How Do OP Return Transactions Impact Bitcoin?
This blog post is based on the BRL Working Paper “Dominating OP Returns: The Impact of Omni and Veriblock on Bitcoin” by our researchers Dr. Elias Strehle and Fred Steinmetz. Read the full paper here.
Many blockchains are multipurpose platforms. Their scripting capabilities enable a wide range of different applications, from decentralised insurance to breeding digital pets. Bitcoin is different. It was built to serve a single purpose: the operation of a decentralized and secure digital currency. Its scripting capabilities are intentionally limited—to increase security, but also to make it difficult to use Bitcoin for anything else than the transfer of bitcoins.
One unintended use, however, turned out to be both popular and difficult to prevent: storing arbitrary data on Bitcoin. Early users found creative ways of inserting links, texts, and even images into the blockchain. This was often accomplished by creating “fake” transactions with unspendable transaction outputs. These transactions had the undesirable side effect of permanently clogging the memory of Bitcoin nodes. Bitcoin’s core developers reacted, albeit grudgingly, and released the OP Return operator as a less harmful method for storing arbitrary data. Since its release in 2014, the OP Return operator has become an integral part of Bitcoin. It is being used to implement a wide range of applications, such as notarization, digital rights management, and financial services.
Until 2017, OP Return transactions played a minor role in the Bitcoin ecosystem, accounting for less than 2% of new transactions. This share increased throughout 2017 and the first half of 2018. Then it exploded. In 2019, OP Return transactions accounted for more than 20% of all transactions. The Bitcoin community was not amused. Service providers whose applications relied on OP Return transactions were accused of raising transaction fees and crowding out “real” Bitcoin transactions. The service providers begged to differ, of course, and emphasized how their innovations would create increased demand for the bitcoin token and thus benefit the entire network.
Who was right? Our research paper “Dominating OP Returns: The Impact of Omni and Veriblock on Bitcoin” studies how the surge in the number of OP Return transactions impacted the Bitcoin ecosystem. The results are based on an in-depth analysis of all 147.6 million transactions published on Bitcoin between September 14, 2018, and December 31, 2019.
We identified twenty-seven services which published OP Return transactions during this time. The following table lists the ten that were most active. The full table can be found in the research paper.