BIP-110: A Data Cap That Could Break Bitcoin's Flow

The scale of Ordinals-driven blockspace demand is now undeniable. Ordinals now make up 50% of all blockspace, a figure that has rapidly accelerated and signals a fundamental shift in how the network is being used. This massive data load has directly impacted core network activity, with active addresses currently sitting at their lowest levels since December 2024. The data flood appears to be crowding out regular monetary use, leading to a notable decline in on-chain utility.

This shift has hit miner revenue hard. Daily miner revenue has declined from an average of $50 million during the third quarter to roughly $40 million as the year closes. The drop underscores a critical vulnerability: the network's economic model is becoming more dependent on a dwindling block subsidy, as transaction fees have not kept pace with the surge in data-heavy activity.

An unusual fee dynamic has emerged. Ordinal inscriptions tend to have a lower fee rate than regular transactions, and this pattern extends to newer protocols like Runes. Despite contributing a large share of total transactions, these data-rich operations generate minimal fee revenue. This creates a mismatch where blockspace is consumed for low-value data, putting downward pressure on the fee market that miners rely on for long-term sustainability.

The BIP-110 Proposal: Mechanics and Market Reaction

The proposed fix is a targeted technical intervention. BIP-110 is a temporary soft fork that would cap transaction data at the consensus level, limiting OP_RETURN to 83 bytes and output sizes to 34 bytes. This aims to reverse the controversial removal of the data cap in Bitcoin Core version 30, which critics argue incentivizes spam and increases node costs.

Support for the proposal remains minimal but is growing. 583 nodes are signaling support, representing about 2.38% of the network. The primary software implementation for running this soft fork is Bitcoin Knots, an alternative node client often favored by operators critical of recent changes to the main Bitcoin Core software.

The technical review is now underway. After months of debate, developers have a release client to scrutinize. Bitcoin developers are tearing it apart to ensure the code functions correctly before any potential release. This phase is critical for identifying consensus risks and building the coordination needed for a safe activation.

Catalysts, Risks, and What to Watch

The primary catalyst for BIP-110 is converting its current 2.38% node support into a hard fork consensus. This is a multi-month process requiring coordination across the entire network. The proposal's fate hinges on whether the 583 supporting nodes can grow their signal to a critical mass that triggers activation, a timeline that remains uncertain.

The major risk is a chain split. The proposal's ideological nature means it could fracture the network into two competing chains: one maintaining uncapped data for Ordinals and Runes, and the other enforcing the cap to protect Bitcoin's monetary function. This would create a fundamental divergence in the network's purpose and user base.

The key metric to watch is a divergence in miner revenue and hash rate between potential forks. Miners must choose which chain to support, and their economic incentives will be paramount. A split would likely see hash rate and revenue flow to the chain with the most valuable data activity, creating a direct test of which network model-data-rich or money-focused-commands greater economic utility.