What are Bitcoin NFTs Ordinals and how do they work?

Quick Take

  • Past changes in the way Bitcoin works have made it cheaper to post fully on-chain NFTs on the blockchain.
  • Ordinals has set up its own system to take advantage of this and associate satoshis with their own NFTs.

Bitcoin is no stranger to NFTs, but it's not been much of a friend to them either. That could be all changing as a new kind of Bitcoin-based NFTs called Ordinals emerge.

The first blockchain-based NFTs were made in 2014 on Counterparty, a protocol built on Bitcoin. The biggest collections that came out of this were Spells of Genesis in 2015 and Rare Pepes in 2016.

When Counterparty was taking off, it led to a debate over whether this was a good use of the Bitcoin blockchain. “Using full nodes as dumb data storage terminals is simply abusing an all-volunteer network resource,” Jeff Garzik, then a Bitcoin core developer, said at the time

The core issue is the use of what’s called OP_RETURN, a function that can be used to store arbitrary data in the blockchain. Bitcoin had a limit that meant you could effectively only store 40 bytes of data using this function, but in 2016 it was increased to 80 bytes.

The 2017 upgrade Segwit made it 75% cheaper to store data with this function, while the 2021 upgrade Taproot made it around 10% cheaper and easier to store this data in single transactions (as opposed to spreading it among multiple ones), according to Bitcoin core developer Peter Todd.

As a result, anyone can now store as much data as they like with this function as long as they’re willing to pay for it and the total block size remains under 4MB.

Introducing Ordinals

That's where Ordinals comes in. It’s still basically a bit of a workaround, but it provides a new way to store NFTs on the Bitcoin blockchain now that it's easier and cheaper to store larger amounts of data.

There are two things that stand out when it comes to Ordinals NFTs. First, they are comprised entirely of on-chain data. This means the actual image for the NFT itself is stored on the blockchain, instead of simply linking to some image that’s stored on an external website. This matches only a select few NFTs on Ethereum, as the vast majority link to external sites.

Swedish researcher (and former Arcane Assets CIO) Eric Wall estimates that storing fully on-chain NFTs is now seven times cheaper on Bitcoin than on Ethereum.

Start your day with the most influential events and analysis happening across the digital asset ecosystem.

By signing-up you agree to our Terms of Service and Privacy Policy
By signing-up you agree to our Terms of Service and Privacy Policy

The second standout is that NFTs are connected with individual satoshis. That's different from Ethereum, where NFTs are more natively supported and each one has its own token.

It can get complicated, though. Bitcoins are fungible, meaning each one can be used interchangeably and the only way to separate them is through the complex system of transaction inputs and outputs. Ordinals basically set out to find a way to make fungible Bitcoin non-fungible, and to do that, it decided on a shared logic with the proje