8th May 2023
Lightning is the fast (VISA / MASTERCARD) like payment system for Bitcoin introduced in 2017 to process small transactions “off chain” almost instantly and for almost zero fees.
Ordinals are Bitcoin’s equivalent to NFT’s (Non fungible Tokens), original works of digital art in the form of JPEGs.
The mempool is a backlog of Bitcoin transactions waiting to be processed and included in the Blockchain. A new block is “mined” approximately every 10 minutes and that block can contain just over 4,000 transactions, meaning up to a maximum of around 7 transactions can occur per second on Bitcoin.
Ordinals are different to NFTs in that the JPEG itself is stored within the Blockchain. Compared with Ethereum NFT’s which only contain an external link to the JPEG along with the public key of the owner.
Because the Bitcoin blockchain is capable of storing the artwork itself, it is rapidly becoming the preferred option for online galleries selling their art, as an external link, as used by Ethereum is prone to ageing with the site hosting the artwork disappearing over time.
Up until now, Ordinals have been added to the blockchain with low fees / low priority, only when the network isn’t busy. Waiting until few traditional Bitcoin transactions are waiting to be processed. It was a good way to use up spare capacity on the blockchain.
However, their growing popularity has meant that artists and galleries are selling more and more Ordinals and are less willing to wait hours or days for their pieces to be added to the blockchain.
Recently a faster route to add ordinals to the Bitcoin blockchain was discovered.
Enter the Bitcoin algorithm CPFP “Child Pays for Parent”. This is a piece of code introduced to allow transactions whose fees have been set too low to be processed expediently by bumping them up the waiting list. “Child Pays for Parent” allows a new transaction with a much higher fee to allocate some of its fee to an older, waiting transaction. The rule being the older transaction must be processed first in order for the miner to earn the new higher fee. This had a very legitimate use in forcing through transactions, whose fees had been set too low to be added to the blockchain anytime soon.
Recently, it was discovered this technique could be adopted by Ordinals, by expediting their low fee and queue position by attaching a higher “CPFP” transaction to it. So what’s the problem? Normally a Block on the blockchain can either store over 4,000 transactions or a handful of JPEG ordinals. Now with ordinals jumping to the front of the queue, they are taking up the finite block space with their JPEGs, thus forcing high priority Bitcoin payments down the queue. This has forced bitcoin transactions to up their fees to compete with Ordinals, which in turn is increasing CPFP transactions to stay ahead.
For the first time since 2017, mining fees in block 788695 mined on the 23rd May 2023 at 23:06 have exceed the block reward of 6.25 BTC, with transaction fees exceeding 650 sat/VB ($25) per transaction.
Not only are regular transactions impacted, but Lightning Node Runners providing liquidity are also affected. To provide liquidity to route Lightning payments, Node operators, such as us, regularly open channels to other node operators by issuing transactions on layer 1 of the Bitcoin blockchain. To do this efficiently and profitably, node operators typically wait until layer 1 fees are low (1 – 4 sats/vB – a few pennies). Because Lightning networks charge such small fees, their operating costs have to be low, meaning channel openings and closings have to be done at off-peak hours when fees are low. With Ordinals now flooding the network, the lowest fees are now in the range of 32 sats / vB (around $1.25). Thus making liquidity management through layer 1 impossible.
Without the ability to manage liquidity through Layer 1 of the Bitcoin network, not only will existing channels stagnate, but it will be impossible to open new channels to support the growth of the network. The only solution is to increase lightning fees to compensate this. But this would mean the end of almost free lightning routing and fees, meaning lightning would suddenly be no better than VISA or MASTERCARD that it looks to disrupt.
Some would argue this is how free markets work, others would point out that trying to emulate functionality of a competing service (such as Ethereum NFTs) is not necessary and that having a network or service do one thing well is sufficient instead of trying to do everything badly.
What will happen in the future? Who knows, but for the moment, Ordinals are winning and the current Lightning Network is crippled.