Bitcoin Nonfungible Tokens (NFTs): A New Way to Unlock Bitcoin’s Potential
The crypto world has been abuzz with the emergence of Bitcoin nonfungible tokens (NFTs) since their explosion in 2020. NFTs have typically been minted and traded on Ethereum-based platforms, but a new protocol known as Ordinals has opened up new opportunities for the oldest blockchain.
Ordinals was launched in January 2023 by former Bitcoin Core contributor Casey Rodarmor, who exploited the 2021 Bitcoin Taproot upgrade to expand the cryptocurrency’s capability and enable on-chain Bitcoin-native NFTs. Taproot offered a way to expand the base layer’s block capability by condensing the size of transactions, requiring less data usage and encouraging the use of smart contracts on Bitcoin.
By February 2023, the world’s largest issuer of NFTs, Yuga Labs, had already announced the creation of TwelveFold, a new NFT collection issued on Bitcoin, thereby endorsing Bitcoin NFTs and avouching their success.
Ordinals are serial numbers imprinted in a single, unique satoshi (sat), the smallest unit of Bitcoin (BTC), through the ordinal theory that assigns them in the order in which they are mined. The first satoshi in the first block has the ordinal number 0, the second has the ordinal number 1, and the last satoshi of the first block has the ordinal number 4,999,999,999.
The process of assigning assets to individual satoshis is called inscription. Inscriptions are digital artifacts native to the Bitcoin blockchain, the digital equivalent of physical artifacts. They are fully on-chain, do not require a sidechain or a separate token, and use the Ordinals protocol to inscribe sats with content on ord, an index, an explorer and a wallet that relies on Bitcoin Core for private key management and transaction signing.
The Ordinals ecosystem is in full development, but its accessibility is still restricted to two primary ways to mint an ordinal NFT. The first method requires some technical skills, running a full Bitcoin node and then installing Ord on this node to inscribe satoshis into an Ordinals wallet and make Bitcoin Ordinals NFTs. The second method is more straightforward and involves using a no-code tool, such as Gamma or Ordinalsbot.com, to inscribe your ordinal NFT.
While proper infrastructure and marketplaces to trade Bitcoin Ordinals are being built, the digital artifacts are traded peer-to-peer over-the-counter (OTC) in dedicated Discord servers, with escrows as intermediaries and tracked on Google sheets.
A few differences distance Ethereum-based traditional NFTs from Bitcoin Ordinals, although they both tend to be grouped under the same umbrella of digital art. The creator of Bitcoin Ordinals, Casey Rodarmor, defines Bitcoin NFTs as authentic digital artifacts because they are on-chain and enjoy all of the good properties Bitcoin holds.
The new Ordinals protocol has raised an important question and sparked a heated debate among the NFT community. Should Bitcoin just be money, or should it expand its functionality to other use cases? Is the Ordinals protocol an attack on the Bitcoin network?
The Bitcoin blockchain has traditionally been used only for payment transactions due to its limited block size and network architecture. Such infrastructure favors solutions built on top of the blockchain as additional layers to increase the network’s programmability and scalability.
The latest Ordinals craze has raised many eyebrows among the BTC community. Some are concerned it could distract from Bitcoin’s primary use case as a medium of exchange and whether Ordinals make good use of block space. Ordinals can be images, audio clips or even games inevitably requiring space that is subtracted from the financial data, significantly slowing down on-chain confirmation times.
Bitcoin’s fungibility — one of the main properties of money — is also challenged by Ordinals. This is because inscriptions are imprinted in one satoshi, making it a rare unit, just like numismatic coins are rare physical objects used for collections.
A few weeks after the project was launched, a record-breaking-sized block of 4MB was created, raising concerns among the community about the future efficiency and costs of the blockchain and its full nodes. The average size of a Bitcoin block had never exceeded 1.5MB until the launch of Ordinal NFTs.
The debate will unfold in the future as the Ordinals market takes a more robust shape and new opportunities arise. Ultimately, Bitcoin’s true spirit and value reside in its resilience to guide the market in the direction the people want.