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The Latest Craze in Bitcoin: Ordinals Become the Newest NFT Trend

Web3 has recently made headlines due to the launch of the new Ordinals protocol, which has sparked a lot of interest in the community. Yet, not everyone is convinced that this is a positive step for Bitcoin. In this paper, we will look at the Ordinals protocol, its relationship to non-fungible tokens (NFTs), and its potential impact on Bitcoin’s future.

The history of Bitcoin and NFTs

To understand the significance of the Ordinals protocol, it is important to first look at the history of Bitcoin and its relationship to NFTs. Counterparty, a technology built on top of Bitcoin, was the first to create blockchain-based NFTs in 2014. This resulted in the creation of well-known compilations such as Rare Pepes in 2016. However, the usage of the Bitcoin blockchain for NFTs prompted a dispute in the community, with some criticising the idea of employing full nodes for data storage. The dispute came from the use of an OP RETURN function, which allowed for the preservation of arbitrary data in the blockchain.

Limitations of the OP RETURN function

The OP RETURN function had limitations, as it could only retain 40 bytes of data. However, this limit was later expanded to 80 bytes in 2016. With the adoption of Segwit’s 2017 upgrade and Taproot’s 2021 upgrade, it has become more cost-effective and easier to store data with OP RETURN. Segwit made it 75% cheaper, while Taproot made it 10% cheaper and easier to store data in a single transaction rather than numerous ones. As a result, anyone can now pay to store an endless amount of data with this function, as long as the overall block size does not exceed 4 MB.

The Ordinals protocol builds upon the concept of Bitcoin by allowing for the creation of non-fungible tokens (NFTs). It does this by dividing each Bitcoin into 100,000,000 satoshis or sats and allowing individuals running Bitcoin nodes to write data on each block, which is known as an Ordinal. This data can include smart contracts, which can enable the creation of NFTs on the Bitcoin network.

The Ordinals protocol represents a significant advancement over traditional Bitcoin NFTs created using the OP RETURN function. Unlike the OP RETURN function, which is limited in the amount of data it can store, Ordinals allow for the creation of more complex and sophisticated NFTs. Furthermore, the protocol enables the creation of NFTs that are completely on-chain, meaning that all data related to the NFT is stored directly on the blockchain. This reduces the need for off-chain storage solutions, such as IPFS, which is commonly used by Ethereum-based NFTs.

Differences between Ethereum-based NFTs and Bitcoin NFTs

It is important to understand that there are notable differences between NFTs on the Ethereum blockchain, or other Ethereum Virtual Machine blockchains, and Bitcoin NFTs created using the Ordinals protocol. Ethereum NFTs typically reference off-chain data that can be modified on the Interplanetary File System (IPFS), a decentralized file storage system similar to a hard drive on the Blockchain. Some NFT projects alter the metadata of individual NFTs to enhance image quality. While this approach allows for greater flexibility in the types of NFTs that can be created, it also introduces additional complexity and potential points of failure. By contrast, Bitcoin NFTs created using the Ordinals protocol are completely on-chain, which makes them more secure and less reliant on off-chain storage solutions.

In conclusion, the Ordinals protocol represents a significant step forward for Bitcoin and its potential use in the NFT market. While there are still concerns and debates surrounding its use, the protocol provides a new avenue for innovation and creativity within the Bitcoin ecosystem. As the cryptocurrency landscape continues to evolve, it will be interesting to see how the use of NFTs on both the Ethereum and Bitcoin networks develop and intersect in the future.

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