Bitcoin NFTs: What Are Ordinal NFTs & How Do They Work?

NFTs, or non-fungible tokens, are digital assets that can be bought, sold and collected in the same way as cryptocurrencies. These digital assets are tokenized on a blockchain, and may be drawings, digital creations, music, in-game assets or many other items. Each NFT is unique, giving it rarity and value. While many blockchains support NFT creation, the Bitcoin blockchain wasn’t specifically designed with this purpose in mind. Instead, it was created as a secure ledger for peer-to-peer transactions. However, Bitcoin’s developers have been working tirelessly to enhance the blockchain’s functionality with NFTs, and they’ve made great progress.

Key Takeaways:

• Bitcoin NFTs are created through an inscription process by imprinting an ordinal on a single satoshi (or one one-hundred-millionth of a single Bitcoin).
• While Bitcoin NFTs have been rising in popularity, they’ve also had their fair share of criticisms and controversies.
• There are now more than 663,000 Bitcoin Ordinals inscribed as of March 2023.

What Are Bitcoin NFTs?

Source: Ordinals

Bitcoin NFTs are non-fungible tokens on the Bitcoin blockchain. They are created through an inscription process using the Ordinals protocol. Each Bitcoin NFT has a serial number, or ordinal, that is imprinted on a single satoshi. This unique number makes each of these digital assets rare and valuable.

Bitcoin NFTs have been made possible through several upgrades to the blockchain over the last few years, including SegWit, Taproot and various Layer 2 payment channels. These upgrades have standardized the appearance of complex transactions and scrambled signatures so that they’re more difficult to identify, thus expanding the blockchain’s capabilities and condensing the size of transactions. 

Bitcoin NFTs were enabled by the launch of the Ordinals protocol in January 2023. A month later, Yuga Labs announced the launch of its Bitcoin NFTs collection, TwelveFold. Notably, Bitcoin NFTs are also referred to as Bitcoin Ordinals and Ordinal NFTs.

How Do Bitcoin NFTs Work?

Each Bitcoin NFT has an inscribed satoshi featuring a unique serial number. Therefore, each satoshi has an individual identity which allows it to be exchanged and tracked.

In order to create a Bitcoin Ordinal, you must access Bitcoin Core and sync to a Bitcoin node. Then, you create an Ordinals Wallet and fund it with satoshis. The “ord” client must be installed on the Bitcoin node in order to inscribe the satoshis and make the Ordinal NFTs. An alternative method is to create a Bitcoin NFT by using OrdinalsBot or Gamma, both of which support this activity without using code. 

Ordinals

Ordinals are comparable to NFTs as digital assets. However, they stand apart with inscriptions on a satoshi, Bitcoin’s smallest denomination. Inscriptions on satoshis became possible because of Bitcoin’s 2021 launch of the Taproot upgrade. 

While NFTs can be purchased on a variety of platforms, Ordinals are currently only available on Discord, Telegram and other select marketplaces. Bitcoin Ordinals have dramatically increased in popularity in a relatively short period of time. In fact, roughly 200,000 Bitcoin Ordinals were inscribed by Feb 28, 2023. This number has since increased to more than 663,000 by late March 2023. 

Inscriptions

When a Bitcoin NFT is inscribed, its content data is written into an authenticating signature within the specific Bitcoin transaction. This authentication signature (or “witness”) was made possible through the SegWit upgrade in 2017. Inscriptions are on-chain and utilize the Ordinals protocol, as opposed to most other NFTs, which are “off-chain.” The Ordinals protocol assigns a unique serial number to each NFT. 

Why Are Bitcoin NFTs Rising in Popularity?

Within weeks after their launch, there were several hundred thousand Bitcoin NFTs on the blockchain, a number that grows by the day. This attests to the strong appeal of Bitcoin NFTs and the pent-up demand for them. Ordinals use Partially Signed Bitcoin Transaction technology (PSBT), which is secure and trustless. Atomic swaps are completed without an intermediary for a 2.7% market fee. Soon, the creators of Bitcoin NFTs will benefit from a 4.2% royalty fee,  which will likely result in their continued rise in popularity.

Controversy Surrounding Bitcoin NFTs

The crypto community has been abuzz since the launch of Bitcoin NFTs, but not all of the attention has been positive. Since its founding in 2009, the Bitcoin blockchain has been used primarily for Bitcoin transactions. Some reasons for this are its unique network structure and limited block size. 

While there is considerable excitement in the crypto community about Bitcoin NFTs, some critics worry about their impact on block space and Bitcoin transactions. Because some NFTs are games, audio clips and images, the file sizes may be considerably larger than those of files for financial data. With greater demand for block space, critics are concerned that confirmation time for a Bitcoin transaction will increase.

Bitcoin’s Fungibility

Opponents of Bitcoin NFTs argue that all satoshis must be valued equally. As the smallest unit of Bitcoin’s currency, their equality supports a fundamental trait of money. Bitcoin NFTs, however, use this smallest unit for inscriptions, which give each NFT its uniqueness and rarity. The value of each Bitcoin NFT is unique, rather than equal, which places the fungibility of Bitcoin in question.

Full Node Costs

Until the recent launch of Bitcoin NFTs, the average block size on Bitcoin’s blockchain was 1.5 MB, a figure that was shattered with a block size of 4 MB after the launch. Some members of the Bitcoin community are concerned that the costs and requirements of running a blockchain node may skyrocket because of such large transactions. However, supporters of Bitcoin NFTs say that the blocks need to be full in order to maintain the security of the Bitcoin network. While the fees may increase, these supporters say that a more secure network is worth the cost.

Bitcoin NFTs vs. Other NFTs

The new Bitcoin NFTs stand apart from Ethereum NFTs and others in several key ways. For example, Bitcoin NFTs are on-chain digital artifacts that are authentic and unique. Through the Ordinals protocol, the inscriptions on Bitcoin NFTs are immutable. In addition, the full data file of Bitcoin NFTs is on the blockchain, as compared to Ethereum NFTs, which are off-chain and may be altered or deleted because the metadata for an Ethereum NFT usually includes a link to the file, rather than the file itself. In order for NFTs on the Ethereum blockchain to be immutable, they must be audited.

Moreover, Bitcoin NFT fees are based on the size of the file, and the content can never be lost. However, because Ethereum NFTs are off-chain and stored on the IPFS, their content may be lost. Another important distinction is that PSBT enables Bitcoin NFTs to be exchanged without a third party. Ethereum NFTs, on the other hand, are exchanged using intermediary platforms with unlimited permission.

How to Trade Bitcoin NFTs

Bitcoin NFTs can only be purchased and sold with wallets that are compatible with Taproot. These include Hiro Wallet, Xverse and the Ordinals Wallet. It’s important to remember that NFT markets are peer-to-peer unregulated markets, and their users are subject to scams. Because of this, all Bitcoin NFTs trades should be carefully monitored.

While you do need to pay close attention while trading Bitcoin NFTs, the process is relatively simple. You can choose to do it over dedicated Bitcoin Ordinals Discord servers, which may be slightly riskier, or on Bitcoin NFT marketplaces such as the Magic Eden Bitcoin NFT marketplace, Generative.xyz or Gamma.io. 

The Magic Eden Bitcoin NFT marketplace is one of the latest NFT marketplaces to join the bandwagon in offering the sale of Bitcoin Ordinals. It was launched on Mar 22, 2023, following the surge in popularity of Bitcoin NFTs. To trade Bitcoin Ordinals on Magic Eden, simply connect a compatible wallet and browse through the Bitcoin NFT collections available.

Magic Eden is looking to expand its support beyond just secondary sales of Bitcoin Ordinals. With future tools in development, creators will soon be able to easily mint or inscribe Bitcoin NFTs. 

Are Bitcoin NFTs a Good Investment?

Bitcoin Ordinals aren’t the first attempt at NFTs on the Bitcoin blockchain, but they stand out because of their inscriptions on satoshis. The file for a Bitcoin NFT lives on the blockchain, and this makes them a novel item in the NFT world. Many people see Bitcoin NFTs as the future because they’re on-chain. However, because of the novelty of Bitcoin NFTs, there isn’t a dedicated NFT market for them yet. In addition, the royalty structure is still being developed, and other developments are in the works. This gives other existing blockchains a leg up. 

Nonetheless, some people believe that many Ethereum NFT projects will bridge to the Bitcoin network in the future. In addition to the use of inscriptions on Bitcoin NFTs, these non-fungible tokens may be viewed as more legitimate because of the unrivaled reputation and dominance of Bitcoin. While there is controversy surrounding Bitcoin NFTs today, such concerns may reasonably be addressed by developers going forward. With this in mind, Bitcoin NFTs may be a solid investment.

Closing Thoughts

Ethereum and other popular blockchains have supported NFTs for years, establishing infrastructure and NFT marketplaces. However, Bitcoin has until recently remained a ledger-based blockchain. The new Bitcoin NFTs stand apart from the other NFTs in exciting ways. Their use of the Ordinals protocol and their other standout features are positioning Bitcoin NFTs for the future with their novel, on-chain non-fungible tokens.

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