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.
Top 10 Publishers of OP Return transactions on Bitcoin
between September 14, 2018, and December 31, 2019
|Service||Transactions||Average transaction (sat/vbyte)|
Two services account for the vast majority of OP Return transactions: Omni/Tether and Veriblock. The “stable coin” Tether (USDT), whose value is pegged to the US Dollar, is probably the most famous product based on an OP Return service. It operates on the Bitcoin blockchain via the Omni Layer protocol. Veriblock is a blockchain project built around a novel security mechanism called Proof-of-Proof (PoP), which combines notarization of the current state of Veriblock’s blockchain with a complex system of mining rewards. Almost overnight, Veriblock became one of the largest publisher of OP Return transactions on Bitcoin after its launch in September 2018.
The sheer number of transactions, however, is only one part of the story. Bitcoin miners give preferential treatment to transactions which offer a higher transaction fee. Transaction fees are measured in satoshi per virtual byte, or sat/vbyte in short. (A satoshi is the smallest monetary unit on Bitcoin; 100 million satoshi equal one bitcoin. Virtual size, measured in vbytes, is the size of a Bitcoin transaction relative to the block size limit of one million vbytes.) The average transaction in our sample paid 37.98 sat/vbyte. Omni/Tether transactions paid a whopping 67.92 sat/vbyte and Veriblock transactions paid only 5.45 sat/vbyte. This tremendous difference adds up: Although Veriblock published significantly more transactions during our sample period, it paid only BTC 273 (approximately USD 2 million at 7,000 USD/BTC) transaction fees in total, compared to BTC 2,929 (USD 21 million) for Omni/Tether.
Our research paper explores possible causes for this. Regardless of the cause, however, the difference in transaction fees implies that Omni/Tether and Veriblock affected the Bitcoin ecosystem in very different ways. The high transaction fees paid by Omni/Tether transactions were good news for Bitcoin miners and speculators. But they also left everyone who published transactions on Bitcoin with two options: match the high fees of Omni/Tether transactions or get in line behind them. In this sense, the popularity of Tether impeded Bitcoin’s intended functionality as a payment infrastructure for bitcoin. It seems likely that many Bitcoin users have been glad to see Tether move on from Bitcoin to other blockchains like Ethereum. The transaction fees offered by Veriblock transactions, on the other hand, were too low to present serious competition for other transactions. Veriblock’s activity on Bitcoin is more appropriately viewed as a supplement to, rather than a competitor of, regular Bitcoin activity. Metaphorically speaking, Veriblock transactions filled new Bitcoin blocks in the way that padding fills the empty space in a parcel.
In two upcoming blog posts, we will dive deeper into the impact that Omni/Tether and Veriblock have had on Bitcoin over our sample period and explore the connection between transaction timing and transaction fees.