Bitcoin Ordinals — A Gamechanger for Crypto
Ordinals is a somewhat controversial but very exciting brand new NFT innovation on the Bitcoin network. This is because Ordinals involve inscriptions directly onto the Bitcoin network and as such, represent a superior record-keeping mechanism compared to current NFT creation. Maintaining Bitcoin inscriptions on the blockchain of course means they are decentralised and globally accessible to all. This innovation has many advantages — which I will explain below — so will likely not only continue to exhibit extraordinary growth, but will, I believe, be transformative for the digital asset sector as a whole.
Technically speaking, Ordinals enable non-fungible tokens (NFTs) to be appended to Bitcoin transactions, effectively bringing NFTs to the largest Crypto network by market capitalisation where they didn’t really exist before. Existing NFTs (mostly found on the Ethereum and Solana chains) simply ‘point’ to a target file in a storage solution rather than store the image on-chain. Much like your own cloud-based images, movies and songs, these NFTs — some of which are apparently priceless pieces of art — are stored on cloud servers which is obviously less than ideal from a security perspective.
Only launched in January of this year, the Ordinals project enables not just images but also other types of data to be inscribed directly on satoshis (the smallest denominational units of Bitcoin — each is worth 0.00000001 BTC) on the Bitcoin blockchain without requiring a separate sidechain or token.
Why the excitement? Because Ordinals are truly different from other NFTs due to some key advantages. Every Ordinal inscription can be deemed a “digital artifact” because it is immutable in the sense that it is forever enshrined on the Bitcoin blockchain. This is unlike most other NFT projects on Ethereum, Solana and Stacks, whose metadata can be later altered or deleted by the smart contract’s creator. The data that can potentially be modified — especially if the data is hosted on a centralised database — includes, for example, the image linked to the token, the description of the item, the category of the token, the universal resource identifier of the contract. Conversely, Ordinals store the entire image or content on-chain, not just the ‘link’ pointing to a server hosting the data. Effectively you can now store any data, whether it is images, audio files, or even pieces of software into the ‘witness data’ portion of the Bitcoin transaction, without file size constraints.
The Founder of Gamma, a Stacks-based NFT marketplace, Jamil Dhanani commented, “Stacks is a blockchain where the transactions settle on Bitcoin — you can always go back and verify the history of transactions on the main Bitcoin chain. However, the actual images are not stored on the Bitcoin layer-one. This differs from inscriptions, where we store the raw image data directly in a transaction on the Bitcoin L1. Even on Ethereum, it would cost hundreds to thousands of dollars to do this, but it’s relatively inexpensive right now to do it on Bitcoin.”
Not the First Attempt at NFTs on Bitcoin
Ordinals is not the first project to bring non-fungible assets to Bitcoin, with the first having been developed by Counterparty, which launched the Rare Pepes collection in 2014, followed by the 2017 launch of Stacks (Nb Stacks is to this day a Bitcoin sidechain that leverages Bitcoin’s security and has a growing NFT ecosystem of its own).
Enabled by Network Upgrades
The only reason Ordinals can now exist is as a result of two key upgrades to the Bitcoin network: Taproot and SegWit, Bitcoin software upgrades that took place in 2021 and 2017 respectively, opened the door for new forms of metadata to be stored on the Bitcoin blockchain. SegWit increased Bitcoin’s block size from 1 megabyte to 4 megabytes and Taproot loosened requirements for data limits, allowing the full 4 megabyte block to be inscribed with ordinal NFTs.
It is important to note that since Bitcoin has a maximum supply of 21 million coins, and each coin is divisible into 100 million Satoshis, the network can theoretically store a maximum of 2.1 quadrillion NFTs.
Seismic Growth Potential
Ordinals have only really been in existence since the start of 2023. In this short time, we have seen Ordinals in all manner of file types — including audio, video and text — grow at spectacular rates. For now, rather unsurprisingly, image inscriptions remain the most popular, representing 88.1% of all inscriptions. But the overall growth in Ordinals in this very short time has been nothing if not spectacular: at their highest, inscription-bearing transactions actually reached 6% of all of Bitcoin’s 369,499 total daily transactions!
In terms of the potential size of the opportunity, taking the NFT market as a whole is a useful indicator. Since the first NFT was minted in 2014, NFTs have morphed into a monster sub-sector within the blockchain space. According to Chainanalysis, c.$41bn was spent on NFT marketplaces in 2021 alone, almost matching the total sales volume of conventional art and antique sales in 2020 of $50bn.
To date, none of this NFT activity happened on the Bitcoin network, but that is seemingly about to change. Bitcoin has the brand and the market presence to give the Ordinals innovation every chance of gaining massive adoption quickly.
Despite significant pushback from Bitcoin purists, Ordinals show no signs of slowing. To date, over 76,400 ordinals have been minted on the Bitcoin blockchain, with the number of Ordinals spiking on February 9, 2023 to over 20,800 inscriptions for the day, according to data from Dune.
Bitcoin’s Own ‘Blue-Chip’ Digital Collectibles?
For years, blockchains like Ethereum have established collections such as the Bored Ape Yacht Club (BAYC), Cryptopunks, Azuki, Moon Birds, Doodles, Mutant Ape Yacht Club (MAYC), and others. Some of these NFTs have become known as “blue-chip” NFTs, as they have maintained significant value on the open market for several years. For instance, BAYC and Cryptopunks currently hold the highest floor values (some priced in the millions of dollars) among all the collections.
Many newly minted Ordinal inscription collections are similar to ideas stemming from popular Ethereum collections, such as the Ordinal Punks collection. The collection features different versions of pixelated punk characters, with only 100 of them available, in contrast to the 10,000 available Cryptopunks.
Some Ordinals projects are already fetching high prices. The Ordinal Punk pictured below sold for 9.5 BTC (~$218,000), highlighting how some of these early projects are already accruing significant value.
Part of the reason Ordinal NFT projects such as Ordinal Punks are rising in value, is that they represent a “first” project deployed on the protocol. Many of these collections also have a low supply: Ordinal Punks have a total supply of 100 vs CryptoPunks 10,000, and thus this relative “scarcity” makes it easier to push the price higher.
Buyers of these assets must be aware they are still largely speculative investments. However, if the Ordinals protocol proves to have staying power and gains more functionality and attention, some of these projects may serve as an early-adopter high status symbol for collectors and accrue significant value, in a similar vein to what happened with CryptoPunks or Autoglyphs.
A GameChanger for Crypto?
Though the numbers speak for themselves, there are differing perspectives and interests at play which will inevitably impact how the Ordinals protocol develops from here.
Ordinals Divide the Bitcoin Community
The popularity of the Ordinals project has ignited an intense debate within the Bitcoin community. Bitcoin purists and maximalists are firmly against the Ordinals project and would prefer no innovation at all on the network and that it simply stays a new form of money. They argue that Ordinal inscriptions are spam that bloat block space and crowd out more legitimate financial transactions on the network. Conversely, proponents of Ordinals argue that inscriptions increase demand for block space and drive a healthy fee market compensating miners for securing the network. Supporters also point to libertarian principles of the free market in which the market determines the best use of block space.
Some detractors of Ordinals have even gone as far as appealing to Bitcoin node operators and miners to censor inscriptions. Ultimately, it is up to nodes and miners to determine which transactions are legitimate and included in the blockchain. They have the ability to censor certain transactions. However, it is in their best economic interest to support any use cases that bolster fee revenue, especially as transaction fees make up a greater percentage of miner revenue over time.
“There is a subset of Bitcoin culture which sees Bitcoin as purely a way to settle transactions; they see any other use of Bitcoin as an ‘abuse’ of the system. There will always be a contingent of people who oppose using the base layer for anything but those transactions. Though, since Bitcoin is an open, permissionless system, anybody can submit a transaction with any data they want — and we’ve historically seen an incredible amount of creativity and innovation for expanding Bitcoin beyond its original use cases.” — Jamil Dhanani, Founder of Gamma.io
Boosts Miner Revenues
As Bitcoin Twitter continues to argue the merits of filling blocks with pictures and videos, Bitcoin miners are raking in a tidal wave of fees that topped $92,220 on February 12, 2023, for Ordinal transactions alone.
To put this in context, currently, the majority of miner revenue comes from the Bitcoin block subsidy, in which 6.25 BTC (currently $136,556) is rewarded to miners approximately every 10 minutes. The block subsidy cuts in half every four years, with the next halving event scheduled to take place in the Spring of 2024, at which point it will fall to 3.125. In order to ensure the security and longevity of the network, transaction fees will need to increase and replace the dwindling block subsidy.
Ordinals have already bolstered miner transaction fee revenue and ensured blocks are full. Cumulatively, 13 BTC (~$285,000) has been spent on transaction fees involving inscriptions since the protocol launched.
As a percentage of total transaction fees on the network, inscriptions have comprised about 12% of total transaction fees over the last few days.
Turbocharge Developer Activity
Ordinals have caught the attention of a new audience of Bitcoin users and developers. Embedding inscriptions in Bitcoin transactions may encourage further experimentation and development of the network, spurring new innovation within the Bitcoin ecosystem. Inscriptions may rejuvenate excitement to build on Bitcoin again, challenging the community’s culture of technological rigidity and ossification.
Market share gain from other Chains
Unsurprisingly, clones of popular NFT projects like CryptoPunks and Bored Ape Yacht Club NFTs have made their way to the Bitcoin Blockchain. On February 8, a single Ordinal Punk sold for 9.5 BTC, or nearly $215,000.
Additionally, we may see prolific artists and NFT collections on other chains deploy new NFTs on Ordinals, leveraging Bitcoin’s permanence and immutability. The most prominent Stacks NFT project, Megapont Ape Club, recently announced their intention to launch a new Ordinals collection, called Megapunks.
Investors Seeking Exposure
No doubt many investors are looking for exposure to this promising growth area within the Crypto sector. I believe one option for investors seeking exposure may be to purchase STX tokens: Stacks NFT collections first launched in late 2021, and trading volume has spiked in recent days, with daily trading volume increasing 3,000% from ~10,000 STX ($3,000) in late January to ~312,500 STX ($94,000) on February 9th.
Early Stage Tech
Despite the obvious growth potential of Ordinals, it is important to note that the technology is still in its infancy, especially when compared to NFTs on Ethereum and Solana, which have had several years to perfect the minting, trading, and viewing of digital collectibles. Also, the full utility of inscriptions has yet to be realised. Ethereum-based NFT projects have been able to develop innovative creator royalties and auction mechanics, and it remains to be seen if these structures can be replicated on Bitcoin.
In addition, given that the project just launched last month, the infrastructure to support the creation, storage, trading, and transfer of Ordinal NFTs is very nascent. This however is a relatively ‘easy fix’: in the coming weeks and months, I would expect wallets and marketplaces to begin offering native support for Ordinals, expanding the design space for what can be done with the protocol.
“Ordinals have been live for a few months now, but it’s only really a week old in terms of mass adoption,” according to Satoshibles developer Brian Laughlan. “It’s going to take a while before we see general wallet support.” Launched in 2021, Satoshibles is the first NFT Collection to bridge Ethereum NFTs with Bitcoin using Stacks.
The other issue surrounding NFTs on Bitcoin, similar to other NFT standards, is the open questions about intellectual property and copyright infringement. Copycat projects are sure to be inscribed on Bitcoin, and some of these matters may need to be resolved in court.
Final Thoughts
Overall, Bitcoin Ordinals represent an exciting development not just for the Bitcoin network but for the world of Crypto. In my opinion, they are very likely to play a significant role in shaping and revolutionising the sector’s future. By enabling users to create unique and traceable identifiers for each transaction, Bitcoin Ordinals stand to enhance the transparency, security, and efficiency of crypto transactions.
But just like ordinary NFTs, the real excitement isn’t really about art or images: this new innovation also opens up better possibilities for businesses and individuals who wish to utilise blockchain technology for various real world purposes, including supply chain management, digital identity verification, and more.
PTLIB is CIO of Dragonfly Asset Management.
DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
