NFTs
Understanding Ordinals: The Evolution of NFTs on Bitcoin
Ordinals are not NFTs: they are Ordinals. But what exactly makes ordinals different? And what is it about its ecosystem that has inspired so much passion, FOMO and debate within the Bitcoin ecosystem? Understanding this requires going back in time to the beginning of NFTs to trace their journey from Bitcoin to Ethereum and then back again.
Yes, ordinals share a number of similarities with NFTs. After all, they are non-fungible tokens that are provably unique, fully owned and stored on-chain. But thanks to the genius of creator Casey Rodarmor, Ordinals incorporate a number of unique features that have turned them into a multibillion-dollar industry, even as NFTs on Ethereum falter. Today, Ordinals form a distinct market whose community is one of the quirkiest and most engaged in all of crypto. And that is a feat.
From colored coins to PFPs
One of the most curious things about NFTs is that their origins date back to Bitcoin. Although the Bitcoin network was never designed for anything other than transacting and securing BTC, it didn’t take long for imagineers to start, well, imagining other ways to use it. One of them, which merged in 2012, was Colored coinsa system for creating non-fungible assets by adding unique metadata to BTC transactions.
Although Colored Coins never really took off, they planted a seed, and within two years the first NFT was created on the Namecoin blockchain. Then, in 2017, the now-famous Crypto Kitties emerged on Ethereum, briefly clogging the network and starting the first wave of NFTs as we know them. In 2020, the concept of PFPs was popularized: a themed collection of unique characters, often numbering 10,000, that ushered in the modern era of NFTs.
In 2021, NFTs were stratospheric on Ethereum, making its early users extremely rich in the case of top-tier collections like Bored Apes and Crypto Punks. At this stage, some basic rules defining NFTs were established: each was unique, but often part of a larger collection of themed characters; its metadata was stored on-chain whenever possible or using decentralized file storage when necessary; and its true value lay in the communities that rallied around it.
While anyone can create an NFT, it takes memes, energy, and perseverance to turn 10,000 “jpegs,” as they are pejoratively nicknamed, into a multimillion-dollar movement. Many tried and most failed, but a handful of NFT communities overcame the subsequent bear market, which saw valuations plummet as celebrities who had FOMO disappeared from the scene almost as quickly.
But despite naysayers’ predictions, NFTs were not dead. In fact, they were about to be reignited in the jail where it all began. Enter Casey Rodarmor, Ordinals, and Bitcoin.
A Wild Ordinal Appears
In December 2022, at the height of the crypto and NFT bear market, Ordinals it was live. A system for minting or “inscribing” unique metadata onto a satoshi – the smallest unit of a bitcoin – Ordinals was launched with little fanfare. But the relative ambivalence that greeted its launch didn’t last long: After bored bitcoiners and bear market survivors latched on, Ordinals went stratospheric. And they haven’t stopped since.
In the first six months, more than 23 million Ordinal registrations were created and a thriving market emerged to support their trading. People began paying absurd amounts for Bitcoin-based “jpegs,” while miners gratefully soaked up the revenue that the rise in transaction fees brought. Ordinals now have generated nearly half a billion dollars in transaction fees, solving the problem of decreasing block rewards, and more than 66 million registrations were generated.
Like many crypto crazes, Ordinals have sometimes been victims of their own success, resulting in Bitcoin network fee hikes during vaunted launches. But, as so often happens, when cryptography creates a problem, it creates a solution. As the Bitcoin ecosystem expanded to receive L2s and accommodate DeFi, networks emerged to withstand the pressure – including Ordinals action.
Merlin Chain, for example, supports native Bitcoin assets, including Ordinals, providing a cheaper and faster environment for trade signups. This allows Ordinals to be traded without incurring the high L1 fees and long confirmation times that are one of the biggest barriers to wider adoption. Bitcoin L2s have the ability to facilitate actions such as sweeping a collection (i.e. purchasing multiple subscriptions in one transaction), which are essential in Ethereum NFTs.
As a result, Ordinals can inherit the properties that made NFTs so eminently collectible, while maintaining Bitcoin’s unique characteristic – rarity. And not just the rarity of the inscription itself, but of the satoshi itself in which it is encoded.
Understanding Rare Sats
Case Rodamor had two masterstrokes when conceiving ordinals. The first was to design a protocol that would allow encoding images and metadata in a single satoshi. The second was to devise a value system for the satoshis themselves, making specific satos extremely collectible, even without the addition of an inscription, simply due to their age and transaction history.
Like Magical Eden explains in his guide to rare sats, “Sats that were mined by Satoshi Nakamoto himself are… highly sought after by collectors… The Rodarmor Rarity Index is a classification system devised by Casey Rodarmor and rooted in Ordinal Theory – these satoshis are categorized based on crucial moments in the Bitcoin timeline, such as mining difficulty adjustments and halving events.”
Combine rare satoshis with unique inscriptions and you have the ultimate collectible: a Bitcoin artifact that is as coveted for its past as its current reincarnation. It’s a powerful formula that combines Bitcoin tradition with NFT culture and is at the heart of Ordinals’ compelling value proposition.
NFTs, but different
Whereas the token assigned to each Ethereum NFT is unremarkable and merely serves to map each piece of multimedia to a digital unit of exchange, the sats to which many Ordinals are attached have a meaning of their own that, in the eyes of their collectors, increases your appeal.
But there are also fundamental differences between ordinals and NFTs that are less mystical in nature. As is the fact that, unlike NFT collections traded on EVM networks, Ordinals creators do not receive royalties for each resale. This doesn’t inherently make one medium superior to the other, but it does show that Ordinals are driven less by the creator and more by the community behind the collection. Until now, major artists have been slow to release Ordinals collections, which have instead emerged in a more grassroots form.
Bitcoiners who have bet on Ordinals are hopeful that their entries will prove more durable than NFTs and thus avoid the boom and bust cycle that has befallen the latter. It remains to be seen whether this will be confirmed. But one thing can be said for sure: whatever the ordinals are, they are not NFTs. They are ordinal and, in the eyes of their most ardent collectors, they are the best thing since Bitcoin.