Removing OP_Return: What Impact Does It Have on the Bitcoin Ecosystem?

Recently, there has been a proposal to remove the size limit on OP_Return outputs in the Bitcoin Core software code repository. OP_Return is an output type designed to store arbitrary (non-transaction) data on the Bitcoin blockchain. Under the existing size limit, Bitcoin Core nodes do not relay transactions that exceed this limit. However, this is not a consensus rule, and Bitcoin Core nodes will always consider blocks containing such transaction outputs as valid blocks and accept them.

The removal of this restriction has sparked some controversy, with some arguing that the restriction is necessary to prevent or curb spam. Many who advocate for keeping the restriction hope that Bitcoin is used solely for "financial transactions" and wish to regard data related to images and the like as non-standard transactions.

Ordinals craze

However, the trend of storing images on the Bitcoin blockchain has long appeared. This trend began in early 2023 and is known as "Ordinals." Unlike using OP_Return outputs, images are stored in the input scripts of Taproot expenditures. The vast majority of these Ordinals transactions are standard transactions, which are relayed by Bitcoin core nodes. In some cases, this Taproot method is cheaper than OP_Return because it benefits from a 75% discount on witness data brought by the Segregated Witness (SegWit) upgrade.

According to a dashboard on Dune.com, the usage of Ordinals has been consistently high, with over 88 million inscriptions and transaction fees paid exceeding 7,000 Bitcoins. At the current Bitcoin price, this amounts to over 660 million dollars. The Ordinals space has seen the emergence of many businesses looking to capitalize on this growth trend, with millions of dollars already invested in Ordinals-related tools, such as wallets, inscription trading systems, and methods for creating Ordinals and submitting them to the network.

Many people view these images as spam. From our perspective, in this context, we tend to consider spam from the intent of the person creating the transaction. Are they trying to intentionally harm others, or are they trying to profit from it? With this in mind, we believe that storing images on the blockchain is not always spam, as those doing so seem to primarily be doing it for personal entertainment or speculation and trying to profit. However, if someone puts an image on the blockchain to maliciously attack others (which does occur to some extent), then yes, that is spam.

Although images on the blockchain may seem like spam to many, we agree with the subjective value theory:

The value of various consumer goods and services does not objectively and intrinsically arise from the things themselves, but rather depends on the individual conducting the assessment. His valuation is a subjective matter, and even he cannot reduce it to objective terms or measurement standards.

Some people seem to enjoy images on the blockchain and have already paid over 600 million dollars for them. Since the value of these items is subjective, what right do we have to question it? We can only say that we do not value these images and will not pay for them. We believe that those businesses and individuals hoping to profit from investing in this field are likely to lose money in the end. But let the market decide!

Our view is that the horse has already bolted, and people have already widely used blockchain for storing images, and retaining the OP_Return limitation does not change this. Systems that use a part of the Taproot input script to store images already exist, and in terms of bytes, this method is four times cheaper than OP_Return.

Bitcoin Mining

We have been focused on the Bitcoin mining sector for over 14 years. We have witnessed the transformation of Bitcoin mining from a hobbyist activity into an industry with publicly listed companies. We closely track 10 of these publicly traded companies and have nearly read all of their public disclosure documents. These miners report their financial statements quarterly and update their production data to the market monthly. We frequently communicate with the investor relations officers and management teams of these companies. These management teams are very fond of Ordinals, viewing it as a potential revenue driver, which is crucial in a highly competitive industry. The notion that Ordinals are spam and should be filtered out will not resonate with these professional management teams now or in the future. Some may not like it, but that is the business reality. It is also the reality that some of us have been anticipating. Bitcoin has grown and become a business, and businesses need to maximize profits and return on equity.

Bitcoin is about incentives and the pursuit of incentive compatibility. The operation of Bitcoin is not because this space is composed of a group of altruistic, well-meaning, and aligned individuals. The Bitcoin space consists of a diverse range of people with different perspectives and ideas. The operation of Bitcoin is not because we are all on the same team, but because it is robust and the incentive mechanisms are aligned. We believe it is time to remove the OP_Return restriction, this paternalistic protection measure, and embrace the economic reality of the block space market.

If larger 'OP_Return' outputs are still considered non-standard transactions, but people still want to use them, miners will only set up businesses that receive these transactions directly, bypassing the public mempool. Marathon [ticker:MARA US], the largest publicly traded miner, has already done just that. However, as far as we know, this service offered by Marathon is not popular at the moment. Still, if miners start receiving transactions off-chain, this has a lot of negative effects for Bitcoin. This will mean that the difference between the transactions in the block produced by the miner and the transactions that users expect to see will increase. This could break techniques such as compact blocks, which help blocks travel faster through the network by eliminating the need for nodes to download transactions twice (once for the mempool and once after the transaction enters the block). It may be wise for Bitcoin Core to remove this restriction upfront to ensure that compact blocks are not broken. If it is corrupted and the block propagation delay increases, then this could benefit larger miners and mining pools at the expense of smaller miners, exacerbating the centralization of mining.

The establishment of enterprises that accept non-standard transactions by miners and mining pools can also bring about other negative consequences. Setting up such enterprises incurs costs, such as technical costs and marketing costs. This business model may also be monopolistic, as users might prefer to use a simple platform to submit their non-standard transactions. This raises the barriers to entry for mining and mining pools, making it more difficult for smaller participants to mine. This again leads to more centralization pressure. Once these systems develop, even if the strategies of Bitcoin Core are relaxed later on, it will be difficult to stop these businesses. For example, once the infrastructure is built, lazy customers may continue to use these services instead of the public mempool.

We believe that Bitcoin developers should strive to keep the software competitive. Making the open-source trading choice algorithm competitive in maximizing revenue, preventing miners from building their own proprietary algorithms, and making the public mempool competitive to stop miners from establishing private mempool operations. We understand that not everyone thinks this way, but this is the current economic reality in the mining field. We hope that the mempool can operate effectively, and we believe that removing the OP_Return restriction is a better choice than burying our heads in the sand and pretending that garbage transactions are not being mined. The choice is between having an effective mempool or an ineffective mempool.

Node Operator

If the blockchain is assumed to be full, then the increase in 'OP_Return' usage actually makes it easier to run a full node. Keep in mind that 'OP_Return' doesn't have a witness discount, so the maximum size of a block containing only 'OP_Return' output is 1MB, which is much smaller than the maximum of 4MB. At the same time, the 'OP_Return' output doesn't bloat the UTXO set. Other protocols use alternative systems, such as fake addresses, to store arbitrary data, and this approach has serious negative consequences for those seeking to verify all Bitcoin transactions. 'OP_Return' is simply data that doesn't need to be validated and then can be ignored. Those who are worried about the cheaper cost of node operations need not worry about the problems that come with removing the 'OP_Return' limit.

How do we stop spam?

At the beginning of this section, we will quote Eric Voskuil's work "The Economics of Cryptography". In the book, Eric writes:

Resistance to censorship is the result of transaction fees.

The core goal of Bitcoin is to resist censorship, and transaction fees are a fundamental component of the security model aimed at achieving that goal. Attackers hoping to censor transactions cannot succeed by encouraging node operators to filter out certain transactions from their memory pools. If that were possible, Bitcoin would not be particularly effective at preventing censorship. Instead, everything revolves around fees, fee rates, and miners trying to maximize their income from each block. This holds true regardless of whether the transaction is spam, whether it uses OP_Return, or whether it employs Segregated Witness. To enter the blockchain, one must bid higher than other users, which is the only viable spam prevention model. As Satoshi Nakamoto said:

As long as you're willing to bid higher than other users, you can almost always get in at a certain price.

This garbage information prevention model has been understood for many years. As we mentioned in our article on Segregated Witness in September 2017:

Indeed, spammers can generate a 4MB block with fees equivalent to a 1MB block. This is a potential issue. However, it does not change the security properties of the system, as a 4MB block is not cheaper than a 1MB block; it simply costs the same. Regardless of whether Segregated Witness is used, spammers can always bid higher than legitimate users. In fact, attackers can simply generate 1MB of non-witness data to compete with 'legitimate' users, and the cost of this attack method remains the same as before. Segregated Witness does not and cannot change such a security dynamic: if an attacker wants to bid higher than users with spam data, they can do so.

To ensure that your transactions are confirmed in a timely manner, you need to have good information about what miners may be mining in the next block so that you can set appropriate transaction fees. This is also another reason why node operators may want their memory pool strategies to align as closely as possible with the actual operations of miners. If Bitcoin Core does not remove the relay restriction on OP_Return, users will have to run other software or use third-party websites to obtain information about what transaction fees to use.

Admittedly, there has always been a limit to the 'OP_Return' output, and Bitcoin has been working well for over a decade with that limit. So why remove it now? In our opinion, this reasoning is a bit like the discussion that often took place during the block size battles from 2015 to 2017. The "big blockers" often say that Bitcoin has been working well for years without a full block, so why is a full block being introduced now? The answer is that it's just the economic reality of success. As former Bitcoin developer Gregory Maxwell put it in an important 2015 email:

The demand for cheap, highly replicable, and permanent storage is limitless.

In our view, these changes are always inevitable. The demand to store images on the blockchain is infinite, and the only way to prevent this demand is through transaction fees. Some people have always believed this, while others do not, which may lead to arguments.

We are fortunate that the small block faction won the block size debate. If the big block faction had won and adopted something like Bitcoin XT, the block size limit could now be around 250MB. Blocks could be filled with images, with 250MB of images every 10 minutes. This could make it impossible for ordinary users to run nodes, and it might have already stifled Bitcoin.

Conclusion

We hold a certain supportive attitude towards the removal of the OP_Return restriction. Now is the time to face economic realities and maintain competitiveness. We hope that the local mempool can operate effectively, and we wish for the public p2p transaction broadcasting system to become the ultimate winner. If attackers or spammers want to bid higher than other users, they can do so, and we should embrace this reality. The budget for spam will not last forever, and many investors in blockchain assets are likely to collectively lose millions of dollars. People will learn painful lessons, and as a result, Bitcoin will become stronger.