The surge in Ordinals trading clogs the BTC network, how does it compare to NFTs? | veDAO Research Institute

Elon Musk commented on The Joe Rogan Experience podcast on October 31, stating that NFTs do not actually store artwork on the blockchain. He said, "You should at least encode the JPEG on the blockchain. If the company storing the image goes bankrupt, then you no longer own that image." While Musk criticized NFTs, his comments also highlighted the benefits of Bitcoin Ordinals (also known as Bitcoin NFTs). Ordinals permanently store image data on the Bitcoin blockchain, making it more decentralized and less reliant on third parties, which enhances the anti-counterfeiting aspect of NFTs.

Videos inscribed on the Bitcoin blockchain through the Ordinals protocol. Source: Ord.io

Since the emergence of the Ordinals protocol in 2022, Bitcoin-based NFTs have divided the global user community of the blockchain. On one hand, proponents of the technology argue 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 represent an unnecessary deviation from Bitcoin's original premise, potentially leading to congestion in what was originally a streamlined payment network.

Bitcoin Network Congestion Caused by Ordinals

In October, the Bitcoin network recorded more Ordinals transactions than in any previous month. As of the first week of November, the blockchain had recorded over 175,000 transactions. Interest in NFT series such as Bitcoin Bees and OrdiRats has surged, leading to a rapid rise in activity for these two BRP-20 tokens.

Of course, compared to blockchains like Mythos that are specifically built for NFTs, the transaction volume of Ordinals still pales in comparison. Bitcoin Ordinals transactions are also overshadowed by faster blockchains like Ethereum and Polygon, which regularly record tens of thousands of NFT transactions daily. The reason for this phenomenon is primarily due to a key difference between Bitcoin and later generations of blockchains, many of which were designed with data-intensive NFT transactions in mind.

Increased Bitcoin Transaction Fees Driven by Ordinals Activity

Even at maximum capacity, Bitcoin's processing speed is limited to just 7 transactions per second (TPS). In contrast, faster and lighter 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 evident that Bitcoin's transaction processing speed appears slow compared to its younger and more agile counterparts. As a result, skeptics of Ordinals warned that the protocol would lead to network congestion, and their concerns were validated when Bitcoin transaction fees began to rise in October. This summer, the average transaction fee for Bitcoin fluctuated within 20% of $1, but on November 8, the average transaction fee surged to $7.168, reaching a six-month high.

When Ordinals transactions last clogged the Bitcoin network in May, some community members proposed modifying the underlying protocol to limit Ordinals transactions. As one developer stated, "The 'worthless' BRP-20 tokens threaten the smooth and normal use of the Bitcoin network as a peer-to-peer digital currency."

However, Bitcoin purists may never succeed in restricting Ordinals, as building the necessary consensus to enforce changes to Bitcoin's core codebase is notoriously difficult. Similarly, persuading miners to support upgrades that could negatively impact their transaction fee revenue is an unlikely task, especially with the impending Bitcoin halving.

Bitcoin Ordinals and NFTs

The Ordinals protocol was created by Casey Rodarmor in December 2022, following the Taproot update that enabled complex smart contracts on Bitcoin. According to Dune data, approximately 38 million Ordinals inscriptions are permanently etched 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 skyrocket and filling the mempool with pending transactions.

On the other hand, NFTs were first conceived in 2014. Their emergence allowed for 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 multi-billion dollar market and become a cultural phenomenon. However, it wasn't until many years later that NFTs finally gained a foothold. By 2021, celebrities like Justin Bieber and Madonna were flaunting their Bored Apes, and it seemed everyone had their own opinion on the notorious "expensive JPEGs." The market peaked on January 19, 2022, nearly eight years after its conception.

Bitcoin Ordinals differ from traditional NFTs in two key ways. NFTs on platforms like Ethereum typically only store links to off-chain artwork rather than encoding the actual artwork on the blockchain. As Musk pointed out, this means that if the link fails, the NFT loses its associated artwork, and thus the NFT loses its original value. Additionally, NFTs often embed creator royalties into smart contracts, allowing artists to receive a percentage of resale value. Bitcoin Ordinals do not have such royalties, or at least not inherently, as data etched onto Bitcoin cannot be changed.

Digital Artifact

Bitcoin Ordinals encode artwork directly on the Bitcoin blockchain, ensuring that as long as Bitcoin exists, the artwork will exist. For this reason, there is a viewpoint that Ordinals more purely reflect 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" over Bitcoin NFT.

Conclusion

In the future, we may see a differentiation in the non-fungible market. One is NFTs, which allow for more complex and evolving functionalities, while the other is Bitcoin Ordinals, which guarantee irrevocable ownership and provenance. The "Digital Artifacts" created by Casey may become what we now know as NFTs—more enduring digital collectibles. Data is etched 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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