No one’s ready for Bitcoin NFTs, not even Bitcoin itself, and here’s my attempt at trying to see the sense in this.

Let me start by explaining what Ordinals are —

The implementation of Ordinals, a new protocol on the Bitcoin network, has generated quite a bit of controversy lately. The protocol makes it possible to add non-fungible tokens (NFTs) to Bitcoin transactions, enabling the use of NFTs on the Bitcoin blockchain. They’re not technically tokens, and have nothing to do with fungibility. NFTs on Bitcoin are actually metadata added to transaction details. Yes they are immutable. No, nobody really owns them.

The Ordinals protocol was introduced in January and allows various forms of data such as images to be directly encoded onto sats, the smallest units of Bitcoin that have a value of 0.00000001 BTC, on the Bitcoin blockchain. Unlike other methods that use a separate sidechain or token, Ordinals doesn’t require such resources. Different types of data like JPEG images, digital art, new profile picture (PFP) projects, and even an old video game called DOOM from 1993 have already been encoded onto the Bitcoin blockchain using the Ordinals protocol.

Each inscription made using Ordinals is considered a “digital artifact” that is believed to be permanent and permanently stored on the Bitcoin blockchain. This sets it apart from many other NFT projects on Ethereum, Solana, and Stacks, where metadata can be modified or removed by the creator of the smart contract. While some types of mutable data can be changed, like the linked image, description, category, or contract identifier, especially if stored on a centralized database, Ordinals store the entire image or content directly on the blockchain, not just a link to an external server.

So far, more than 50,000 ordinals have been created on the Bitcoin blockchain, and some of them have already been sold for high prices. The Ordinal Punk project is a spinoff of the original Ethereum-based CryptoPunks NFT collection. The record sale so far is 9.5 BTC (about $218,000) for Inscription 620.

Back to the protocol itself — this was made possible as a result of two major upgrades to the Bitcoin blockchain — Segwit and Taproot. Without going into too much detail, these protocols allow for storing of metadata on transaction details, so it works in a very different way compared to say Ethereum where the NFT is the token. On Bitcoin, the NFT is actually the information that is attached to the transaction details of a sat.

What the the implications of Ordinals and NFTs on the Bitcoin Blockchain?

Since the introduction of Ordinals practically means more information to be stored, transacted and computed, it’s likely that it will have long-lasting implication over the Bitcoin Ecosystem.

Transaction FeesOne of the immediate concerns around the introduction of ordinals are scalability issues. The Bitcoin network is already facing scalability issues, with limited transaction throughput and higher fees during times of high demand. The integration of NFTs could exacerbate these issues, making it more difficult and expensive to transact on the network. In fact, according to Glassnode data, over 50% of all block space is now taken up by Ordinals.

We can also see a massive increase in the utilisation of one of the recent protocols that led to the support of Ordinals — Taproot:

As Taproot utilisation increases, that means block size is increasing, and therefore, transaction costs are increasing too

This could lead to network congestion, but may also make a good case for additional L2s with specialised use cases for Ordinals. More Dune data here.

Storage RequirementsStoring NFT data directly on the Bitcoin blockchain is also likely to create storage issues, as the blockchain would need to store much more data than it currently does. This could lead to increased storage costs and could potentially make it more difficult for nodes to participate in the network as Blocksize has more than tripled since the introduction of ordinals, jumping from around 0.7mb per block, to over 2.2mb.

Diversification of Use CaseOn the flip side, introduction of NFTs on the Bitcoin blockchain could open up new use cases for Bitcoin, expanding its utility beyond a store of value and a means of payment. This could help to diversify the Bitcoin ecosystem and attract new users. This, however cuts both ways. The main argument against it is that Bitcoin was never meant to be anything more than a trust-less, decentralised, peer-to-peer to serve as fairer money.

Introduction of a new use case such a Chain to permanently store NFTs in the form of ordinals is definitely going to shake things up.

Raise in popularityAnother argument I’ve seen people make is that due to this new use case, Bitcoin popularity will grow. My main issue with this argument is that Bitcoin is already the number #1 cryptocurrency. It doesn’t need a new use case in order to gain popularity. Bitcoin grows as cryptocurrency adoption grows. It does not need to compete with Ethereum, or offer any additional benefits to people already in crypto. And even if there was a demand for yet another chain that can support NFTs (there isn’t), why on earth would anyone choose the slowest, and most expensive network to do it on? It just all seems a bit counterintuitive and counter productive.

You could however make the argument that storing an NFT on the Bitcoin blockchain is more secure than any other blockchain, but then again — this has very limited utility.

All in all, Bitcoin NFTs are controversial and rightly so. From the perspective of what Bitcoin is, and what it stands for, NFTs are a rather odd addition, and can easily be considered a liability. If Bitcoin NFTs are here to stay, I do hope a sidechain or rollup solution will step up to take the load off and leave the base chain untouched.