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- The idea of NFTs on the Bitcoin blockchain is not new. Yet only after a long gestation did it genuinely gain popularity.<\/li>\n
- The hype around Ordinals significantly affects various on-chain metrics of digital gold: transaction activity, mempool congestion, block fullness, etc.<\/li>\n
- The project remains in the early stages of development, but many in the community are actively building the infrastructure. Wallets with native support for this new type of NFT, user-friendly tools for anchoring digital objects into the blockchain, and solutions for Ethereum integration are emerging.<\/li>\n<\/ul>\n<\/div>\n
What Ordinals Are<\/h2>\n
The Ordinals project, which appeared in January 2023, opened the ability to place images and other data types in the Bitcoin blockchain\u2014the largest cryptocurrency by market capitalization\u2014without using a separate token or sidechain<\/a>.<\/p>\n
Examples of Bitcoin NFTs. Data: Rare Ordinals<\/a>.<\/figcaption><\/figure>\n The system uses<\/a> the numbering of satoshis<\/span> (serialization) to record data in \u201cwitness portion\u201d<\/a> of a Bitcoin transaction.<\/p>\n
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\u201cOrdinal Theory is a proposed methodology for identifying (by number) and tracking each individual satoshi across the entire Bitcoin supply,\u201d \u2014 analysts at Glassnode<\/a>.<\/p>\n<\/blockquote>\n
The Ordinals phenomenon became possible thanks to the implementation of Segregate Witness (SegWit)<\/a> in August 2017 and the software fork Taproot<\/a> implemented a few years later. The latter, among other things, helped reduce costs and increase privacy. <\/p>\n
Primarily aimed at solving the scalability problem, SegWit changed the block structure, allowing signatures to be detached from the process of their transmission. The update also addressed the malleability problem and laid the groundwork for the development of Lightning Network<\/a>.<\/p>\n
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\u201cSegWit increased the Bitcoin block size from 1 MB to 4 MB. In turn, Taproot relaxed data limits, allowing an entire block of 4 MB to be filled with NFTs from Ordinals,\u201d \u2014 noted<\/a> partner NovaBlock Capital Leor Shimron.<\/p>\n<\/blockquote>\n
The graph below illustrates the move beyond the 1 MB limit and the subsequent gradual rise in Bitcoin\u2019s average block size after SegWit\u2019s soft fork:<\/p>\n
Data: Glassnode<\/a>.<\/figcaption><\/figure>\n Inscriptions created thanks to Ordinals are positioned as \u201cdigital artifacts\u201d.<\/p>\n
NFTs in other ecosystems such as Ethereum or Solana are tokens that attest to ownership of specific items. The latter are usually stored off-chain in some off-chain storage.<\/p>\n
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\u201cHosting services range from cloud servers to IPFS and blockchains for file storage [\u2026]. On the other hand, \u201cinscriptions\u201d actually contain raw data written directly into the Bitcoin blockchain. This makes them unique,\u201d \u2014 explained researchers at Glassnode.<\/p>\n<\/blockquote>\n
On the Ordinals site the following is stated<\/a>:<\/p>\n
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\u201cDigital artifacts are perfect. An NFT pointing to off-chain content on IPFS or Arweave is imperfect and, therefore, not a digital artifact.\u201d<\/p>\n<\/blockquote>\n
One of the popular collections of the new type of assets is Ordinal Punks<\/a>, consisting of just 100 digital items. According to Leor Shimron, the NFT shown below sold for 9.5 BTC (~$226,000 at the 22.02.2023 rate).<\/p>\n
Data: forbes.com<\/a>, ordinals.com.<\/figcaption><\/figure>\n Chronicles of the Bitcoin NFT Boom<\/h2>\n
It is worth noting that the idea of NFTs on the Bitcoin blockchain is not new \u2014 experiments with similar assets began with solutions such as Colored Coins<\/a> and Counterparty<\/a> in 2012 and 2014 respectively. Only after a long gestation did the concept genuinely gain popularity. <\/p>\n
As of 22.02.2023 the number of Ordinals assets issued exceeded 160,000. The chart shows that the majority of objects (>80%) are images. The text-format Bitcoin NFT ranks second in popularity (>10%).<\/p>\n
Data: Dune<\/a> as of 22.02.2023.<\/figcaption><\/figure>\n \n
\u201cThe hype surrounding the spread of information about inscriptions is notable. The excitement around the possibility of anchoring digital artifacts in the oldest and most decentralized blockchain has led to explosive growth in transaction volumes, mempool congestion, and increased average block size,\u201d researchers at Glassnode noted.<\/p>\n<\/blockquote>\n
Below is shown the dynamics of the fees spent inscribing NFTs \u2014 on February 15 the daily total exceeded $170,000.<\/p>\n
Data: Dune<\/a> as of 22.02.2023.<\/figcaption><\/figure>\n The Ordinals project\u2019s popularity has positively affected the amount of fees per block. Thus, some increased miner revenue can be expected.<\/p>\n
Data: Dune<\/a> as of 22.02.2023.<\/figcaption><\/figure>\n Another consequence of the hype around the innovation is the expansion of Taproot signature usage. The graph below shows a historical maximum readout.<\/p>\n
Data: Dune<\/a> as of 22.02.2023.<\/figcaption><\/figure>\n Average block size has also increased. Arbitrary data like images and other objects can fill the entire available space.<\/p>\n
Data: Glassnode<\/a> as of 22.02.2023.<\/figcaption><\/figure>\n The share of block space occupied by Ordinals transactions peaked at 60%. It then stabilized around 47%.<\/p>\n
Data: Glassnode<\/a>.<\/figcaption><\/figure>\n \n
\u201cNoting that inscriptions account for 4.2% of total on-chain transactions, while consuming more than 47% of block space, this is an incredibly dense data class,\u201d stressed Glassnode\u2019s analysts.<\/p>\n<\/blockquote>\n
According to their observations, before the Ordinals mania blocks were filled to 25-50%. Now this figure ranges from 80-90%, which corresponds to 3.2\u20133.6 MB.<\/p>\n
Data: Glassnode<\/a>.<\/figcaption><\/figure>\n \n
\u201cGiven that inscriptions account for 4.2% of total on-chain transactions, while consuming more than 47% of block space, this is an incredibly dense data class,\u201d emphasized Glassnode\u2019s analysts.<\/p>\n<\/blockquote>\n
According to their observations, before the Ordinals mania, blocks were filled to 25-50%. Now this figure sits in the 80-90% range, corresponding to 3.2\u20133.6 MB.<\/p>\n
Data: Glassnode<\/a>.<\/figcaption><\/figure>\n The chart shows that the greatest congestion occurred during dramatic events related to FTX. However, the situation soon stabilized\u2014the inflow of high-fee transactions dropped significantly.<\/p>\n
In the case of Ordinals, mempool filling occurs gradually, as demand for block space grows.<\/p>\n
New Market Segment<\/h2>\n
The project is still in the early stages, but many community participants are actively building the infrastructure.<\/p>\n
For example, the Bitcoin wallet Hiro Wallet is being developed with native support for this new type of NFT. A similar solution is being pursued by the project Xverse<\/a>.<\/p>\n
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We\u2019ve begun rolling out support to Hiro Wallet for Bitcoin, NFTs and Ordinals for a truly cross-protocol Bitcoin Web3 experience. https:\/\/t.co\/OAVriTraFq<\/a><\/p>\n
? A thread with details\u2026 #bitcoin<\/a> #web3<\/a> #stx<\/a> #nfts<\/a> #ordinals<\/a> pic.twitter.com\/SiWrIluFhk<\/a><\/p>\n
\u2014 Mark Hendrickson | mark.btc | Hiro Wallet (@markymark) February 14, 2023<\/a><\/p><\/blockquote>\n