In what felt like a flash in 2021, NFTs (non-fungible tokens) came into vogue as the new crown jewel of the crypto industry, prompting Collins Dictionary to name NFT word of the year in 2021. However, the trend thoroughly bypassed the largest cryptocurrency Bitcoin, as it does not largely facilitate such tokens and decentralized protocols for NFTs natively on its blockchain. Instead, NFTs were mainly minted on Ethereum and to a limited extent on other blockchains, such as Solana and Avalanche. No matter what one thinks about NFTs, they have undoubtedly boosted the value of the blockchains, on which they have mainly been minted, since they have increased the activity on these chains, altogether boosting the transaction fees paid.
In that NFTs have not largely been supported by Bitcoin, the cryptocurrency has been left in the dust with no way to profit from NFTs, at least until recently. In January 2023, a developer by the name of Casey Rodarmor released open-source software named Bitcoin Ordinals. The latter has managed to natively incorporate characteristics into the Bitcoin blockchain that are widely similar to NFTs on other blockchains. This has fueled broad enthusiasm as millions of Ordinals have been issued, causing daily transaction fees paid on Bitcoin to surge. Although Ordinals appears to be an important step forward for Bitcoin, the most loud-mouthed critics of Ordinals are in fact the largest Bitcoin maximalists. This is fairly counterintuitive, but it originates from a long-standing conflict in the Bitcoin community on whatever should be the key properties of the blockchain. More on that later. First, we must regard Ordinals.
What is Bitcoin Ordinals?
To incorporate Ordinals into the Bitcoin network, Rodarmor applied two fairly recent Bitcoin improvements called SegWit and Taproot activated on the network in August 2017 and November 2021, respectively. In tandem, SegWit and Taproot allow data such as text, images, and videos to be assigned to individually transferable and traceable so-called Satoshis, also known as sats. The latter is the smallest possible unit of a Bitcoin derived by dividing a single Bitcoin by 100mn. It is named after the pseudonymous person or persons who developed Bitcoin.
The act of earmarking data to individually numbered satoshis is named inscribing. In a like manner, it is labeled inscriptions when measured in units. Not only is the inscribed data immutable, but it is also entirely stored on-chain on Bitcoin rather than by metadata referring to off-chain data stored elsewhere, a technique often used by NFTs on other blockchains. Ordinals are not at all as user-friendly to issue and transfer compared to NFTs on other blockchains, along with the fact that they cannot be traded decentralized. However, it is expected that user-friendliness gradually improves, after which decentralized trading applications may arise, although they may not happen for a long time to come.
One of the most epoch-making events of Bitcoin
In its about 6-month existence, Bitcoin Ordinals has truly thrived. Now, over 11.5mn inscriptions have been made on Bitcoin. With respect to the limited time period and the difficulties of creating an inscription, this is an encouraging number, particularly in view of the fact that Ordinals came out of thin air with largely no prior ecosystem of NFTs nor decentralized applications on Bitcoin.
The surge of inscriptions on Bitcoin is plain as day seeing the daily paid transaction fees on Bitcoin over the past year. The paid fees started to increase in January 2023, at which month Bitcoin Ordinals was launched. Next, transaction fees gradually gained momentum in 2023 before reaching May, at which point the total transaction fees surged heavily as Ordinals turned into a fad of the industry. To further stress the impact of Ordinals, the daily transaction fees measured in Bitcoin rose to a 5-year high of 635 Bitcoins on the 8th of May. In the bull market of 2021, the most lucrative day was nowhere near amounting to about 300 BTC in transaction fees, although the amount was greater in real terms.