Ordinals Trading Surge Clogs BTC Network, How Does It Compare to NFTs?

Elon Musk commented on The Joe Rogan Experience podcast on October 31, stating that NFTs do not actually store art on the blockchain. He said, "You should at least encode the JPEG on the blockchain. If the company storing the image goes out of business, then you no longer own the image." While Musk criticized NFTs, his comments also emphasized the benefits of Bitcoin Ordinals (also known as Bitcoin NFTs). Ordinals permanently stores image data on the Bitcoin blockchain, making it more decentralized and independent of third parties, making NFTs more counterfeit-proof.

Since the appearance of the Ordinals protocol in 2022, Bitcoin-based NFTs have divided the global user community of the blockchain. On the one hand, proponents of this technology believe that no other blockchain platform can provide the same on-chain functionality, guaranteed security, and active user base as Bitcoin, making it a natural home for NFTs. On the other hand, purists believe that Ordinals represents an unnecessary deviation from the original premise of Bitcoin, which could lead to the originally streamlined payment network becoming congested.

In October, the volume of Ordinals transactions recorded on the Bitcoin network exceeded any previous month. As of the first week of November, the blockchain has recorded over 175,000 transactions. Due to the increasing interest in NFT series (such as Bitcoin Bees and OrdiRats), these two types of BRP-20 tokens have rapidly gained popularity.

Of course, compared to blockchains specifically designed for NFTs like Mythos, the transaction volume of Ordinals still pales in comparison. The transaction volume of Bitcoin Ordinals is also overshadowed by faster blockchains such as Ethereum and Polygon, which regularly record tens of thousands of NFT transactions per day. The main reason for this phenomenon is the key difference between Bitcoin and later generations of blockchains, many of which were designed to accommodate data-intensive NFT transactions.

Even at maximum capacity, Bitcoin's processing speed is limited to only 7 transactions per second (TPS). In comparison, faster and more lightweight blockchains can achieve 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 is obvious that compared to younger and more flexible counterparts, Bitcoin's transaction processing speed appears slow. Therefore, skeptics of Ordinals warned that the protocol would lead to network congestion, and their concerns were confirmed when Bitcoin transaction fees began to rise in October. This summer, the fluctuation range of Bitcoin's average transaction fees was within 20% of $1, but on November 8, the average transaction fee for Bitcoin rose to $7.168, reaching a new high in six months.

The last time Ordinals transactions congested the Bitcoin network was in May, when some members of the community proposed changes to the underlying protocol to limit Ordinals transactions. As one developer put it, the "worthless" BRP-20 tokens "threaten the smooth and normal use of Bitcoin as a peer-to-peer digital currency."

However, Bitcoin purists may never be able to impose restrictions on Ordinals, as it is notoriously difficult to establish the necessary consensus to force changes to Bitcoin's core codebase. Similarly, convincing miners to support upgrades that could negatively impact their transaction fee income is definitely an unlikely task, especially with the upcoming Bitcoin halving.

The Ordinals protocol was created by Casey Rodarmor in December 2022, and the previous Taproot update enabled complex smart contracts on Bitcoin. According to Dune's data, approximately 38 million Ordinals inscriptions are permanently engraved on the Bitcoin blockchain. In early May, the number of Bitcoin Ordinals surged, overwhelming the Bitcoin network. On May 7 and 8, the daily inscription count peaked at 400,000, causing Bitcoin fees to soar, and the mempool was filled with pending transactions.

On the other hand, NFTs were first conceived in 2014. It was their birth that first allowed the trading of digital artworks, collectibles, and in-game items, as if they were as scarce as physical items. It is well known that since their introduction a few years ago, NFTs have rapidly grown into a market worth billions of dollars and have become a cultural phenomenon. However, it was not until many years later that NFTs finally gained a foothold. By 2021, celebrities like Justin Bieber and Madonna were waving their Bored Apes, and it seemed that everyone had their own opinion on the infamous "expensive JPEG." It was not until January 19, 2022, that the market reached its peak, nearly eight years after its conception.

Bitcoin Ordinals differs from traditional NFTs in two key aspects. NFTs on platforms like Ethereum usually only store links to off-chain artworks, rather than encoding the actual artworks on the blockchain. As Musk said, this means that if the link becomes invalid, the NFT loses its associated artwork, and the NFT loses its original value. In addition, NFTs typically embed creator royalties into smart contracts, allowing artists to receive a certain percentage of resale value. Bitcoin Ordinals does not have such royalties, or at least not inherently, because once the data is engraved on Bitcoin, it cannot be changed.

Digital Artifact

Bitcoin Ordinals directly encodes artworks on the Bitcoin blockchain, ensuring that as long as Bitcoin exists, the artwork will exist. For this reason, some believe that Ordinals more purely reflects the original vision of NFTs as irrevocable proof of ownership and provenance. It is for this reason that their creator, Casey, prefers the term "Digital Artifact" rather than Bitcoin NFT.

In the future, we may see a differentiation in the non-fungible market. One is NFTs, which allow for more complex and evolving functionality, and the other is Bitcoin Ordinals, which ensures irrevocable ownership and provenance. The "Digital Artifact" created by Casey may become what we now know as NFTs—a more enduring digital collectible. Data is engraved on the blockchain, not just a link.

References:

https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2023-May/021648.html

https://docs.ordinals.com/digital-artifacts.html

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