from the Ordinals protocol created by developer Casey Rodarmor, which was born earlier this year. In March, another developer Domo created the BRC-20 inscription (Bitcoin Inscription) gameplay based on this protocol.

In simple terms, Ordinals is a protocol that can engrave data on the smallest divisible unit of Bitcoin, "Sats (Satoshi)" (Note: 1 BTC is equal to 100 million Sat, so 1 Sat = 0.00000001 BTC). The developer did an experiment, he tracked every 1 Sat of Bitcoin and numbered them in chronological order.

According to the technical rules of the Bitcoin network, these numbered Sat are also allowed to write some data with limited capacity.

So, with protocols and rules, a Twitter user named @domodata couldn't sit still and created the BRC-20 inscription, which is actually inputting metadata into Sats. This process is called Inscribe. Small-byte text, images, audio, video and other content can be written into Sats in the form of data, and what is written is called "BRC-20 inscription".

In this way, Sats with different inscriptions and chronological numbers become very unique. This is in line with the concept of non-fungible tokens "NFTs", and is even more NFT than NFTs on the Ethereum network, because the content in Sats is really engraved on the Bitcoin chain. In contrast, NFTs generated on blockchain networks such as Ethereum are more like uniquely numbered certificates, and the pictures, videos and other content certified by NFT certificates are often not stored or recorded on the chain.

Numbering and engraving, the two experiments have created a "combination punch". Although @domodata clearly stated in the BRC-20 white paper that "this is just an interesting experimental standard" and "strongly opposes making any financial decisions based on this design", players still rushed in and began to use the Ordinals protocol and BRC-20 method to do something fancy.

If Sats contain different annotations and different contents, then such Sats are non-fungible NFTs; if they contain the same annotations and the same content, then they are fungible tokens, which is equivalent to issuing homogeneous encrypted assets on the Bitcoin blockchain using the Ordinals protocol and the BRC-20 method. The resulting Sats can be described as "numbered banknotes" to use an inappropriate metaphor.

Image category BRC-20 Inscription

"Bitcoin Inscription - content engraved on the world's most secure blockchain network", the sense of romance and preciousness comes out immediately.

Once this kind of "diamond ring" marketing rhetoric appears, it is difficult to avoid the circulation market with users and traffic support. Soon, ORDI, a token commemorating the Ordinals protocol, wallets dedicated to storing and sending various BRC-20 inscriptions, and decentralized exchanges all came out, and an ecosystem around Bitcoin inscriptions became active.

BRC-20 Inscription Market Data

According to statistics, as of December 7, 56,300 BRC-20 inscriptions have been generated on the Bitcoin network, with a total of 306,400 holders and a total market value of US$1.11 trillion.

The recent surge in bitcoin prices to around $43,000 has a total market value of $858.8 billion, and the total market value of the entire crypto asset market is $1.65 trillion, which shows the strength of the inscription speculation market. In China, the well-known second-hand trading platform Xianyu has posted information on "inscription proxy" services and "inscription zero-based introductory tutorials".

BRC-20 information appeared on Xianyu

However, Bitcoin inscriptions do have negative consequences.

It should be noted that the inscription data will be packaged into the Bitcoin network in the form of blocks, and the capacity of each block is fixed at 1M. The original capacity and speed of this network are worrying. The newly added inscription data increases the block data of the Bitcoin network, slowing down the block speed, commonly known as "congestion", which invisibly affects the transaction rate of Bitcoin, and the transaction fee also soars.

In May and November this year, Bitcoin network-wide transaction fees were abnormal twice. In particular, on May 9, the network-wide transaction fee reached 3.909 BTC, worth $111,100.

Bitcoin network fee data on May 9

Bitcoin traders are not happy about network congestion and higher transaction fees, but miners who are responsible for generating blocks and maintaining network security to earn transaction fees must be happy. After all, not only have they experienced a sharp drop in income in the crypto bear market of the past two years, they will also face the halving of Bitcoin block rewards in April and May next year.

According to data from Blockchain.com, in November when the BRC-20 inscription became popular again, the daily Bitcoin mining reward on November 12 was directly pushed up to US$44 million. This was the first time since 2023, and the last time it occurred was in April 2022.

According to Dune data on November 24, the Ordinals protocol inscriptions have created a total of 3,061 BTC (about $114 million) in Bitcoin transaction fees, and the total number of inscriptions minted has reached 43.5322 million.

The total amount of Ordinals inscriptions has soared

After reading this, you will understand why miners represented by Shenyu support inscriptions.

The main reason why Luke dislikes the inscriptions is that this information and data takes up the capacity of the Bitcoin block, causing poor network transactions and increased costs, thus weakening the function of Bitcoin as a payment network and hindering its widespread adoption.

This means that if the problem of inscriptions occupying the Bitcoin block capacity is solved, can inscriptions continue to survive? Some solutions are emerging.

Is the opportunity for Bitcoin Layer2 coming?

In fact, after Luke criticized the inscriptions for causing spam to be uploaded to the chain, someone suggested to him that he create an "inscription chain", similar to Ethereum's Layer 2. "This chain only needs to submit hash values ​​to the Bitcoin network regularly to run, right?"

“Yes,” Luke agreed, after giving an affirmative reply. “That would work, it wouldn’t even need to have a block size limit, each node could set their own limit (or no limit).”

Luke agrees with the Layer 2 solution to the inscription

In fact, this kind of Layer 2 solution has already appeared in the Bitcoin ecosystem community. The "Taproot Asset Protocol" for inscription migration mentioned by OKX founder Xu Mingxing in the inscription debate is one of them.

The Taproot Assets protocol was proposed by Lightning Labs, the developer of the Bitcoin payment network "Lightning Network". It aims to provide developers with "scalable Bitcoin multi-asset network tools", support the issuance of stablecoins and other assets on the Bitcoin network, and complete transactions through the Lightning Network.

Ryan Gentry, director of development at Lightning Labs, explained that the Taproot Assets protocol only requires issuers to conduct a single Bitcoin transaction to mint an effectively unlimited amount of Taproot assets, while all metadata describing these assets is stored off-chain.

This approach solves the problem of assets such as inscriptions occupying the capacity of Bitcoin blocks, while issuing and trading these assets can still make miners profitable. The only problem is that the metadata of those pictures, texts, videos and audios will be stored off-chain and can no longer be "carved" on the Bitcoin chain, which is the same as the way of issuing NFTs or other homogeneous tokens using Ethereum smart contracts.

In order to still leave inscription tokens in the Bitcoin network, developers of the Atomicals protocol similar to BRC-20 proposed a "restriction method", that is, introducing the SUBSTANTIATION FACTOR (SF), redefining the number of satoshis per unit of ARC-20 inscriptions, and setting the default proof coefficient to 1:1, so that arbitrary precision is limited to a feasible range, so as to process token transfers of less than 546 units.

This method is actually a way to bypass the Bitcoin dust attack defense system. To prevent dust attacks, the Bitcoin network limits the number of Bitcoin transactions in a single UTXO to no less than 546 Sats. This means that the minimum transfer limit for ARC-20 inscription tokens is 546. If it is lower than this standard, the transaction is likely not to be packaged.

The Atomicals protocol approach did not solve the block occupancy problem that Luke was concerned about, and the Layer2 approach seemed to be more in line with the core developer's idea - to remove non-standard activities that are not conducive to the simple operation of Bitcoin from the network.

There are actually many Layer 2 solutions like Taproot Assets that expand the Bitcoin ecosystem off-chain, including Rootstock, Stacks, Liquid Network, etc. The hype demand for inscriptions has once again pushed these expansion technologies to the forefront.

Regardless of whether the inscription is valuable or not, its popularity is due to the Bitcoin ecosystem that needs to be improved. Although the Lightning Network has been adopted in small BTC payments, no other use cases have emerged on the Bitcoin mainnet. The Taproot upgrade has brought this possibility, but due to limited performance, DeFi, GameFi and other scenarios that require high concurrency in the Ethereum ecosystem cannot be built on the Bitcoin network.

This is related to the positioning of Bitcoin. As developers Ali and Luke insist, in their eyes, Bitcoin must follow Satoshi Nakamoto's definition of "peer-to-peer electronic payment system", pursuing security, decentralization, and privacy protection. It is precisely the insistence on these characteristics that has made the Bitcoin network the world's largest and most secure blockchain network.

However, the solidity of this network requires the maintenance of thousands of miners. Only when the income of this group is guaranteed will they be willing to work as workers. That is, the value of Bitcoin can cover or even exceed the cost of maintaining the network, which means that the price of Bitcoin must be greater than the mining cost.

Currently, the price of Bitcoin has exceeded $43,000, which has doubled from the low point of the year. According to the mining cost estimation model made by Cambridge University based on the global Bitcoin electricity consumption and the number of new issuances per day, the average cost of 1 BTC is currently $42,700, which is not cost-effective.

The current surge in Bitcoin's market value is not only due to the halving of Bitcoin's block reward next year, but also due to the market's expectation of approval of a Bitcoin spot ETF in the United States, which means that the blockchain asset Bitcoin is becoming a target of the mainstream financial market.

From this point of view, this wave of Bitcoin value increase is not caused by the inscription market, and the fluctuations in the past are even more so. The reason why the inscription is so popular is that it is engraved on Bitcoin.

But what happens after the Bitcoin spot ETF? As the limited supply of Bitcoin (21 million) is mined less and less, how will its narrative unfold? Can the story around it have more plots? These are the real nerves of the community that the inscription market has touched.

As Hong Shuning, a former blockchain expert at the People's Bank of China, said, Ordinals is a high-rise building built on the beach. Its foundation is very unstable and it is impossible for it to develop into a very strong and complete ecosystem. "After more than half a year of development, we have entered the period of the biggest bubble, but the biggest benefit this bubble period brings us is that it has reawakened people's confidence in the Bitcoin ecosystem."