Ordinals trading surge clogs up BTC network compared to NFTs.

Source: veDAO Research Institute

Elon Musk commented on The Joe Rogan Experience podcast on October 31 that NFTs don’t actually store artwork on the blockchain. “You should at least encode JPEG in the blockchain,” he says. If the company that stored the image goes out of business, then you don’t own the image anymore. While Musk is criticizing NFTs, his comments also highlight the benefits of Bitcoin Ordinals, also known as Bitcoin NFTs. Ordinals permanently stores image data on the Bitcoin blockchain, making it more decentralized and not dependent on third parties, which makes NFTs more counterfeit-proof.

Video engraved on the Bitcoin blockchain via the Ordinals protocol. Source: Ord.io

Since the advent of the Ordinals protocol in 2022, Bitcoin-based NFTs have divided the blockchain’s global user community. On the one hand, proponents of the technology argue that no other blockchain platform offers the same on-chain functionality, guaranteed security, and active user base as Bitcoin, making it a natural home for NFTs. Purists, on the other hand, argue that Ordinals represent an unnecessary departure from Bitcoin’s original premise and threaten to congest an otherwise streamlined payment network.

Bitcoin network congestion due to Ordinals

In October, the Bitcoin network recorded more Ordinals transactions than in any previous month. As of the first week of November, the blockchain has recorded more than 175,000 transactions. Due to the growing interest in NFT collections, such as Bitcoin Bees and OrdiRats, the two BRP-20 tokens have quickly gained popularity in recent times, with a surge in activity.

Of course, Ordinals’ trading volume still pales in comparison to Mythos, a blockchain built specifically for NFTs. Bitcoin Ordinals trading volume is also overshadowed by faster blockchains like Ethereum and Polygon, which regularly record tens of thousands of NFT transactions per day. The main reason for this phenomenon is that there is a key difference between Bitcoin and later generations of blockchains, and that is that many of these blockchains are designed with data-intensive NFT transactions in mind.

The activity of Ordinals has driven up Bitcoin transaction fees

Even when running at maximum load, Bitcoin’s processing speed is capped at just 7 transactions per second (TPS). In contrast, faster, lighter blockchains can reach tens of thousands of TPS. For example, the TON network recently set a new record of 104,715 TPS, making it faster than Visa and Mastercard.

It’s clear that Bitcoin is slow to process transactions compared to its younger, more flexible counterparts. As a result, Ordinals skeptics warned that the protocol would lead to network congestion, and their fears were confirmed when Bitcoin transaction fees began to climb in October. This summer, the average Bitcoin transaction fee fluctuated within $1 of 20%, but on November 8, the average Bitcoin transaction fee rose to $7.168, a 6-month high.

The last time Ordinals transactions clogged the Bitcoin network in May, some members of the community proposed to modify the underlying protocol to limit Ordinals transactions. As one developer put it, the “worthless” BRP-20 token “threatens the smooth and normal use of the Bitcoin network as a peer-to-peer digital currency.” ”

But Bitcoin purists may never be able to complete the restrictions on Ordinals, as it is notoriously difficult to establish the consensus necessary to force changes to Bitcoin’s core codebase. Similarly, convincing miners to support an upgrade that could negatively impact their transaction fee income is definitely an unlikely task, especially now in the face of the imminent Bitcoin halving.

Bitcoin Ordinals and NFTs

The Ordinals protocol was created by Casey Rodarmor in December 2022 after a Taproot update that enabled complex smart contracts on Bitcoin. According to Dune, there are approximately 38 million Ordinals inscriptions permanently etched on the Bitcoin blockchain. In early May, the number of Bitcoin Ordinals skyrocketed, crushing the Bitcoin network. On May 7 and 8, the number of daily inscriptions peaked at 400,000, causing Bitcoin fees to spike and the mempool to fill with pending transactions.

NFTs, on the other hand, were first conceived in 2014. It was they that were born that, for the first time, allowed the trade of digital art, collectibles, and game items as if they were as scarce as the physical object. It’s no secret that NFTs have quickly grown into a multi-billion dollar market and become a cultural phenomenon since their launch a few years ago. However, it wasn’t until years later that NFTs finally gained a foothold. With celebrities like Justin Bieber and Madonna brandishing their Bored Apes in 2021, it seems like everyone has their own opinion on the infamous “expensive JPEG”. It wasn’t until January 19, 2022, that the market reached its peak, almost eight years after its conception.

Bitcoin Ordinals differ from traditional NFTs in two key ways. NFTs on platforms such as Ethereum typically only store links to off-chain artworks, rather than encoding the actual artwork on the blockchain. As Musk said, this means that if the link fails, the NFT will lose its associated artwork, and the NFT will lose its original value. Additionally, NFTs often embed creator royalties into smart contracts, enabling artists to earn a percentage of the resale value. Bitcoin Ordinals does not have such royalties, or at least not on its own, because the data cannot be changed once it is engraved on Bitcoin.

Digital Artifact

Bitcoin Ordinals encodes the artwork directly on the Bitcoin blockchain, ensuring that as long as Bitcoin exists, the artwork will exist. For this reason, there is an opinion that Ordinals more purely reflects the original vision of NFTs as irrevocable proof of ownership and provenance. It’s for this reason that their creator, Casey, prefers the term “Digital Artifact” over Bitcoin NFTs.

Conclusion

In the future, we may see the differentiation of irreplaceable markets. One is NFTs, which allow for more complex and evolving functionality, and the other is Bitcoin Ordinals, which guarantees irrevocable ownership and proof of provenance. The “digital artifacts” created by Casey could become what we now know as NFTs – more enduring digital collectibles. Data is engraved on the blockchain, not just a link.