“Bitcoin NFTs” called Ordinals have gained tremendous popularity since the beginning of 2023. The “inscriptions” methodology used in their creation has since spread to other networks. We explore how they differ from NFT token structures, and the implications of their popularity.
Last 30 days’ NFT sales volumes by blockchain
Inscription vs. smart contracts
As NFTs gained popularity during the 2020-2021 bull cycle, most of them were created as smart contracts – computer programmes stored on the blockchain. However, this year has seen a rise of NFTs created through inscribing metadata onto the blockchain.
Smart contract based NFTs usually store the digital image, video or other form of data externally, with the NFT itself containing a link pointing to the file. While off-chain stored NFTs are less secure, fully on-chain NFTs were only a small percent of the NFT market until recently due to the prohibitive costs involved.
Inscription-based NFTs (called Ordinals on the Bitcoin blockchain) offer the security of on-chain NFTs but at a much lower cost. Just as smart contracts, inscriptions can also be used to create fungible tokens.
Inscriptions on the Bitcoin blockchain are immutable. Other blockchains like Solana have both mutable and immutable inscriptions. Unlike smart contracts, inscriptions cannot automatically enforce creator royalties for NFTs.
Inscription based NFTs have become extremely popular since the beginning of the year, allowing the Bitcoin network to achieve a dominant market share in NFTs. It also changed Bitcoin’s mix of use cases. Used predominantly as a medium of exchange and store of value traditionally – “sound money” and “digital gold” – Bitcoin is now increasingly used as a platform.
Recursive inscriptions which create a chain by calling data from existing inscriptions support the creation of complex data structures, surpassing Bitcoin’s original block size limit. Recursive inscriptions enable use cases such as 3D video games, music videos, or large data sets for real world assets (RWA), vastly expanding the Bitcoin network’s ability to compete as a platform.
The popularity of Bitcoin Ordinals, and their greater security and lower cost vs. smart contract based NFTs, has inspired other blockchain communities to implement inscriptions.
The inscriptions frenzy has led to the impacted blockchains getting congested and transaction fees rising, inspiring a debate about their benefits vs. drawbacks and possible solutions to the latter.
On the Bitcoin network, the debate is even more heated due to Bitcoin’s limited scalability and the long-standing philosophical debate on whether Bitcoin’s multiple use cases detract from its primary intended purpose as an alternative monetary system.
In response, Bitcoin mining firm OCEAN began rejecting Ordinals transactions, citing denial of service attacks and increased congestion risks. Over Christmas, another developer created a script for miners, designed to reject blocks containing Ordinals.
Concerns about centralisation and censorship have arisen. On the one hand, the higher cost to run a node due to the need for storage space and bandwidth for the much greater volume of data could lead to miner concentration and the resulting centralisation of Bitcoin’s ledger – especially as miners face increasing regulatory pressure to filter and block transactions. On the other hand, censoring Ordinals transactions on the network is also seen as contradictory to Bitcoin’s decentralised ethos.
Inscriptions have revitalised innovation on the Bitcoin network and inspired other protocols. Inscription-based NFTs have also injected fresh excitement into the NFT market. While controversy and concerns have arisen, the issues encountered will encourage further innovation.
Read more about crypto assets from Sygnum here.
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