Non-fungible tokens (NFTs) are digital assets that have been a staple for blockchains like Ethereum, Solana, and Polygon. If you have purchased NFTs before, you most likely paid ETH or SOL to get your hands on these digital collectibles. However, you’ve probably never paid in Bitcoin for an NFT. Or have you? Bitcoin NFTs have existed for over a decade, and till now, they’ve existed on layer 2 solutions or sidechains for many technical reasons.
But what if I tell you that now you could mint NFTs on the MAIN Bitcoin network? You’d call me crazy. However, the Ordinals protocol is already allowing users to mint the Bitcoin version of NFTs on Bitcoin’s mainnet. But what did the Bitcoin community’s reaction look like? Well, it split in half. Let’s see what Bitcoin NFTs are all about.
NFTs and Smart Contract
Let us first dive into why Bitcoin NFTs weren’t massively adopted in the first place. NFTs, or non-fungible tokens, are digital tokens that serve as proof or certificates of ownership. NFTs are often linked to digital assets such as artwork, videos, music, and more. They could even link to physical assets such as garments or real-life objects.
NFTs are minted on the blockchain by using smart contracts. They are self-executing contracts stored on the blockchain that automates the execution of a certain agreement. Meaning, smart contracts assign the ownership of a digital asset to a certain holder. When the NFT is sold, the smart contract self-updates the ownership to the new holder.
The reason why the Bitcoin blockchain did not deploy NFTs is because of its limited smart contract support. In contrast, blockchains like the Ethereum blockchain have smart contract protocols that act as the fundamental building blocks of the network.
First Iterations of Bitcoin NFTs
Many early projects have tried to bring these non-fungible tokens to the Bitcoin blockchain by developing alternate solutions. In fact, some solutions to include blockchain-based verifications of digital assets came long before NFTs were a thing on the Ethereum blockchain. Let’s see how earlier solutions tried to include digital assets on the Bitcoin network.
Counterparty
Back in 2014, Counterparty marked a revolution in digital history by letting users mint, buy, and sell unique digital assets on the Bitcoin blockchain. What is it exactly? It’s a layer 2 solution that builds on top of the Bitcoin network and has its own native decentralized exchange (DEX) and token XCP.
It provides the outline of how people can mint unique tokens on the Bitcoin blockchain. Just like how Ethereum has token standards to define how certain assets work on its protocol. Back then, the word NFT did not exist yet, instead, they were referred to as visual assets that were tokenized via the Counterparty protocol. One early example of a Bitcoin NFT is the Like Rare Pepes collection, which was wrapped and moved onto the Ethereum blockchain.
Stacks
Stacks is a blockchain that emerged back in 2017 which can run smart contracts for the Bitcoin network. Acting as a layer 1 blockchain, Stacks can enable Bitcoin-based DeFi protocols and deploy smart contracts that power Bitcoin-based NFTs. Even though many Bitcoin-based NFT collections saw somewhat of a success, they didn’t come close to the massive success of Ethereum or Solana-based NFTs.
Ordinals Protocol: On-Chain Bitcoin NFTs
Recently, a protocol by the name “Ordinals” surfaced that allows people to mint NFTs on the main Bitcoin network. Former Bitcoin Core contributor and software engineer, Casey Rodarmor launched the Ordinal protocol in January.
Inscriptions are finally ready for Bitcoin mainnet.
Inscriptions are like NFTs, but are true digital artifacts: decentralized, immutable, always on-chain, and native to Bitcoin. 🧵https://t.co/a4dK7zdITS
— Casey Rodarmor (@rodarmor) January 20, 2023
However, unlike other blockchain NFTs, users can’t mint Bitcoin NFTs minted traditionally via smart contracts. Instead, the Ordinals protocol allows users to transfer and receive Satoshis (the smallest unit of Bitcoin) that might include digital data such as images or videos. Unlike previous solutions, the Ordinals protocol is completely on the main Bitcoin network and doesn’t require layer 2 solutions, sidechains, or additional tokens.
Ordinal Theory
So, how come NFTs can exist on a blockchain without the use of smart contracts? That’s where the Ordinal theory comes in. The ordinal theory uses Satoshis as the token that carries the digital data. Satoshis are the atomic native currency of Bitcoin that makeup 1/100,000,000 of one single Bitcoin.
So, instead of building a layer 2 solution or using a side chain to deploy smart contracts, the Ordinal theory assigns each satoshi with a value that dictates a digital asset. This process is called inscription. Furthermore, Satoshis can be inscribed with values that create unique Bitcoin-based “digital artifacts”, in other words, NFTs. Since digital assets are inscribed within a satoshi currency, they can be easily transferred through Bitcoin transactions.
How Does It Work?
According to the Ordinal Theory Handbook, “Ordinals are a numbering scheme for satoshis that allows tracking and transferring individual sats. Satoshis are numbered in the order in which they are mined and in the order they are transferred from transaction inputs to transaction outputs. Digital assets link to satoshis using these ordinal numbers as identifiers. They can also be classified based on their rarity level.
Digital Artifacts vs. NFTs
Referring to linked satoshis as Bitcoin NFTs might not be right. In fact, Rodarmor makes sure to differentiate between regular NFTs and Bitcoin’s digital artifacts by saying that “Inscriptions are digital artifacts, and digital artifacts are NFTs, but not all NFTs are digital artifacts”. The main difference lies in the fact that NFTs often link to off-chain content, while Bitcoin’s digital artifacts will be completely on-chain.
In addition, Rodarmor also points to the fact that smart contracts are “audited on a case-by-case basis to determine their properties” while inscriptions do not need to be examined individually to determine their properties. “The definition of a digital artifact intends to reflect what NFTs should be, sometimes are, and what inscriptions always are, by their very nature.”.
The Rise of Bitcoin Transaction Fees
According to Dune, almost 9600 Bitcoin NFTs were minted via the Ordinals protocol. On Monday alone the number of daily mints reached 3000 mints. However, recently the Bitcoin transaction fee per data has risen to surpass $1.5 in the past couple of days.
Bitcoin Community Reaction
The rise of Bitcoin transaction fees sparked major debate and controversy within the Bitcoin community. Some Bitcoin maximalists stated that the Bitcoin NFTs are migrating from the Bitcoin ethos. On the other hand, some believers said that Bitcoin NFTs will bring more value to the cryptocurrency.
The negative response relates to the answer of Satoshi Nakamoto, the pseudonymous creator of Bitcoin when asked if Bitcoin would be used for non-financial purposes, to which they responded with a solid no. The aggressive backlash includes the reasoning of the Ordinals crowding up blocks of data. Thus driving up transaction fees.
BREAKING: 🚨 NFTs ON #BITCOIN
Ordinals are taking up most of the BLOCKSPACE 😯 pic.twitter.com/Gxwq4vV8MI
— Bitcoin News ⚡ (@BitcoinNewsCom) January 29, 2023
This is sparking up after the fact that inscribed satoshis are large files and have led a single block of data to almost reach 4 MB, which is huge in retrospect. People who worry about the size of data blocks have valid reasoning. The influx of large blocks can accumulate over time and miners would not be able to conduct the verification process easily.
However, Ordinals’ creator Rodarmor stated that “If blocks are not full, then nobody has any reason to pay more than the minimum fee rate to have their transactions included in a block, so as a result, blocks must be full.” However, Rodarmor doesn’t condone maximizing the size of the actual block.
Moreover, Bitcoin’s latest Taproot and SegWit updates allowed blocks to reach the scale of 4 MB by discounting the size of witness data. Witness data can separate the signatures and scripts from the main transactions.
Blockstream CEO and Bitcoin core developer Adam Back wasn’t happy with the introduction of Bitcoin NFTs either.
"you can't stop them" well ofc! bitcoin is designed to be censor resistant. doesn't stop us mildly commenting on the sheer waste and stupidity of an encoding. at least do something efficient. otherwise it's another proof of consumption of block-space thingy.
— Adam Back (@adam3us) January 29, 2023
However, some people have applauded the new Ordinals protocol by noting that Bitcoin NFTs will bring more use cases to the general network.
Why it's good:
– Brings more financial use cases to Bitcoin
– Drives more demand for block space (aka fees)My take:
– If you pay a tx fee, it's not spam.
– Bitcoin is permissionless. Can't stop anyone from building it anyway.— Dan Held (@danheld) January 29, 2023
So Are Bitcoin NFTs Bad?
Well, it’s early to say. It’s true that Ordinal NFTs alone won’t increase the overall transaction fee, but sooner or later people would inscribe Ordinal NFTs to a point where they compete for block space. In this case, miners would rush to validate blocks of data with inscription since they would get fees by the byte.
This creates pressure for users to pay higher fees for ordinary transactions for a miner to accept them. Here, miners can play a game to prioritize normal transactions with higher fees and larger space to include as many transactions as they can, and as a consequence double up the fees.
All we can do is wait out this Bitcoin NFT craze and see if it actually amounts to something valuable, or would pass as a failed Bitcoin project.