Bitcoin has long been recognized as a dominant force in the cryptocurrency world, serving primarily as a digital cash system and a store of value. However, the introduction of Ordinal NFTs is revolutionizing its functionality and potential. In this Cryptopolitan guide, we will explore how Ordinal NFTs are reshaping the Bitcoin landscape, examining their unique characteristics, the challenges they present, and their impact on the Bitcoin network and its community.
What are Bitcoin Ordinals?
In January 2023, Bitcoin saw the emergence of Bitcoin Ordinals, a novel approach to creating non-fungible tokens (NFTs) based on the Bitcoin network. This innovation involves attaching unique data to individual satoshis, which are the smallest units of Bitcoin, through a process called “inscribing.”
Traditionally, NFTs have been associated with blockchains like Ethereum, Solana, and BSC Chain. However, the Ordinals project has shifted this perception by showcasing the potential for NFTs within the Bitcoin ecosystem.
Altering Bitcoin’s core code has always been a challenging task due to its decentralized nature and the community’s reluctance to compromise network security. This has hindered the widespread adoption of Bitcoin NFTs. However, the evolving cryptocurrency landscape has paved the way for forward-thinking individuals who see Bitcoin NFTs as an integral part of the Web3 evolution.
Since its launch, the Ordinals platform has experienced a steady increase in activity. Its growing user base is inscribing a diverse range of content, including images, audio files, and videos. Now, let’s delve into the mechanics of this innovative process.
Bitcoin Ordinals operate through a unique system that assigns serial numbers to satoshis, the smallest units of Bitcoin. This system, known as the Ordinals protocol, enables users to transform ordinary satoshis into distinct entities by attaching additional data, a process known as “inscription.”
A satoshi represents the smallest fraction of a Bitcoin, with one Bitcoin divisible into 100 million satoshis. Each satoshi is equivalent to 0.00000001 BTC.
The uniqueness of each satoshi is determined by its sequence in the mining and transaction process. The ordinal numbering is based on the chronological order of mining, while the transactional sequence is determined by the order of transaction inputs and outputs. These numbers serve as consistent identifiers for the data linked to the satoshis, forming the basis of the term “ordinals.” For example, the first satoshi in the initial block is assigned ordinal number 0, the next one is 1, and so on.
While there are similarities between traditional NFTs and ordinals, there are notable distinctions. Traditional NFTs are created using smart contracts on blockchains like Ethereum, Solana, and BSC Chain, with the represented assets often stored externally.
In contrast, ordinals are directly inscribed onto individual satoshis and incorporated into the Bitcoin blockchain’s blocks. This means that ordinals are entirely contained within the blockchain, eliminating the need for sidechains or additional tokens. As a result, ordinal inscriptions benefit from the simplicity, immutability, security, and robustness of the Bitcoin network.
Key Distinctions Between Ordinal NFTs and Traditional NFTs
Storage on the Bitcoin Blockchain
Ordinal inscriptions offer decentralized and enhanced security advantages over conventional NFTs, thanks to Bitcoin’s cryptographic strengths.
Ordinal inscriptions are essentially satoshis that are permanently stored on the Bitcoin blockchain, ensuring their decentralization and security.
When you inscribe a satoshi using an inscription tool, your Bitcoin NFT is transferred to your Ordinals wallet and securely recorded on the Bitcoin blockchain, providing a straightforward and reliable process.
On the other hand, most traditional NFTs are hosted on decentralized applications using self-executing smart contracts, such as those on the Ethereum Virtual Machine (EVM). This setup makes these NFTs reliant on the specific rules and logic of the contract, making them vulnerable to unexpected changes in the Ethereum network or EVM.
Increased Liquidity with Ordinals
The established status of Bitcoin as the most widely traded and liquid cryptocurrency, available 24/7 on various exchange platforms, gives ordinals a significant liquidity advantage. By inscribing digital artifacts on Bitcoin, you connect your art or asset to the most liquid cryptocurrency in the market.
In comparison, other NFT-supporting cryptocurrencies like Ethereum, Polkadot, and Binance Coin may not offer the same level of liquidity due to concerns about their security features, robustness, and market value.
Choosing Bitcoin for your digital creations not only safeguards your art or asset but also provides access to a broad and deep market, allowing you to sell whenever the need arises.
Bitcoin NFTs and Royalties
Bitcoin NFTs stand out due to their straightforward approach to royalties, which differs from other platforms. This simplicity in handling royalties contributes to their immediate liquidity and clear-cut nature for creators regarding compensation:
Creators understand that relying on Bitcoin’s on-chain mechanisms means no royalties from secondary sales. Therefore, they adjust the pricing of their initial sales to reflect this.
Alternatively, creators can opt for off-chain methods, like traditional contracts, to secure royalties on secondary transactions.
The irreversible nature of Bitcoin transactions poses a challenge in implementing long-term royalty mechanisms. Ensuring consistent and automatic royalty payments from secondary sales is problematic using Bitcoin’s blockchain. However, some tools developed for Ordinals, like Gamma, claim to offer a solution with a “fixed opt-in royalties” system for creators, hinting at a potential evolution in how Bitcoin NFTs handle creator compensation.
Ordinal Inscriptions are Immutable
The Bitcoin protocol guarantees the immutability of transactions through cryptographic hashes and a consensus mechanism. Each block in the Bitcoin blockchain includes the hash of the preceding block, forming a tamper-resistant chain. Once a transaction is confirmed by the majority of nodes on the Bitcoin network, it becomes an unalterable part of the public ledger. This structure significantly reduces the risk of fraud and alteration of records.
In contrast, Ethereum NFTs often have mutable metadata, even though the core NFT itself is immutable. This metadata, which can include details about the NFT’s owner, associated images or videos, and other attributes, is typically stored off-chain on centralized servers. It can be updated by the NFT’s creator or owner by altering the metadata on the central server and re-linking it to the NFT’s token ID.
Bitcoin Ordinals are Scarcer
Bitcoin’s fixed supply limit of 21 million coins, governed by a transaction halving mechanism and a proof-of-work (PoW) algorithm, contributes to its scarcity.
Miners receive new bitcoins as a reward for creating new blocks in the blockchain. This reward halves every four years, reducing the incentive for expanding the Bitcoin network and maintaining the supply cap.
The difficulty of creating new blocks increases over time, ensuring a stable rate of new block creation.
These factors make mining increasingly costly and uphold the supply limit. As a result, ordinal inscriptions are limited to the existing bitcoins and a finite number yet to be mined, preventing market oversaturation and preserving the value of digital artifacts.
In comparison, Ethereum NFTs, typically based on the ERC-721 contract, can represent an unlimited number of NFTs within a single contract.
How will Ordinal NFTs change Bitcoin?
Bitcoin has always reigned supreme in terms of market capitalization. Initially designed as a digital cash payment system, it has evolved into a value storage medium and has given rise to various cryptocurrencies through hard forks.
The ability to allocate data to individual satoshis introduces both advantages and challenges. By integrating with the mainnet, NFTs can leverage Bitcoin’s established security features and provide a method to verify the ownership and uniqueness of digital assets.
However, this development presents dilemmas for miners. They must decide whether to allocate block space to standard transactions or a mix of ordinal and smaller transactions. As interest and speculation in ordinal NFTs grow, the competition for block space intensifies, requiring miners to selectively choose which transactions to include.
Are Ordinals Bad for Bitcoin?
If ordinal inscriptions overshadow standard transactions, accessing block space could become more challenging, potentially leading to higher fees for on-chain transactions. Some proponents and early adopters of Bitcoin argue that the blockchain should prioritize BTC transactions over data storage, aligning with its original purpose as a monetary network.
On the other hand, the growing demand for block space could benefit the network’s long-term health. Miners could earn more from transaction fees, especially as the block reward decreases with each halving.
Additionally, the inclusion of larger files in the blockchain will increase its overall size. This growth may require more advanced technical capabilities to operate a full node, possibly leading to increased centralization as fewer nodes can manage the expanded storage requirements.
However, the direct storage of files on the blockchain ensures that NFTs are protected from censorship and remain unchangeable. These files become an indelible part of the blockchain.
Conclusion
Ordinal NFTs represent a groundbreaking development in the realm of Bitcoin, offering new possibilities and challenges. While they bring innovation and additional utility to Bitcoin, they also raise questions about network capacity, transaction fees, and the fundamental purpose of Bitcoin. As the crypto community navigates these changes, the long-term implications of Ordinal NFTs on Bitcoin’s role and functionality remain a subject of keen interest and ongoing debate. The protocol could potentially attach ordinal satoshis to individual security tokens or stablecoins, enable Bitcoin smart contracts, and introduce the cryptocurrency to a broader audience.
