NFTs and Tokens: Bitcoin's New Frontier (Part 1 of 2)

Bitcoin is in the midst of its most exciting cultural shift in years. Thanks to the release of Ordinal Theory, the idea of numbering individual units of Bitcoin, it has become possible to create all sorts of new assets directly on the Bitcoin blockchain, including fungible tokens and NFTs. In this article, we’ll dive into the history behind Ordinals, community sentiment, and what could come next for the original crypto.

Ordinals are a relatively new feature in the Bitcoin protocol that aims to make it more engaging and fun for users. The Ordinal Theory proposed by Casey Rodarmor is a revolutionary approach to tracking and transferring individual satoshis, the smallest unit in today’s Bitcoin marketplace. A satoshi, or sat, is 100 millionth of a Bitcoin. These numbers are assigned based on the order in which the satoshis are mined and transferred in transactions. For example, the first satoshi ever mined would have the ordinal number 1, the second one would have 2, and so on. Through this numbering system, each satoshi inherently becomes a non-fungible token, each with its unique identity and transaction history. Furthermore, thanks to a recent addition to the Bitcoin protocol’s code, users can inscribe data onto specific satoshis, creating digital artifacts that can be sold, stored, or purchased. Nearly anything, as long as it will fit into a Bitcoin transaction, can be inscribed on an Ordinal - One developer even inscribed a version of the video game Doom on Satoshi #1905393798236699.

Ordinal Theory also led to BRC-20, a standard for creating fungible tokens on Bitcoin. Though incredibly limited in their scope, they allow for non-Bitcoin assets to be traded on the chain and derive all of the strong security guarantees provided by the large proof of work network.

While Ordinals may appear to be relatively uncontroversial, there are certainly strong arguments against their proliferation. Some see ordinals as a way to unleash the creative potential of Bitcoin and explore new use cases for the network. Others view ordinals as a waste of block space and a distraction from Bitcoin’s core value proposition as digital gold. It also introduces the potential for unequal transactions and MEV, a problem well-known in the Ethereum community. Miners could extract value by reordering or censoring transactions that involve ordinal data. For example, a miner could front-run a transaction that bids for a rare ordinal NFT by inserting their bid with a higher fee before the original transaction in the same block. Alternatively, a miner could exclude a transaction that sells an ordinal token at a low price and buy it themselves in a later block. These possibilities mean that Bitcoin would no longer be a neutral network purely used for payments but an on-chain settlement layer with a much broader scope and, therefore, less usable for its original intended purpose.

Whether or not the cultural shift originated by Ordinals will become a mainstream movement or a niche experiment in the Bitcoin space remains to be seen. What is certain is that they have opened up new possibilities and questions for the oldest and most established cryptocurrency. As always, Bitcoin continues evolving and surprises us with its resilience and adaptability.

By Lincoln Murr

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