The growth of Non-Fungible Tokens (NFTs) integrated in the blockchain of the Bitcoin network may not be the best decision for Bitcoin's long-term viability as a digital currency. Although the new technology that crypto fans are buzzing about allows up to four megabytes of data to be inserted into the Bitcoin blockchain, it has caused tensions among the Bitcoin community. The current advancement raises several critical questions about Bitcoin's future and usefulness.

 

The Bitcoin blockchain has always featured random, non-financial data, with the first example being the secret message in the genesis block. SegWit and Taproot, two key enhancements to Bitcoin, enhanced the amount of data that may be included on the Bitcoin network.

 

But, inscriptions have permitted the incorporation of this data with a manufactured ordering system, creating an atmosphere of non-fungibility over the satoshis, which are minuscule chunks of bitcoin that are equivalent to a penny. While Bitcoin's fungible unit of account, the satoshi, differs from bitcoin-inscribed NFTs, the question is whether converting Bitcoin into a public data store is beneficial.

Bitcoin NFTs

To understand the impact of Bitcoin NFTs, transactions should be divided into two categories: financial transactions and non-financial transactions. Financial transactions are value transfers from one party to another, and they were the original goal of Bitcoin as a peer-to-peer electronic payment system. These transactions make use of Bitcoin's fundamental computational framework, which mixes value transfers (satoshis) with digital signatures that unlock that value.

 

NFTs, on the other hand, incorporate arbitrary data into the transaction, which exceeds the size of the normal components. Medical records, 3D-printed designs, land titles, audio files, pornography, and political pictures are examples of such data, as are digital monkeys.

 

Since the advent of inscriptions, NFTs have taken up more space in the limited Bitcoin block space. When the blocks fill up, as they did recently, the Bitcoin transaction fee market clears by raising prices, making Bitcoin less expensive for financial transactions.

 

Increased Transaction Fees

The increased use of NFTs and inscriptions has resulted in greater transaction fees as blocks fill up faster. While proponents of inscriptions say that higher fees will benefit miners and force users to run additional nodes, the fact is that higher fees will drive financial users away from Bitcoin and towards other options.

 

Inscription supporters claim that increasing transaction fees are not a concern because they accrue to miners and force users to run additional nodes. Some of these new users may begin using Bitcoin for monetary purposes, thereby raising the network's security budget and preparing Bitcoin for the future when the block subsidy for miners expires. Third, the bitcoin NFT trend will motivate future Bitcoin developers and entrepreneurs to create better financial tools in order to compete with the increased attention that Bitcoin blocks are receiving from the art world. Fourth, NFTs have the potential to increase traffic to the Lightning Network.

 

These theories, however, overlook the equilibrium impacts of diverse Bitcoin users. Demand for Bitcoin block space originates from two distinct sources: financial transactions and non-financial transactions (NFTs), although they all settle in a single market. If the fee market clears at a higher price due to increased NFT demand, the higher price will be borne by all users. Higher costs will drive financial users away from Bitcoin and towards other options, most likely in the conventional banking system. The Lightning Network is still in its early stages, and most financial use cases continue to rely heavily on the Bitcoin blockchain's basic layer.

 

Everything else being equal, inscriptions may promote Bitcoin acceptance among NFT users but inhibit adoption among financial users. A Tribeca art collector can store a Bored Ape on Bitcoin, but a Dhaka bank couldn't afford to settle a transaction with Bitcoin.

The Bitcoin Future

Finally, it is time for the Bitcoin community to have a serious discussion about the cryptocurrency's future. Although inscriptions and NFTs may enhance Bitcoin demand, they also have the ability to devalue Bitcoin as a digital currency. As a result, we must decide whether we want a Bitcoin that acts as a public data repository or a Bitcoin that functions as a digital currency.

 

There is no simple answer to this topic, but it is evident that the long-term consequences of inscriptions and NFTs for the future of Bitcoin must be carefully considered. It is up to us, as users, to determine which version of Bitcoin we want to see in the coming years.