Bitcoin NFTs — What are ordinals and why are they booming?

Bitcoin NFTs are the hottest trend in crypto right now. JPEGs, pictures and other types of content can be uploaded to the bitcoin blockchain thanks to a new protocol called Ordinals. In the last few weeks, over 100,000 of these NFTs were created, causing a spike in the average block size and transaction fees. Many have welcomed ordinals as a revolutionary use case for bitcoin, but purists see them as a potential danger for bitcoin's original function as a peer to peer cash system. But how do NFTs on Bitcoin actually work? Are they here to stay or it is just hype? And do they really pose a threat to the bitcoin blockchain? I discussed all this with one of the most vocal proponents of ordinals, Bitcoin OG Udi Bertheimer. I'm Giovanni. On this show, we challenge the ideas that shape the world of crypto. In each episode, we assess a crypto narrative, a macroeconomic outlook, or a potential disruptive technology. Only the most solid ideas will make it to the other side. Could you give us a brief overview of what this NFTs on Bitcoin are and how are they different from usual NFTs people know?

So ordinals is the name of the protocol. It's made by Bitcoin, an open source bitcoin developer whose name is Casey Watermore. And at the very basic level, what ordinals mean, before we even talk about jpegs and whatever, what ordinals mean is there's just an accounting method to keep track of, of bitcoins and satoshis moving through the system. So you could say, well, here's this one sat it was mined today, or maybe it was mined in 2009 and you can track how it moved through the bitcoin blockchain. So that's at the very base level, that's what ordinals are. And then on top of that ordinals protocol, Casey also added a way to do what he calls inscriptions. And inscriptions are basically a way to attach any arbitrary data to bitcoin transactions. And those ordinals, as we talked about before, they point at those inscriptions. So you could say, okay, I'm going to put an image of, you know, let's say 50 kilobyte on the bitcoin chain as an inscription. And that inscription is going to point at a specific ordinal so that that ordinal represents it. So essentially you have this bitcoin sat, the satoshi, and you can move it around and it represents this inscription, this jpeg, this whatever sort of arbitrary data that you put on chain.

According to the latest Data, apparently over 76,000 of inscriptions have been created so far. So the block size, the average block size of bitcoin has been also spiking. We also saw a spike in transaction fees. A lot of critics say that this new trend of creating these inscriptions is creating a backlog in the network and so creating problems for people that are using it, that want to use it in the normal way. So just transacting money, basically. So what is your response? This sort of concerns?

Yeah, so, you know, at the most basic level, bitcoin is, you know, it's an uncensorable network and people can use it however they want. There isn't any way that I can see to say that a certain transaction is legitimate and another transaction isn't legitimate. It shouldn't happen. There isn't any, you know, council or any CEO that can look at transactions and say, oh, this transaction is good and should be allowed and this other transaction is bad and should not be allowed. This is the entire point of Bitcoin. No one, no one can make such a claim. To me, it seems that there's, you know, this movement of ordinals and inscriptions found this new use case for Bitcoin and it seems like people are very interested in this use case, so they're willing to pay transaction fees that are higher than other people. If you want to make a purely financial bitcoin transaction that does not involve inscriptions at all, then all you have to do is compete with the rest of the bitcoin users and assign a transaction fee that is high enough in order for your transaction to be included in the block.

If you have to sum up what the benefits are that this new trend, this new way of building NFTs on Bitcoin, how is that positive work for Bitcoin and for adoption in general?

Yeah, so the first and most obvious thing is what we call the security budget. So eventually bitcoin miners are going to stop receiving rewards based on new bitcoin mined. So the amount of new bitcoin mined is going to flatten and people are going to receive very small rewards from that. And most of the reward for miners is going to come from fees. Right now, bitcoin fees are not super high, but they're higher now than they were two weeks ago. And ideally what we would want is for the fees to go up so that miners eventually, maybe not today, but, you know, 10, 20, 30 years from now will be paid enough from fees alone that it will still be worth, worth it for them to provide security to the network. So use cases like inscriptions. They show a lot of hope that because the block space is scarce and because there's demand for stuff like inscriptions, there's a lot of hope that we will get enough people who want to pay fees in order to keep the bitcoin network secure. This is great for bitcoin developers. So there's this group of open source bitcoin developers and contributors who are very skilled at understanding the bitcoin network, understanding the bitcoin code base, building on top of it. And it's kind of a rare skill right now. And so far, especially in the last two, three years, they just didn't have a lot of opportunity to work on lucrative things. You know, they worked on a lot of open source projects, but not on a lot of commercially successful projects. And with all of that interest around ordinals and inscriptions, I expect that there is going to be like a very big ecosystem that is built around that. There's going to be a lot of new startups that build infrastructure for inscriptions, like, you know, wallets and marketplaces and a ton of other things that we need. So we're going to have teams building that and they're going to need bitcoin developers.

Yeah, of course, like one of the main criticism around bitcoin was that it was not very attractive for developers. While now we have a new use case that could potentially, as you said, attract more development activity on it. Some of the criticism that came around was not from just, you know, regular bitcoin maxes, it was from also bitcoin core developers. So even Adam Beck expressed his skepticism towards this new trend. He said that he agrees with you that this thing cannot be censored because bitcoin is by definition uncensorable. But he makes the point that that doesn't mean that it's recommendable to use it like that. So that there are ways to use it that are more worthy than other ways to use it. So for him apparently using it, a peer to peer cash as it was originally, I guess kind of conceptualized by Satoshi is a more worthy way to use bitcoin than minting NFTs. So what do you make of Adam Beck's view on this?

You know, without without referring to any specific person's remarks, I think that in, in general the culture of bitcoin core development has a problem. I think that for a long time now it's not it's not a new problem. For many years now, Bitcoin core developers have ignored what the actual Bitcoin users want. The decisions that Bitcoin core developers make do not seem to be informed by what Bitcoin users desire or demand. It seems to be informed based mostly on personal preferences, whatever passion projects they want to work on, which is okay. But, but I think that if, if their goal or interest is to make an impact and to make Bitcoin better and to make, you know, the community stronger, I think they're, they're, they're not getting there simply because they don't seem to be very interested in what users want and what users demand.

There is another controversy. So Precisely because these JPEGs, these other pieces of content that you can inscribe into the bitcoin blockchain are immutable, there have been quite a bit of concerns around the type of content that can be inscribed on this doshis. For example, we saw there was a case for ordinals. On the Ordinals website. Someone basically inscribed a shock porn image on one satoshi and that showed up on the website of ordinals and that created quite a bit of a bit of noise. So how do we prevent, if we prevent these situations from happening?

Yeah, so, you know, first thing to say is there's, there's like two aspects to this. One is the inconvenience of, of having to look at Chalkbourne and that's, you know, that's fixable because at the end of the day something like ordinals.com or any other like, you know, Ordinals Explorer that people might use, those are centralized services and people can install like, you know, image filters on them that will remove any kind of porn related stuff from the website. It will not remove it from the chain. And if you want to find it on the chain, you will always be able to, but it will not be there on the website where people can see it by accident and be shocked by it when they're not interested to do so. Also, luckily there isn't an economical use case for people to host like you know, shock porn or whatever on, on, on Bitcoin. The reason that inscriptions make economical sense is because they're collector's items and people buy them and collect them in order to eventually sell them in the future. You just can't do that with shock porn because one, no one wants to collect that and two, even if you wanted, you would have a very hard time marketing that and promoting that later. So economically it doesn't make sense.

What I was wondering is in the future we kind of expect or we hope that Bitcoin is going to be used as a peer to peer cash system among people. So potentially in the future we expect to have like so much more transactions going on with Bitcoin, like millions of people transacting with it. At that point the fees will be a completely different story. And so how do you see NFTs and like inscriptions survive in a future where Bitcoin is being used on an everyday basis by million of people as a way to transact with each other?

Yeah. So what I would expect for inscriptions precisely for this reason. Right, Precisely because block space is scarce and we're not going to get more of it, then I would expect that inscriptions are not going to be a mass market thing. Right. You're not going to have millions of them and millions of users of inscriptions just because the math doesn't add up. What Bitcoin is going to do that is special is that I think it's, it's going to become this market for luxury items. So items that are rare, expensive, not everyone can own them, but very like sought after and very in demand because they're going to be so rare. So, yeah, I would expect that it will become more and more difficult to inscribe new stuff in the future. If you will want to do it, you will have to pay a lot in order to do it.

Yeah, that makes sense. And I'm really excited to see how this thread is going to evolve if it's going to be just a short term sort of hype or if it's going to be like a long term sort of experiment. So, yeah, thanks a lot, Uli for coming on our show. It was brilliant.

Thanks a lot. Yeah, this was very fun.