New trend: NFTs based on the Bitcoin blockchain

The developers of the Ordinals project figured out how to create NFTs on the Bitcoin blockchain, and a market is already forming around the new trend. About it writes RBC.

A new protocol called Ordinals allows non-fungible tokens (NFTs) to be added to bitcoin transactions, effectively creating an NFT market within the largest cryptocurrency network by capitalization.

Launched in January, Ordinals’ proprietary technology allows images and other types of data to be “written” directly into “satoshis” (the smallest units of bitcoin with a face value of 0.00000001 BTC) on the bitcoin blockchain, without requiring a separate token or network branch (sidechain) for this. Each “record” (inscription) is considered a “digital artifact”, since, as stated, it is immutable and remains forever stored on the blockchain.

The metadata of most NFT projects in the Ethereum or Solana ecosystems can be modified or deleted by the smart contract creator, especially if hosted in a centralized database. With some technical manipulations, it is possible to modify the image associated with the token, its characteristics, or the smart contract identifier. The difference between the Ordinals solution is that it allows you to store the data itself in the blockchain, and not a link pointing to the server on which it is hosted.

More than 50,000 records have already been released on the bitcoin blockchain, which have taken root in the community under the quickly become household term ordinals, some of which are already quite expensive. For example, the Bitcoin Punks collection is growing in value, consisting of a small set of CryptoPunks images, one of the most expensive and well-known collections on Ethereum. One of the first bitcoin punks was sold for 9.5 BTC (~$218,000), demonstrating how early projects are already making significant profits.

new trend

Updates to the bitcoin code called Taproot and SegWit, which occurred in 2021 and 2017, respectively, allowed new forms of metadata to be stored on the bitcoin blockchain. Thanks to SegWit, the block size in the bitcoin blockchain increased from 1 to 4 MB, and after the activation of Taproot, restrictions on the amount of data placed on the blockchain were relaxed, which made it possible to invent a method for creating and storing NFTs proposed by Ordinals. Since the maximum number of coins in bitcoin at the software level is limited to 21 million units, and each coin is divided into 100 million Satoshi, in theory, the blockchain of the first cryptocurrency can store 2.1 quadrillion NFTs.

“At the moment, I would not talk about the trend for non-fungible tokens in the bitcoin network. Yes, of course, over the past few days, the Ordinals protocol has grown quite a lot in terms of volumes and in terms of block subsidies, so these transactions play a certain role in terms of NFT technology in general. There are several factors that, in my opinion, do not yet make it a trend and do not create the conditions for it to turn into some kind of global story, ”comments cryptanalyst Viktor Pershikov.

According to the expert, the specificity lies in the bandwidth of the bitcoin network, because the mass release of NFTs puts a significant burden on it. Users make a lot of transactions that lead to an increase in load, so you can really talk about a trend only if the network has the appropriate scalability.

Due to the popularity of the Ordinals project, a fierce debate broke out in the crypto community. Purists who oppose the idea of ​​Ordinals argue that any non-financial data on the Bitcoin blockchain is nothing more than spam, aimlessly occupying the space of blocks with transactions. In turn, supporters of the idea of ​​Ordinals see the project as a trigger for a wider demand for the blockchain of the first cryptocurrency, which stimulates the development of a market for commissions that compensate miners for the costs of maintaining the network. Given that in the future, fees will remain, in fact, the only source of income for miners, it is in their interests to welcome any use cases for the Bitcoin blockchain that increase their income.

The NFTs created with the help of Ordinals have already increased miners’ income from commissions and ensured the filling of blocks with transactions. Since the launch of the protocol, about 13 BTC (about $285,000 at the exchange rate at the time of publication) has been spent on paying for transactions with NFTs, and NFTs themselves have been contained in about every tenth transaction in the past few days. Activity on the bitcoin network grew to the highest since spring 2021, not least thanks to a new trend.

“Interesting experiment”

Ordinals is not the first project to create non-fungible assets on the bitcoin blockchain. The first attempts were made at the stage of market inception by such projects as Counterparty, Stacks or Mastercoin. Longtime market participants can recall at least two popular collections on the Counterparty protocol: Spells of Genesis and Rare Pepes. Auctions to sell images from the latter sometimes took place offline among enthusiasts at crypto conferences in early 2017. The first NFT collections on Stacks appeared at the end of 2021, and in early February they had a sharp increase in trading volume, probably due to interest in the Ordinals protocol and the idea of ​​NFT on Bitcoin in general.

“We are now seeing an interesting experiment. Its further development rests on how popular NFTs will remain in principle. The NFT sector has grown slightly over the past couple of months, but the overall cryptocurrency market has also grown. If the market does not get a second wind, bitcoin will not help it. Yes, we will get some kind of development prospect, but everything will depend on marketing, how NFTs will be sold in general, and whether they will be sold at all,” predicts Pershikov.

Considering that the project was launched only last month, the infrastructure for creating, storing and trading new NFTs is still being created. In the coming months, we can expect trading platforms to start offering native NFT support from Ordinals, looking at the potential profits from the new trend.

Part of the reason for the rise in value of projects like Bitcoin Punks is that they are one of the first projects deployed on the protocol. There are already over a hundred collections, many of them also have a deliberately low offer. For the same Bitcoin Punks, only 100 units were issued against 10 thousand for the “classic” CryptoPunks, and the shortage also contributes to the growth in demand and prices.

Buyers of such assets should be aware that these are still largely speculative investments, and early projects may be superseded by newer ones that offer more useful features, a more compelling narrative, better art, or other characteristics. However, if the Ordinals protocol proves viable and gains more attention, some of the first projects could become high status symbols for collectors and add significant value, like CryptoPunks or Yuga Labs’ acclaimed Bored Ape Yacht Club (BAYC).

By analogy with other standards, intellectual property and copyright infringement issues remain open for Bitcoin NFTs. As in the already established NFT market, copycat projects are likely to place other people’s works on the bitcoin blockchain, which can lead to litigation. Such precedents for collections on Ethereum have already been on the market. In addition, due to the wider possibilities of smart contracts, Ethereum-based NFT projects have been able to develop innovative royalty systems, auction and collateral mechanics, and it is not yet clear whether it is technically possible to reproduce such functionality in bitcoin.

Source: Cryptocurrency

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