The Bitcoin blockchain is almost similar to a secure digital vault safeguarded with an unbreakable chain. Every transaction on the Bitcoin blockchain stays there for eternity, without the fear of anyone modifying the transaction details. The capability of Bitcoin blockchain to revolutionize money is obviously one of its biggest strengths. You must also know about […]
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The Bitcoin blockchain is almost similar to a secure digital vault safeguarded with an unbreakable chain. Every transaction on the Bitcoin blockchain stays there for eternity, without the fear of anyone modifying the transaction details. The capability of Bitcoin blockchain to revolutionize money is obviously one of its biggest strengths. You must also know about a unique opcode, OP_RETURN in Bitcoin, to understand how Bitcoin can store arbitrary data.

It is important to note that storing arbitrary data is not about saving your family photos on the Bitcoin blockchain. On the contrary, it focuses on embedding small and immutable chunks of information that open the doors to create multiple innovative applications. Let us learn more about the “OP_RETURN” opcode and its utility in the Bitcoin blockchain.

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Exploring Bitcoin Beyond the Crypto Transactions

The first introduction to Bitcoin painted it as a decentralized electronic cash system. With the help of blockchain technology, the blocks of Bitcoin network record every transaction on the ledger. At the same time, the distinctive traits of Bitcoin blockchain such as decentralization, public verification and tamper-proof nature attracted developers. The attention of developers on Bitcoin blockchain created new avenues for using Bitcoin for something more than virtual currency. 

The thought of storing data on blockchain emerged for the first time as developers discovered that the Bitcoin ledger can store non-financial data. However, early attempts to store data on Bitcoin were inefficient and resulted in various issues. For instance, storing unspendable addresses created blockchain bloat since all the nodes have to track the unspendable outputs. It resulted in expansion of the size of Unspent Transaction Output or UTXO set, which requires more memory for operation of the nodes.

How Does OP_RETURN Help in Storing Arbitrary Data?

The need for data embedding alongside addressing the concerns of blockchain bloat led to the arrival of OP_RETURN. The Bitcoin developer community introduced the “OP_RETURN” opcode in 2014. You can review answers to “What is OP_RETURN in Bitcoin?” and discover that it is just a special script opcode for adding arbitrary data to the output of a transaction. One of the distinctive highlights of “OP_RETURN” outputs is that they cannot be spent. Any Bitcoin tokens linked to an “OP_RETURN” output will be burned and the UTXO set does not need to track the output. As a result, the opcode ensures a more efficient approach with reduced overheads for data storage on blockchain.

You can notice that making “OP_RETURN” outputs unspendable is an effective design choice. Since “OP_RETURN” transactions are not included in the UTXO set, they don’t consume memory of the full nodes. The unique design choice addresses the concerns of ‘blockchain bloat’ by supporting limited data storage without affecting the decentralization and efficiency of the network. 

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Workflow of OP_RETURN

The most crucial highlight in any guide on ‘OP_RETURN’ is its working mechanism. You can use a Bitcoin OP_RETURN example transaction to understand how the special opcode works. The standard Bitcoin transaction involves the output specifying the address of the recipient and the amount of Bitcoin you want to send. The ‘OP_RETURN’ opcode ensures that Bitcoin transactions can have an output which will not receive any Bitcoins. In addition, the transaction also includes a script featuring the “OP_RETURN” opcode accompanied with arbitrary data.

Here is a breakdown of the individual steps in the working of ‘OP_RETURN’ opcode.

• The first step begins when a user initiates a Bitcoin transaction. 
• In the second step, you have to add a special output i.e. the OP_RETURN output, which has a zero value. 
• You will note that the locking script or scriptPubKey of the zero-value output starts with ‘OP_RETURN’ and then includes the desired data pushed on it. The pushed data is generally a hexadecimal code for the arbitrary information that you want to store.
• Once the data embedding is complete, the transaction will be broadcast across the Bitcoin network. Miners will add the transaction to a block when it complies with the consensus rules and mempool policies. 
• After confirmation of a transaction in a block, the embedded data will become an immutable component of the Bitcoin blockchain.

Discovering New Use Cases of Bitcoin with OP_RETURN

With the introduction of OP_RETURN in blockchain, you can find a wide array of applications that can transform Bitcoin into a trusted platform for data-anchoring services. The following use cases of OP_RETURN prove why it is an innovative advancement for the Bitcoin blockchain.

• Decentralized Apps and Layer-2 Protocols

The utility of ‘OP_RETURN’ in Bitcoin blockchain is seen in the fact that it helps in anchoring data from different layer-2 protocols and decentralized apps. Sidechains or state channel networks can leverage ‘OP_RETURN’ to embed a summary of the off-chain state on the Bitcoin blockchain. It will help in supporting scaling solutions that need occasional interactions with the main blockchain to achieve better integrity and security.

• Asset Issuance and Colored Coins 

Prior to the arrival of advanced token standards, OP_RETURN served as a primary factor for encouraging the development of ‘Colored Coins’. The opcode helped in coloring specific Satoshis or the smallest units of Bitcoin with metadata for representing other assets like shares in digital collectibles or shares in an organization. It helped in tracking and transferring ‘colored’ assets on Bitcoin, which served as a blueprint for tokenization. 

• Proof of Existence 

The earliest example of applying OP_RETURN in Bitcoin is evident in timestamping of documents and digital files. The process involved taking a cryptographic hash of a document and embedding the hash in the OP_RETURN output. It ensures that you can prove the existence of the specific document at a particular point of time. The OP_RETURN opcode serves a significant role in safeguarding intellectual property rights and documentation of legal agreements.

• NFTs and Digital Collectibles

The OP_RETURN opcode has a limited data capacity and many would think twice about its usability for NFTs and digital collectibles. The workflow of ‘OP_RETURN’ involves data embedding, which paved the path for introducing more sophisticated approaches to represent digital collectibles. You can notice how ‘OP_RETURN’ is a vital tool for promoting the rise of Bitcoin Ordinals and BRC-20 tokens which require larger storage. Future developments on Bitcoin blockchain, like Runes, might use ‘OP_RETURN’ in their protocol and BRC-20 tokens can shift to ‘OP_RETURN’ after limit removal.

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Limitations of OP_RETURN

The different ways to use OP_RETURN for storing data on blockchain prove that it is an innovative advancement for Bitcoin. On the other hand, you must also know that the opcode has some limitations that have been subject to debates within the Bitcoin community. You should keep an eye on the following limitations of ‘OP_RETURN’ to make the best use of it.

• Limited Data Size

The first aspect that you notice in the setbacks of the Bitcoin opcode for arbitrary data storage is the data size limit. OP_RETURN has an extremely small data size limit, 80 bytes, which restricts the amount and type of information that you can embed directly in the output. The limitation is in place for preventing excessive growth of the network and maintaining the network efficiency.

• No Direct Utility 

While the concept of storing non-financial data on Bitcoin with OP_RETURN seems interesting, it does not qualify as a valuable utility. The data embedded in ‘OP_RETURN’ output does not have any significance for the Bitcoin protocol. The utility of ‘OP_RETURN’ depends largely on the external applications which interpret the data.

• Burden of Additional Costs

One of the prominent highlights in answers to “What is OP_RETURN in Bitcoin?” focuses on the fact that OP_RETURN outputs have null value. However, the transactions will still impose the burden of fees according to their size. Imagine storing data in small chunks that adds up to the transaction size. For a network like Bitcoin, increased transaction size automatically translates to higher costs that you have to pay to miners.

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Future Direction for OP_RETURN and Data Storage on Bitcoin

The prospects for storing arbitrary non-financial data on Bitcoin blockchain herald the beginning of a series of innovative advancements. The OP_RETURN opcode can become a focal point for innovation, as evident from its utility. For instance, OP_RETURN will emerge as a formidable driver for expanding the extensive data capabilities of Bitcoin. However, the adoption of OP_RETURN will depend a lot on whether the size limit will be reduced. The impact of OP_RETURN on expected advancements like Runes will help in reducing dependence on more complex data embedding techniques. 

Final Thoughts 

The uses of OP_RETURN in blockchain data storage prove that it is an advancement way ahead of its time. OP_RETURN emerged as a solution to blockchain bloat that resulted from ineffective data storage methods. Over the course of time, the opcode has evolved with diverse applications such as anchoring layer-2 protocols or timestamping documents. One of the biggest highlights of OP_RETURN is their adoption in emerging solutions like BRC-20 tokens and Bitcoin Ordinals. The limited data capacity of OP_RETURN is one of the biggest obstacles for its large-scale adoption. However, it will have a significant role in the future of Bitcoin by helping preserve its core identity while encouraging innovation. 

*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!

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