If you’ve been paying attention to the crypto industry for the last few weeks, you’ve probably seen headlines related to the controversy over NFTs on the Bitcoin blockchain. Some passionate members of the Bitcoin community are upset over this development and are strongly opposed to NFTs hosted on the Bitcoin blockchain.
In order to explain this dispute, it is first necessary to provide some background on how Bitcoin and blockchain databases work. A traditional bank spends massive amounts of money maintaining a database of their customer’s assets and transactions. For example, the Bank of America IT department maintains a database that tracks all of the money held by the firm’s 54 million customers.
In contrast, there is no bank, corporate IT department, or government organization that maintains a cryptocurrency. A cryptocurrency runs on a shared blockchain database that is sustained by a community of developers and enthusiasts around the globe. A dispersed community maintains a copy of the blockchain and keeps track of cryptocurrency transactions.
A Raspberry Pi (essentially a cheap, tiny computer) can be used to run a copy of the Bitcoin … [+]
It’s also important to know that the dispersed global community that maintains a blockchain database periodically decides to make updates to the code. The community comes to a consensus to make the change, and then everyone updates their copy of the blockchain database. Code updates happen to make improvements, increase security, offer new features, etc.
Despite the fact that the mainstream media tends to portray all cryptocurrencies as the same, different cryptocurrencies have very different cultures and communities. The Bitcoin community is generally very conservative, and tends to favor stability and network reliability (i.e., the Bitcoin network is always online and is never down). The Bitcoin community generally makes relatively infrequent code updates and tends to ignore calls to make the network as fast or as feature rich as some rival cryptocurrencies. Maintaining the security and stability of Bitcoin is the #1 priority.
In contrast, a cryptocurrency like Solana is on the opposite end of the spectrum. Solana’s “move fast” mentality focused on shipping new features has seen the project suffer from relatively frequent network failures. The mentality of the founder of Solana is very different from that of the Bitcoin community.
Considering another example, Ethereum falls in between the Bitcoin and Solana mindset. Compared to Solana, Ethereum is more cautious and careful when it comes to rolling out updates to the Ethereum blockchain. Compared to Bitcoin, however, the Ethereum community makes more frequent updates to the Ethereum blockchain and rolls out new features relatively often.
With that background on how blockchains work, what has caused this recent controversy over Bitcoin NFTs? To understand the roots of this dispute, it’s necessary to go back to the November 2021 upgrade to the Bitcoin blockchain. This was dubbed the Taproot Update. This update was primarily focused on increasing privacy, efficiency, and better supporting smart contracts and the Bitcoin Lightning Network. Crucial for today’s conversation and controversies, however, the Taproot Update made it easier to embed a larger amount of data on a single Bitcoin transaction.
An example Ordinal Protocol NFT.
Fast forward to January 31, 2023 and a new service was launched called Ordinal Protocol. The Ordinal Protocol takes advantage of the Taproot Update to let people trade NFTs on the Bitcoin blockchain. The Ordinal Protocol attaches the NFT data to Bitcoin transactions.
Broadly speaking, some passionate Bitcoins are upset about NFTs on the Bitcoin blockchain. NFTs are not core to what many Bitcoiners perceive to be the main mission of Bitcoin. Bitcoiners tend to believe that Bitcoin should focus only on building sound, decentralized money that is free from inflation and government intervention. The notion that something like Bitcoin could become a valuable currency and a positive force for humanity is often dismissed by many people in the developed world as some combination of ridiculous, unnecessary, or a scam. It’s important to remember, however, that the vast majority of humanity does not live in countries with stable currencies, reliable banks, democratic governments, and rule of law.
Imagine you are one of the 84 million citizens of Turkey, a country with a 200%+ inflation rate and a government that freezes the bank accounts of opposition parties before an election. Or maybe you’re one of the 225 million citizens of Nigeria, a country with an inflation rate somewhere between 21% and 52%, a recent botched attempt to switch to new banknotes, an active violent insurgency in the northeast of the country, and a government that freezes the bank accounts of anti-police brutality protests. Or you could be one of the 45 million citizens of Argentina, living in a country with a 100% inflation rate and a long, tortuous history of financial and economic instability. The dream of creating an alternative, decentralized cryptocurrency that anyone around the world can use is a core belief of the Bitcoin community, and NFTs seem like a distraction from that essential mission.
Nigerians wait in line for access to an ATM during the government’s recent chaotic attempt to … [+]
There are two key questions about Bitcoin NFTs that will play out in the months and years ahead. First, will NFTs on the Bitcoin blockchain catch on and take market share away from NFTs hosted on competing blockchains (such as Ethereum or Solana)? And second, if NFTs on the Bitcoin blockchain become popular, what does that mean for Bitcoin’s goal of becoming a global decentralized currency?
On the question of whether Bitcoin NFTs will catch on and become popular, it is too early to tell. According to Ovie Faruq, Co-Founder of Canary Labs, “it’s very binary at this stage. If you want to invest in Bitcoin NFTs, you’re either going to make 100x or lose 99%. One of the reasons why NFTs on Ethereum have survived through a difficult bear market is the aspect of community; since a lot of Ordinals are in my opinion just copy pastes of Ethereum NFTs, it’s hard for me to think they will have any enduring community value. That said, owning early editions (low serial numbers) can be valuable, and maybe there’s some historical value there.”
Should Bitcoin NFTs catch on and become popular, there is a technical consideration beyond the broader philosophical question of distracting from the sound, decentralized money mission. Adding NFT data takes up space in the Bitcoin blockchain database. The Bitcoin community seems to have different perspectives on the risk posed by clogging up the Bitcoin blockchain with NFT data. On one hand, creating more transaction activity increases the fees generated by the community that maintains the Bitcoin database. Without going too deeply into the technical details, the more fee activity generated by the Bitcoin network, the more people around the world will maintain the network, thus making the network more stable and secure. In addition, the way that surplus data (like NFTs) is attached to Bitcoin transactions means some data can be pruned. Some members of the Bitcoin community feel that concerns about the burden on the network may ultimately be overblown.
On the other hand, some members of the Bitcoin community are worried that if Bitcoin NFTs become popular, the amount of space they take up on the Bitcoin blockchain could drive up the price of Bitcoin transactions. This would hurt users in the developing world the most, and those are the users where decentralized money is currently most needed. A user trying to send Bitcoin in Nigeria would be burdened by a $5 transaction fee, which is a significant cost in many low-income countries.
Which side is right? It’s hard to say. According to Milan De Reede, a longtime crypto expert who has been in the space since 2012, “Bitcoin NFTs are an interesting dichotomy. Many Bitcoiners are almost religious in their belief that Bitcoin should be secure money and nothing more. Yet these NFTs lead to more fees being paid, which actually increases security. Some of the big names in Bitcoin were strongly against this idea initially, but I think we’re already seeing a turn towards some enthusiasm as the repercussions sink in.”
From approximately 2012-2014, many people in the Bitcoin community were concerned about the the … [+]
Ultimately, Bitcoin NFTs may fizzle out. Previous non-core projects on the Bitcoin blockchain that created some consternation at the time (such as the SatoshiDice gambling service) ultimately did not negatively impact the long-term trajectory of Bitcoin. Regardless, should Bitcoin NFTs catch on and the naysayers are right about the negative repercussions, the Bitcoin community would likely react. The community could come to a consensus to update the code to either better accommodate NFT data or to block (or at least discourage) NFTs on the Bitcoin blockchain. Blockchain databases change over time. Either way, Bitcoin’s long-term mission of developing sound, decentralized money will continue to move forward.
