NFTs on Bitcoin - How ordinals are shaking up the nonfungible token landscape
Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!
(Kitco News) The non-fungible token (NFT) community is undergoing its most notable evolution in years thanks to the emergence of the Ordinals protocol, a project that facilitates the tokenization of assets on the Bitcoin (BTC) blockchain.
Ordinals uses an open-source software protocol known as Ord that assigns unique identities to individual satoshis (sats), the smallest units of bitcoin. Using the Ord software, the Ordinal protocol adds data to sats and allows software users to track them based on a system called ordinal numbers.
The Ord system inscribes each sat with content, thus creating bitcoin-native digital artifacts. Users are able to transfer and trade these uniquely-identified satoshis just as they would any normal bitcoin unit, and unlike most Ethereum NFTs, ordinals are stored entirely on-chain.
Ordinals protocol was launched by bitcoin developer Casey Rodarmor on Jan. 21. The functionality of the protocol was made possible by the SegWit and Taproot soft fork upgrades from 2017 and 2021, respectively, that helped increase Bitcoin’s block capacity.
Rodarmor’s goal was to create a system for numbering satoshis that would provide each with a unique serial number that can be used to track each satoshi across the blockchain. He wanted to ensure that the process was entirely Bitcoin native and didn’t require the use of sidechains or separate tokens.
By assigning a unique identifier to each satoshi, Ordinals enables a way to transform inherently fungible satoshis into non-fungible objects. This identifier makes them completely unique, just like NFTs.
The Jan. 21 launch of Ordinals coincided with the surge in bitcoin above $22,000 for the first time in 2021, which occurred on Jan. 20. Bitcoin proceeded to trade sideways over the next few weeks as traders digested the 40% gain the top crypto experienced in January.
Increased traffic on the Bitcoin network
Since the project's launch, activity on the Bitcoin network has been on the rise. In the time since its launch, Bitcoin’s mean block size jumped from its normal average of 1.5–2 MB to between three and 3.5 MB in early February.
Bitcoin mean block size. Source: Glassnode
Data provided by BitMEX Research shows that in some instances, Ordinals’ data has comprised more than 50% of Bitcoin’s block space.
[2/2] Ordinals data continues to consume a large percentage of Bitcoin block weight, often over 50%— BitMEX Research (@BitMEXResearch) February 13, 2023
Data over rolling 40 block periods pic.twitter.com/7ffJ44JMRM
On-chain data provider Glassnode referred to the launch of Ordinals as a “new and unique moment in Bitcoin history, where an innovation is generating network activity without a classical transfer of coin volume for monetary purposes.” The protocol has resulted in a growth of the bitcoin user base and “an upwards pressure on the fee market from usage beyond the typical investment and monetary use cases.”
Further evidence of the effect that Ordinals is having can be seen in the number of Bitcoin wallets with a non-zero balance, which recently pushed to a new all-time high of 44.06 million addresses, according to Glassnode.
Bitcoin addresses with a non-zero balance. Source: Glassnode
“In aggregate, this demonstrates that there has been a short-term uptick in Bitcoin network usage of late, however it is not necessarily in terms of coin volume moved,” Glassnode wrote. “The primary source of this activity is due to Ordinals, which instead of carrying a large payload of coin volume, is instead carrying a larger payload of data and new active users.”
And to the delight of crypto enthusiasts, the uptick in network usage has not led to an increase in fees since a “new lower bound transaction fee required for block inclusion” has been reached since Ordinals launched on Jan. 21, Glassnode said.
So far, there have been over 78,400 NFT-like images and videos inscribed thus far. Data from Dune Analytics shows that images are the most prevalent type being created, followed by text.
Ordinals by type. Source: Dune Analytics
Overall, the launch of Ordinals has been welcomed with open arms by the crypto community as it has added another use case for the Bitcoin network and expanded the NFT ecosystem to the world’s top cryptocurrency network.
“Bitcoin continues to be on the upswing due to the renewed interest in Bitcoin productivity. Ordinals, through taproot scripts, is a solid example of demand without censorship driving BTC,” said Rena Shah, head of operations and strategy at Trust Machines. “Given the changing regulatory environments, bitcoin remains one of the only asset classes viewed as a commodity. The interest in NFTs and other Bitcoin DeFi use cases is likely driving larger institutions to continue to double down on Bitcoin for its long-term potential.”