Sidechains and layer 2s are most often associated with Ethereum. However, efforts to scale Bitcoin have also focused on reducing congestion by processing transactions away from the main blockchain.
Demonstrating the need for Bitcoin scaling solutions, a rise in Ordinals activity has fueled a recent spike in transaction fees as users embrace the new token types.
In January 2023, the Ordinals protocol introduced the concept of Bitcoin NFTs. By allowing users to inscribe data on individual satoshis, Ordinals has fueled a wave of new Bitcoin use cases that go well beyond the blockchain’s original purpose of moving BTC from wallet to wallet.
Shortly after, in March, the BRC-20 standard was developed as a method of minting fungible token collections that live on the Bitcoin blockchain.
But with the rising interest in NFTs and BRC-20 tokens, Bitcoin transaction fees have also climbed. After gathering pace for weeks, average transaction fees have soared since the end of October, hitting a 6-month high of over $16 on November 9.
Among some Bitcoiners, the recent spike in fees has confirmed their fears that Ordinals would inevitably clog the network. But despite grumbling from certain quarters, the new token and transaction types are here to stay.
Thankfully, a burgeoning ecosystem of Bitcoin sidechains and scaling protocols has the potential to streamline Ordinals transactions and return fees to a more manageable level.
In the 14 years since Bitcoin’s genesis, the volume of transaction data has exploded, and the emergence of Ordinals is only the latest trend to put pressure on the blockchain’s limited throughput.
As researchers turned their attention to the Bitcoin scalability challenge from the mid-2010s onward, the initial focus was on enabling faster and cheaper transactions. For example, the Lightning Network was launched in 2019 as a dedicated Layer 2 designed to power peer-to-peer BTC micropayments.
In the context of Ordinals, bridging NFTs and BRC-20 tokens to more efficient sidechains can dramatically lower fees and create a more frictionless trading environment.
For example, Bioniq uses the Internet Computer Protocol (ICP) to wrap Ordinals NFTs, which can then be traded among users without incurring transaction fees.
Likewise, Bitmos is a dedicated blockchain network built on Cosmos, designed to enhance the scalability of Ordinals projects. Once the platform launches next year, a cross-chain bridge will let users create wrapped BRC-20 tokens that can move freely across Cosmos chains.
As Ordinals evolve, bridging and scaling solutions could power new, more complex use cases for the underlying Bitcoin-based assets.
Describing this process, Bioniq CEO Bob Bodily said the booming market for BRC-20 tokens reflects demand for more sophisticated trading infrastructure that deploys Bitcoin as its consensus layer.
“People really want DeFi to happen on Bitcoin,” he observed in an interview with CCN. And although it might not be possible to build an Ethereum-style decentralized exchange on Bitcoin today, Bodily expects that Ordinals will continue to drive innovation and advance the blockchain’s functionality.