03/19/2024 0 Comments

1. How miners learned to stop worrying and love the JPEG

Ordinals have been a polarizing phenomenon for most every subcommunity in Bitcoin — except for miners.

The meteoric rise of the new Bitcoin-native NFT standard dominated discourse for months as Ordinals flooded blockspace and buoyed transaction fees to multiyear highs. According to critics, these transactions are, at worst, an attack on Bitcoin that tainted the sanctity of scarce blockspace; at best, they are shitcoins, the play-things of gamblers that belong on casino chains like Ethereum.

Well, miners don’t give a shit if they’re shitcoins. They give a shit about making money, and Ordinals gave them a revenue boost at a time when mining income was at one of its lowest points ever. So many miners have embraced — or at the least, are ambivalent about — Ordinals/inscriptions, since they received a much-needed boost to Bitcoin mining profitability when many miners were nearly breakeven or unprofitable.

Hashprice is a measure of the USD (or BTC) amount miners can expect to earn from a unit of hashrate (for example, at $80/PH/day, a miner with 1 petahash of mining rigs — roughly 10 new-gen ASICs like the S19j Pro, for example — can earn $80 per day).

Given their positive impact on hashprice, Ordinals, a darkhorse technical advancement that few could have predicted last year, have found themselves at the center of discussions regarding Bitcoin mining economics, discussions that are more germane with each block that pulls us closer to Bitcoin’s fourth block subsidy halving.

I’m not writing this to proselytize anyone into becoming an Ordinals enjoooyer. I, for one, don’t really understand the appeal. But I do think that they’re important in the context of Bitcoin’s ever-dwindling block subsidy, so they’re worth studying to understand how they affect blockspace and mining economics — and what developments like them might mean in a future where miners subsist solely on transaction fees.

WTF IS AN ORDINAL, ANYWAY?

In NFT parlance, folks use Ordinal and inscription interchangeably, but the individual terms refer to two different aspects of the NFT standard.

An inscription is a piece of art or digital media, while an Ordinal is technically the number prescribed to an inscription to mark its place in the grand scheme of all other inscriptions. Another way to view it is that the inscription itself is the NFT, while the Ordinal is the number used to identify an individual inscription.

The data for each inscription lives in the Segregated Witness section of a transaction. As such, unlike other NFT standards, the actual art, digital media, or data is uploaded directly to Bitcoin’s blockchain. Since the inscriptions are fully on-chain, you could argue that they are the purest form of NFT available as they benefit from the blockchain’s immutability.

NOT ALL INSCRIPTIONS ARE CREATED EQUAL

When you understand that inscriptions are actual on-chain data, you can appreciate some of the critiques and concerns from detractors; if a bunch of NFT degens are inscribing monkey JPEGs and dickbutts and God-knows-what-else on-chain, then this crowds out economic (and potentially necessary) transactions.

This concern was aggravated by the fact that the arbitrary data for each inscription benefits from a transaction fee discount. As a scalability measure, Bitcoin’s Segregated Witness upgrade modified the transaction structure so that the witness data for a private key signature and public key was moved from the transaction hash field to another part of the block. Bitcoin discounts SegWit data, so it requires fewer satoshis per byte in transaction fees to transact. The arbitrary data for an inscription lives in the SegWit field of a transaction, so it’s entitled to the SegWit discount. Cue the pitchforks.

This discount is why, despite the first wave of image-based inscriptions clogging block space in February/March/April, transaction fees did not meaningfully increase; block sizes swelled when trendsetting inscribers flushed the blockchain with thousands of JPEGs for the first inscriptions collections, but these all benefited from SegWit’s 4-to-1 data discount versus normal transactions. Perhaps intuitively, it wasn’t until less data-heavy, text-based inscriptions from BRC-20 tokens became the most popular inscription type that transaction fees soared.

QUANTIFYING TRANSACTION FEE COLLATERAL DAMAGE

The bulk of transaction fee increases in 2023 has not come directly from fees associated with Ordinals; it has come from indirect fee pressure on other transactions.

Per data from independent analyst Data Always’ Dune dashboard, as of November 12, 2023, miners have raked in $70.3 million fees from Ordinals. Seems bigly, but it’s only 19.4% of the $368.2 million in transaction fees that miners have earned in total since inscriptions debuted on December 14, 2022. To put this into further perspective, there have been 40.2 million inscription transactions, which equates to 30% of all transaction volume since December 14. So inscriptions have accounted for one-third of transaction volume over the last year but only one-fifth of all fees.

As for the other fees, many of them are the result of indirect fee pressure from inscriptions — that is, fees that do not come directly from inscriptions themselves, but from the pressure that inscriptions exert on the average transaction fee needed to clear a Bitcoin transaction in a reasonable time frame.

BLESSING AND A CURSE

Inscriptions are a blessing and a curse. They’re a godsend for miners, but they can be a pain in the ass for other Bitcoiners, particularly those who have to send transactions on the network every day.

That said, blockspace is an open market. So I don’t have to like Ordinals to recognize that it’s not my place to police someone else’s spending. Nor is it my place to censor a transaction that pays for blockspace on the f(r)ee market. That’s part of the point of a permissionless blockchain, after all: to make transactions other people don’t want you to make.

2. Bitcoin miners increasingly rely on government handouts to compete

Bitcoin miners have evolved from the beginning when anyone could mine with their CPU at home to a model mostly dominated by sophisticated conglomerates, many of whom employ media relations personnel and use lawsuits, lobbyists, and other corporate tactics to increase their profits.

NASDAQ-listed miner Riot Blockchain recently joined a case against the US Department of Energy, in an attempt to prevent the release of survey data about Bitcoin miners’ energy usage. That data would have helped the Department of Energy to recommend better electricity usage policies, however, miners wanted to hide their energy usage from public view, so they filed a legal complaint in a Waco, Texas courthouse.

Keeping Bitcoin electricity usage private

The lawsuit filed by the Texas Blockchain Council (which has Bitcoin miners as members), claimed that the survey would cause irreparable harm to their business. Furthermore, Council members alleged the Department of Energy violated the Paperwork Reduction Act by failing to provide 60 days’ notice and by threatening “criminal fines and civil penalties” against Texas Blockchain Council members.

Texas Blockchain Council President Lee Bratcher said in a press release announcing the lawsuit, “The EIA’s actions represent an alarming precedent of government intrusion into private industry operations without just cause or proper process.”

In addition to these legal arguments, it is not difficult to see an agenda for these miners’ political actions. Not only would the survey have given offshore competitors visibility into mining operations, but the disclosure could have had negative media consequences, with the potential to affect their access to grants and subsidies.

Their lawsuit worked. Government officials have promised to destroy all data that the Department of Energy collected in an apparent settlement with the Texas Blockchain Council. A court order also blocked any attempts to continue the survey until the matter could be litigated or settled.

3. Biden resurrects 30% crypto mining tax in new budget proposal

United States President Joe Biden has revived the idea of a 30% tax on electricity used by crypto miners in his budget proposal for 2025.

In a U.S. Department of the Treasury document titled “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals,” the administration highlighted that current laws do not address digital assets apart from broker and cash transaction reporting. Because of this, the administration wants to impose an excise tax — taxes levied on goods like fuel — on digital asset mining. The Treasury wrote:

“Any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used in digital asset mining.”

If implemented, crypto mining companies must report the amount and type of electricity they use. In addition, firms must report the value of the electricity used if they purchase it externally. Meanwhile, Miners who lease computational capacity would be mandated to report the value of the electricity of the company that leased them the capacity. The value would then serve as the tax base.

According to the administration, this proposal would be effective for taxable years after Dec. 31, 2024. The government will introduce the tax in three phases: 10% in the first year, 20% in the second year and 30% in the third year.