The launch and popularity of BRC-20 tokens and serialized NFTs on Bitcoin have instantly turned the top-ranked blockchain into a more cumbersome Ethereum.

This is not the outcome Bitcoin Core developers and miners ever imagined when they signed off on the network’s Taproot upgrade in November 2021. Bitcoin now faces many of the same problems that have long plagued Ethereum, including scammy MeMe coins and ShitCoins, and NFTs of monkey pictures taking up block space and causing transaction fees to surge.

The Bitcoin network even had to deal with a Mining Extractable Value (MEV) event, a move that meant miners would profit by reordering pending transactions.

Mati Greenspan, founder of Quantum Economics and a Bitcoin supporter since 2013, said, "I'm a little upset that I didn't realize this problem. It wasn't until these people started hyping up JPEG images on Bitcoin that I realized what we had done." He said with a wry smile.

Some Bitcoin supporters on Bitcointalk and Twitter have called the impact of Ordinals NFTs and BRC-20 tokens an attack on Bitcoin, an exploit for Taproot or simply spam clogging the network.

The move has sparked a fierce debate about whether unforeseen consequences should be expected as a result of a permissionless agreement, or whether steps need to be taken to get rid of them.

01 Why are Bitcoin transaction fees so high?

BRC-20 tokens were launched by anonymous developer Domo on March 8. They use Ordinal notation of Ordinals JSON data to deploy token contracts, mint tokens, and transfer tokens. Some people believe that this is extremely inefficient, with transaction fees four times higher than using binary code.

Adding to the inefficiency, there was a rush to mint MeMecoin. Someone would deploy a trading pair with a new token and a contract with a maximum supply, and then traders would rush to mint as many tokens as possible, on a first-come, first-served basis, at whatever rate would get them priority in trading. The market cap of these tokens has exceeded $1 billion, even though Ordinals founder Domo believes they will be worthless.

But they will continue to exist, at least in the short term, as some major wallets have begun supporting BRC-20 tokens. And new developments, such as a Uniswap fork that gathered $500,000 in “Smart BRC-20” token (SBRC-20) trading volume in just a few days, show that the construction of a new permissionless ecosystem on Bitcoin will continue.

02　Transaction fees are too high to bring the unbanked into the banking system

Greenspan noted that while the surge in interest has pushed bitcoin transactions to an all-time high, the number of unique addresses has fallen sharply, meaning fewer people are accessing the network. While transaction fee revenue has surpassed block rewards — which many believe is the only way to ensure bitcoin's security after several more halvings — it also poses a number of problems.

“I was talking to a miner yesterday and he said his income had doubled, which is great, especially before the halving, so it’s great for miners, but it’s terrible for countries like Nigeria and El Salvador because all of a sudden it costs an average of $30 to send a transaction,” he said. “The dream of using Bitcoin for financial inclusion has been put on hold for now.”

Interestingly, this isn’t the first time someone has put a token or NFT on Bitcoin. Counterparty pioneered NFTs on Bitcoin with Spells of Genesis in 2015 and Rare Pepes in 2016. And stablecoin Tether also launched a stablecoin on Bitcoin in 2014 through the Mastercoin protocol (which later became Omni).

03 Bitcoin maximalists call for a ban on spam

On the Bitcointalk forum, there has been a lot of discussion about countering an “attack on Bitcoin” that some claim was perpetrated by malicious BSV developers. Users are discussing soft forks to “enforce strict Taproot validation script sizes,” how the protocol can filter what they deem to be “spam,” and even hard forks to undo Taproot.

Bitcoin developer Luke Dashjr said, “This action should have been taken months ago. Spam filtering has always been a standard part of Bitcoin Core. It is a mistake that the existing filters are not extended to Taproot transactions, because this is a bug fix that does not actually need to wait for a major version release.”

But there are also different opinions.

Checkmate, lead chain analyst at Glassnode, told the publication that he believes this form of censorship goes against the entire ethos of Bitcoin, noting that there are already optional mempool rules that enable node operators to filter out serialization if they choose.

“In my opinion, any attempt to ban or censor these transactions is a greater attack on Bitcoin than just allowing them to exist. They are governed by consensus rules, and when a small group of people want to change the rules to prevent something they don’t like, that’s a real attack.”

But podcast host Chris Black said on Twitter that limiting transaction types to ensure the health of the network is not censorship.

“If it doesn’t depend on the content of the message or who sent the message, then it’s not censorship,” he said.

Hass McCook, a former member of the Bitcoin Mining Committee and a strong believer in Bitcoin, doesn’t like Ordinals but thinks trying to get rid of them is a step too far, saying, “The most important thing outside of Bitcoin is freedom. My overall view is that I personally don’t like it and don’t see the value in it. But I don’t want to censor it. I think it could go down a very dark path.”

“If the protocol allows something, and someone is willing to pay to do it, then that’s it.”

04 Cannot ban Ordinals

Andrew Poelstra, head of research at Blockstream and one of Taproot’s inventors, also dislikes the upgrade’s “toxic” offspring, but he doesn’t see any practical way to stop them.

“As far as I know, there is no reasonable way to prevent people from storing arbitrary data in validators without incentivizing worse behavior and/or undermining legitimate use cases,” he wrote.

“It’s impossible to just ban ‘useless data,’ ” he said, noting that people can hide useless data like NFTs inside useful data like “virtual signatures or public keys.”

“It would cost them 2x as much to do so, but if 2x was enough to incentivize storage, then this discussion wouldn’t need to be had because they would be forced to stop due to fee market competition.”

05 Ignore them and they will disappear

According to those interviewed for this article, the best-case scenario—and the most likely one—is that as the MeMe coin trend fades, so too will interest in BRC20 and NFTs.

“Congestion in the Bitcoin network is nothing new, right?” Greenspan said. “It usually comes with the hype, but when the hype is over, it goes away.”

What is most likely to happen is that people will run out of money.

But if the Ordinals continue to have too much influence on the network, there is always the core option of forking Bitcoin to modify or remove Taproot. Blec and many others have raised this possibility, although it seems mostly hypothetical at this point.

Greenspan said that while a hard fork is always possible, “it would split the network. Nobody wants that.”

McCook said the market chose Bitcoin over BCH or BSV in the 2017 scaling war, and he predicted the current version would outperform the fork with Taproot.

“I would choose Ordinals. So even though I don’t think Ordinals have any value, maybe I need to engrave something in the future where I need to absolutely protest censorship,” he said.

This could have a very powerful effect. Suppose Julian Assange decided to publish his Wikileaks information as an inscription, this is a very useful thing to do.

Greenspan agrees that the benefits of using Bitcoin to store data are only beginning to be explored.

“People are now realizing that Bitcoin has the ability to store files. I’m excited to see what, you know, forward-thinking developers will do with this new tool. Not just creating MeMe.”

07 A better token

“I believe there are definitely better design choices and optimization improvements,” Domo added when announcing the BRC-20.

Many people agree. One of the easiest improvements would be to use a binary format instead of JSON, which developer John W. Ratcliff considers "one of the least efficient data formats anyone can use." This, he argues, would reduce the size of a BRC-20 token from 89 bytes to 19 bytes.

“That means they paid four times more than necessary to submit these BRC-20 tokens,” he said.

Colin Harper, a researcher at Hashrate Index, said using binary code "could reduce bandwidth by up to 80%." However, this doesn't completely solve the problem, as Bitcoin influencer Udi Wertheimer pointed out that the surge in fees is due to token minters bidding fees to get their transactions prioritized, to mint or to snap up low-serial-number tokens in case supply runs out.

There is another way to issue assets on Bitcoin, called Taro. Domo says it is a "better solution." The Taproot Asset Representation Layer is a proposed protocol that would allow people to issue digital assets on Bitcoin and move them to the Lightning Network for fast, cheap transactions.

08 Building a Virtual Machine (VM) on Bitcoin

A more radical and experimental approach is taken by Trustless Computer, the company behind a Uniswap v2 fork called Trustless Market, which saw $500,000 in trade in its first three days.

The project’s documentation states that it is developing a Turing-complete virtual machine called BVM, built on top of Bitcoin, to enable the DeFi ecosystem.

Core team member @punk3700 told the media that it is "not Bitcoin Layer 2, but a 'protocol within Layer 1'" and is similar to Ordinals but uses SBRC-20 tokens.

Instead of “writing text files to Bitcoin,” Trustless Computer writes smart contract transactions to Bitcoin. “Raw files versus programs/logic/applications.” He claims this can reduce the bandwidth required for tokens by 80% to 90%.

“I think BRC-20 in its current form (using text files) is just a flash in the pan,” he said. “You can’t build and replace scalable financial instruments using paper and pen.”

“Our SBRC-20 implementation is different. We use smart contracts, the same ERC-20 smart contracts on Ethereum. It works exactly as designed.”

“Ordinals is version 0.1 of what’s possible on Bitcoin. Trustless Computer shows that you can build an entire DApp ecosystem on Bitcoin.”

He expects to see the deployment of MakerDAO, Aave, Compound, and other smart contracts soon, and if it works as he claims, it will have a significant impact on Bitcoin.

While the project has received attention from other major cryptocurrency news outlets, this outlet has yet to verify that their technology works as promised, and the extent to which you can integrate smart contracts with Bitcoin is controversial, so proceed with caution.

09 Can we scale Bitcoin using ZK-rollups?

The emergence of NFTs and token minting on Bitcoin shows that blockchain still cannot scale to handle growing demand, meaning the more popular it becomes, the less effective it will be.

The Lightning Network is often cited as a solution, but Nostr founder Fiatjaf pointed out that it cannot cope with the recent surge in fees. "Channels are too fragile, and it is expensive to open a channel in a high-fee environment, run a routing node, etc. At the same time, users must rely on centralized Lightning Network providers."

But Greenspan believes that gradually advancing scaling is the only secure solution to ensure Bitcoin remains strong.

“We’ve seen Segway. We’ve seen Taproot. I mean, these are all good progress and steady scaling. And for decentralized networks of this size, usually the best way to go is to scale steadily. You don’t want to rush things because you might break them. As we’ve seen.”

Parties including StarkWare and blockchain researcher Eric Wall have been working on scaling Bitcoin using zero-knowledge (ZK) Rollups, which is Ethereum’s plan to solve its very similar challenges.

Ironically, while the surge in demand caused by Ordinals suggests a need for further scaling, it also makes it less likely that the community will agree to a new hard fork to enable ZK-rollups. After all, they voted for Taproot, and what happened?

“I doubt it will ever happen,” Checkmate said.

“I’m even skeptical of soft forks because the unintended consequences of the Bitcoin Witness Discount have awakened everyone to the risks of change.”