The rise of Ordinals reveals the risks and opportunities of Bitcoin NFTs

Original Title: NFTs Are Bloating Bitcoin, Creating Risks And Opportunities For Investors

Original Author: Leeor Shimron

Translation: Qianwen, ChainCatcher

"NFTs have entered the Bitcoin space, but opinions on this are mixed."

Ordinals is a recently controversial new protocol deployed on Bitcoin that allows NFTs to be added to Bitcoin transactions, effectively bringing NFTs to the largest cryptocurrency network by market cap.

Launched in January, the project allows images and other types of data to be directly inscribed on the smallest unit of Bitcoin, SAT (worth 0.00000001 BTC), without the need for separate sidechains or tokens. JPEG images, new PFP projects, digital art, and even the first-person shooter video game DOOM from 1993 have been inscribed on Bitcoin using this protocol.

Many different types of NFTs have already been minted on Bitcoin.

Each O rdinals inscription is considered a "digital artifact ," because they cannot be altered, and will forever exist on the Bitcoin blockchain. This is different from most other NFT projects on Ethereum, Solana, and Stacks, where the metadata can be modified or deleted by the creators of the smart contracts. While the modification process is somewhat complex, certain types of mutable data can be changed, such as images linked to tokens, item descriptions, token categories, and contract universal resource identifiers, especially when the data is hosted on a centralized database. In contrast, Ordinals stores the entire image or content on-chain, rather than linking to hosted data on servers.

So far, there have been 50,000 Ordinals inscriptions on the Bitcoin blockchain, with some projects already fetching high prices. Ordinal Punks is a derivative project that originated from the Ethereum-based CryptoPunks NFT collection. The Ordinal Punk shown below sold for 9.5 BTC (~$218,000), indicating that these early projects have accumulated significant value.

Mixed Opinions

Bitcoin software was upgraded in 2021 and 2017, namely Taproot and SegWit, which opened the door for storing new forms of metadata on the Bitcoin blockchain. SegWit increased the block size of Bitcoin from 1 megabyte to 4 megabytes and relaxed data limit requirements, allowing ordinal NFTs to be inscribed across the entire 4-megabyte block.

The Ordinals project has gained popularity and sparked a heated debate within the Bitcoin community. Bitcoin purists opposing the Ordinals project argue that O rdinals are just spam in the block space, only clogging the space and taking up room that should belong to legitimate financial transactions. But supporters believe that Ordinals increase demand for block space, driving the development of a healthy fee market, allowing miners to earn subsidies by securing the network. Supporters also cite the principles of free-market liberalism, arguing that the market will determine the best use of block space.

Some critics of Ordinals have attempted to call for Bitcoin node operators and miners to review Ordinals inscriptions, allowing nodes and miners to decide which transactions are legitimate and include them in the blockchain. For economic reasons, node operators and miners will support any use case that can increase economic returns, especially as transaction fees will occupy a larger proportion of miner income over time.

Ordinals is not the first project to bring NFTs to Bitcoin; previous similar projects include the now-defunct Counterparty and Mastercoin. Additionally, Stacks is a Bitcoin sidechain that leverages Bitcoin's security and has its own evolving NFT ecosystem.

Gamma is an NFT marketplace based on Stacks, and its founder Jamil Dhanani commented: "Stacks is a blockchain where transactions settle on Bitcoin—you can always go back to verify the transaction history on the Bitcoin main chain. But the actual images are not stored on Bitcoin L1. This is different from Ordinals, where the original image data is directly stored in transactions on Bitcoin L1. Even on Ethereum, doing this would cost hundreds to thousands of dollars, but now it's relatively cheap to do it with Bitcoin."

The Stacks NFT series launched in late 2021, and recently, trading volume has surged, possibly driven by interest in the Ordinals protocol and Bitcoin NFTs. Interestingly, its daily trading volume grew from ~10,000 STX ($3,000) at the end of January to ~312,500 STX ($94,000) on February 9, an increase of 3000%. The historical trading volume for Stacks has reached $36.2 million, with $211,000 in volume over the past 30 days.

Regarding this phenomenon, Jamil Dhanani, founder of Gamma.io, stated:

There is a subculture in Bitcoin that views Bitcoin purely as a means of transaction; they believe that any other use of Bitcoin is an "abuse" of the system. Beyond these transactions, there are always those who oppose using it for anything else. However, since Bitcoin is an open, permissionless system, anyone can submit any data transaction they want—this has led to a lot of creativity and innovation that pushes Bitcoin beyond its original use case.

So far, over 50,000 Ordinals inscriptions have been minted, the vast majority of which are embedded as image files. With a maximum supply of 21 million tokens for Bitcoin, each coin can be divided into 100 million satoshis ( SAT ), the network can theoretically store up to 21 billion NFTs.

Outlook and Insights

Currently, most of miners' income comes from Bitcoin block subsidies, receiving a reward of about 6.25 BTC (currently $136,556) approximately every 10 minutes. The block subsidy is halved every four years, with the next halving scheduled for Spring 2024, when the subsidy will drop to 3.125 BTC. To ensure network security, extend its lifespan, there is a need to increase transaction fees to replace the dwindling block subsidies.

Ordinals have increased miners' transaction fee income and ensured that blocks are filled. Since the protocol's launch, a total of 13 BTC (~$285,000) has been used for transaction fees involving inscriptions. Inscription fees have accounted for about 12% of the total transaction fees on the network in recent days.

Ordinals have attracted a new wave of Bitcoin users and developers' attention. Inscribing in Bitcoin transactions may encourage further experimentation and development of the network, stimulating new innovations in the Bitcoin ecosystem. This culture may reignite interest in Bitcoin, challenging the culture of technical rigidity within the community.

Additionally, we may see other artists and NFT collections deploying new NFTs on Ordinals to leverage Bitcoin's permanence and immutability. The well-known Stacks NFT project Megapont Ape Club recently announced plans to launch a new Ordinals series called Megapunks.

Given that the project just launched last month, the infrastructure supporting the creation, storage, trading, and transfer of Ordinals NFTs is still in its early stages. In the coming weeks and months, we expect wallets and marketplaces to begin providing native support for Ordinals, expanding the design space of the protocol.

Should You Buy?

The increasing value of Ordinals NFT projects may be partly due to their representation of the "first" projects deployed on the protocol. At the same time, many of these collectibles have low supply, for example, the total supply of Ordinal Punks is 100, while CryptoPunks has 10,000, this relative "scarcity" makes it easier to drive up prices.

Buyers of these assets must be cautious, as they remain primarily speculative investments. When other projects promise more utility, stronger narratives, more aesthetically pleasing artworks, or other appealing features, older projects may be replaced. Of course, if the Ordinals protocol proves to be durable and gains more functionality and attention, some of these projects may symbolize early adoption, thus holding significant value, similar to CryptoPunks or Autoglyphs. Nevertheless, most of these inscriptions will likely prove worthless, exhibiting a power-law dynamic in value growth.

For investors looking to purchase increasingly popular NFTs on Bitcoin, one option may be to buy STX or NFTs issued through the Stacks network. Since the rise in late January, STX has outperformed BTC by 8%, partly due to investors seeking alternative projects for deploying NFTs on Bitcoin.

STX is an alternative for purchasing Bitcoin NFTs.

Like other NFT standards, Bitcoin NFTs still face unresolved issues regarding intellectual property. There will certainly be plagiarized projects inscribed on Bitcoin, some of which may require legal resolution. The full utility of these inscriptions remains to be realized. Ethereum-based NFT projects have developed innovative creator royalties and auction mechanisms, and whether these structures can be reused on Bitcoin remains to be seen.