Key Takeaways 

Bitcoin NFTs were pretty much unheard of in web3. Though NFTs that originated from Bitcoin like that of the “Rare Pepe'' collection, which was minted back in 2014, have been around for a long time, such collections aren’t true Bitcoin NFTs as they have been reconfigured to run on the Ethereum network. However, Ordinals have made NFTs on Bitcoin a reality.

This article will cover what Ordinals are, the controversy around them, how to start trading Ordinals, some of the biggest collections out there, and finally some insights on the potential impact of Ordinals on the Bitcoin network.

What are Ordinals?

On 21 January 2023, software engineer Casey Rodarmor launched the Ordinals protocol, which allows users to inscribe their own NFTs onto the Bitcoin network.

In the Bitcoin network, each Bitcoin is broken into 100,000,000 units termed "satoshis." The Ordinals protocol then works by allowing users, those who operate Bitcoin nodes, to individually inscribe each satoshi with data, which are not limited to JPEGs but even videos and audio files, and in doing so create an Ordinal.

How are Ordinals Different From Typical NFTs?

On the Ethereum network, NFTs stem from off-chain data from the Interplanetary File System (IPFS), which is a decentralized file storage system that can be changed using dynamic metadata. If you’re well-versed in NFTs, you have probably heard the term "refresh NFT metadata," especially if you've just minted a new NFT. Refreshing an NFT's metadata will update your NFT's cover image and reveal which NFTs you've minted and how rare they are.

On the other hand, Ordinals have their data directly stored on-chain, instead of the directory-like connections that conventional NFTs have to servers, and this makes them true immutable digital artifacts that are interwoven into the Bitcoin network, which is why they’re also termed "inscriptions."

Also, typical NFTs that follow the ERC-721 token standard or their equivalent have their values defined by the rarity of the art based on its attributes, along with its supply. However, Ordinals derive their rarity from the sat they're inscribed on, where key events like halvings would likely add levels of rarity.

As such the launch of the Ordinals protocol was pretty monumental, but as the hype built-up and more eyes were drawn to it, controversy ensued.

Why are Ordinals Controversial?

The birth of the Ordinals protocol fractured the Bitcoin community, as the age-old question shrouding the entire Bitcoin network resurfaced: What is Bitcoin’s true purpose? Was Bitcoin created for processing financial transactions? If so, should it then be used for non-financial, superfluous purposes like inscribing NFTs? For many Bitcoin maxis, it is a matter of what Bitcoin stands for as the very first cryptocurrency; it serves as a rallying symbol of defiance against centralization, against banks and governments all over the world. For them, Bitcoin paved the way for permissionless action in the financial world.

And so when NFTs, which are taken less seriously in the space, were introduced to Bitcoin, the maxis felt that the historical value and symbolism of Bitcoin were seemingly diminished, to the extent that some even claimed that the Ordinals protocol was an attack on the Bitcoin network. One reason for this is that the Ordinals are stored entirely on chain, circumventing the limitation of non-financial data on the Bitcoin network (80 bytes), where an Inscription trasnsaction could even take up an entire 4MB block. On top of that, because NFT is stored in the witness data, a quirk of taproot means that users enjoy a significant discount of 75% when minting Ordinals.

There was also the growing worry that the introduction and growth of non-financial uses like NFTs onto the Bitcoin network would crowd out legitimate financial transactions. After all, since its birth in 2009, Bitcoin has always established itself as one of the sole cryptocurrencies that functions as a financial network.

In spite of the controversy, there is a keen interest from the community around trading Ordinals. Let’s look at how to get started.

How to Start Trading Ordinals

As the Ordinals protocol is still very new, Ordinals are traded very differently from conventional NFTs, due to the lack of a developed technological framework for trading.

To begin trading, you’ll need a web3 wallet capable of receiving and storing Ordinals, and below are some popular ones.

Ordinals

Its name is as literal as it gets: this Bitcoin wallet was released on 16 February with direct support for receiving, storing and viewing Ordinal inscriptions, allowing users to create wallets on their website directly.

Xverse

The Xverse wallet appeals to users who wish to inscribe their own Ordinals without needing to own a Bitcoin node, where users simply upload the image of choice and pay a transaction fee.

Hiro

The Hiro wallet functions similarly to that of Xverse. Note that the actual inscription service for both wallets is done by Gamma.io, a Bitcoin NFT marketplace that has reportedly minted 5% of all Ordinals on Bitcoin.

How to Trade Ordinals

Ordinals are bought from mainly Over-The-Counter (OTC) trades, as there isn’t really a centralized marketplace for trading Ordinals as of now.

OTC Ordinal trades are conducted through trusted middlemen in the Ordinals discord, where new Ordinal projects can also be discovered. Do exercise extreme caution when performing OTC trades as scams run rampant in the space, and ensure that you’ve done enough research and made connections with the right people.

For a start, the most established Ordinal traders have their Twitter profiles linked in their Discord bios. Most of them are big figures in the space with huge followings, and these people would be the safest to trade with. On the other hand, as a rule of thumb, users in the Discord channel with the clover icon next to their name—indicating that they’re new to the server—should be avoided. And even so, when assessing if a user is legitimate, other factors like the age of their Discord account, if they share any mutual servers, or if they’ve sent any previous messages in the Ordinals Discord should also be taken into account. Ultimately, remember to do your own research: the onus is on you to check on any user’s background before trading with them.

Biggest Ordinal Collections Right Now

Just like how CryptoPunks rose to its blue-chip status on the Ethereum network due to it being one of the first few collections there, the fastest-growing Ordinal collections are those that were minted in the first thousands of inscriptions on the network. Here are some Ordinal collections to check out:

Ordinal Punks

The Ordinal Punks collection, which was minted within the first 650 inscriptions using the Ordinals protocol, was created as a throwback to the original CryptoPunks collection on Ethereum. FlowStay, the collection’s creator, currently runs a Google Sheet to facilitate the trading of these Punks and offers himself as an escrow on Discord.

Ordinal Birds

Ordinal Birds is another derivative collection based on Moonbirds, another established NFT collection on Ethereum. Similar to Ordinal Punks, the community trades these Birds through an escrow service in their Discord. These Birds have been trading OTC at prices ranging from 0.17 BTC to 0.72 BTC.

Planetary Ordinals

With an extremely limited supply of only 69 inscriptions, the Planetary Ordinals collection begins at Inscription 463, featuring some of the most intriguing and aesthetic inscriptions on the network.

What Bitcoin NFTs Could Entail for the Chain

One of the easiest answers one can provide is that Bitcoin NFTs give Bitcoin more use cases, a phrase commonly thrown around in crypto to justify any new technological breakthrough. But beyond that, the Ordinals protocol does indeed bring about some real potential benefits for the chain, the biggest being that NFTs on Bitcoin could help improve its sustainability through fees in the long term.

Bitcoin runs on Proof-Of-Work (PoW), requiring miners to actively validate transactions in order to ensure the security of the entire chain. Miners are incentivized to do so as they get a portion of transaction fees when they successfully validate a transaction. Currently, Bitcoin miners are being paid a subsidy to maintain the network, a subsidy which decreases when halving occurs. Halving is an event every 4 years when Bitcoin mining rewards are halved, and eventually, the network will need to be able to pay its miners solely through transaction fees in order to survive.

For Bitcoin, this problem is exacerbated due to its establishment as a cryptocurrency solely for conducting financial transactions, with virtually no other streams of transaction fees. Even Uniswap, an app based on Ethereum, generates more transaction fees today than the entire Bitcoin network.

However, due to the abovementioned discount due to a quirk of taproot, the contributions of Ordinals to the fee market is less than it should be. Even so, on the day that the Ordinals protocol was released, Bitcoin fees rose to all-time highs since Bitcoin transaction fees are based on the amount of data that a transaction contains, and Ordinals and inscriptions add large amounts of data to each block in the network. Collections like Taproot Wizards broke records with the largest NFT that filled nearly an entire 4MB block (the maximum size of Bitcoin transaction blocks).

The increased transaction fees equate to better payouts for miners, attracting more miners to take part in securing the network and therefore contributing to its sustainability. Granted, Ordinal activity would have to continue improving for it to continue providing transaction fees for Bitcoin in the long term.

The sustainability of almost all PoW chains depends on their ability to attract miners, including Bitcoin. As ironic as it sounds, the most effective method of bringing people onto a chain is through enacting non-financial uses onto that chain, like the likes of NFTs, which in turn drives more chain activity and generates transaction fees. This then brings us to the next point: how long will, or if it even can, Ordinals establish itself as a key part to Bitcoin’s future?

Are Bitcoin NFTs Worth Your Time?

For your average NFT trader, Bitcoin NFTs probably seem much more of a hassle to get into than anything else. Given its infancy, the technological framework surrounding it still is cumbersome to understand, evident by the much more complicated steps in trading them compared to your conventional NFTs. Not to mention the high entry prices of some of the Ordinal collections that make them inaccessible to many.

As of now, Bitcoin NFTs probably only appeal to the tech-savvy—those who understand the Ordinals protocol enough to successfully profit from it, or hardcore NFT collectors who seek to collect rare pieces of the monumental Ordinals protocol breakthrough. As always, like many of the things in web3, those that benefited the most from the birth of the Ordinals protocol were early adopters—the first people who managed to make inscriptions.

A rising notion is that Bitcoin doesn’t really need NFTs, as there are many chains out there already with fleshed-out NFT protocols, and many think Ordinals serve more as a gimmick than anything substantial. In recent days the number of inscriptions made has decreased drastically, indicating that the massive hype arising from the initial announcement of Bitcoin NFTs is slowly diminishing.

Ordinals may very well sink deep into the depths of the ever-evolving web3 space in the upcoming weeks, but as mentioned before, the rise of the Ordinals protocol highlighted potential areas of improvement for Bitcoin as a network. Even for a network with such a paramount end goal of serving as a legitimate financial currency, the innovation of non-financial uses still rather support than detract from that goal, as the ultimate use case of Bitcoin could still differ greatly in the same way Ethereum NFTs could evolve from monkey doodles to legal records in the future.

If you are looking to explore the Ordinals protocol in its entirety, you can check out the handbook explaining Ordinals theory.

This article is provided for educational purposes and should not be taken as financial advice. Always do your own research before investing in any digital assets.

(By Aidan Ang)

Read more: https://www.coingecko.com/learn/bitcoin-ordinals-nft