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Bitcoin Is Dead. Long Live Bitcoin.

by Alok Vasudev
"What is this new devilry? A Balrog. A demon of the ancient world. This foe is beyond any of you." – The Fellowship of the Ring

The Bitcoin of old – the Bitcoin we originally encountered – was dynamic. It was a magnet for some of the most creative thinkers and talented builders in all of technology. It was the original source of ideas that define the modern contours of the crypto industry. But then something changed. What began as pragmatic conservatism evolved into Luddite dogma. A technology founded as an act of dissent now primarily values compliance to orthodoxy.

It's time, we think, for the doers to take back Bitcoin from the Tweeters. Bitcoin is at risk of fatal ossification should its community extinguish its (already waning) ability to innovate. There's a difference between measuring twice before cutting and losing your pair of scissors altogether. Bitcoin has legitimate open questions that need answers for it to succeed long-term. Answers to those questions (and others we'll assuredly encounter in the future) won't come unless the Bitcoin community can build. After all, how can you see clearly if you have laser beams obscuring your vision?

There is good news, however. A flaming eye can underestimate the impact of something as small as a Hobbit JPEG...

When we first learned of Bitcoin circa 2012, it was a hotbed for innovation and creativity. Many of the concepts proliferating today in flourishing ecosystems like Ethereum – e.g. smart contracts, sidechains / Layer 2's, NFTs, tokens, DAOs – were all brainchildren of the OG Bitcoin community. But, for Bitcoin itself, those ideas lost steam in the mid 2010s as the community developed an increasingly conservative approach to core protocol development.

Bitcoin, as recent crypto entrants know it, progresses deliberately, incrementally, and slowly. Bitcoin's stasis enabled the community to develop a pseudo-religious zeal. To be clear, a successful non-sovereign money requires a growing cult of belief. But without technical progress, all Bitcoiners had to stoke the flames of adoption were memes (e.g. laser eyes, "stacking sats"). Bitcoin became a way of life with a strict orthodoxy, rather than a technology substrate. That is, until three somewhat innocuous recent upgrades (collectively named "the Taproot upgrade") had unexpected consequences.

Taproot, initially proposed in 2018 by long-time Bitcoin core developer Greg Maxwell, activated in late 2021. Its primary goal is to enhance Bitcoin scalability by improving the efficiency by which digital signatures are aggregated within blocks. As a result, Taproot freed up more data storage capacity per block. Combine this newfound Bitcoin storage with developer creativity atop a permissionless substrate, and you get Ordinals – a protocol for inscribing arbitrary digital data (e.g. text, images, JSON) onto the Bitcoin blockchain.

The Ordinals protocol, released by Bitcoin developer Casey Rodarmor in late 2022, is a simple but powerful scheme to associate individual Satoshis1 with data stored on the blockchain. The owner of a specific sat also owns the data inscribed to it, be that data a JPEG, text, a JSON object, etc. There’s no change to how Bitcoin operates; there’s just now extra data onchain that can be picked up and interpreted by an indexer, provided the data follows the Ordinals inscription protocol.

In 2023, Ordinals broke out. So far this year nearly 37M ordinals have been inscribed2. We’ve seen Ordinals adoption from existing brands (e.g. Yuga Labs) and, critically, new emergent brands and communities (e.g. Taproot Wizards). There’s also been a flurry of new infrastructure to support Ordinals, including wallets, marketplaces, and explorers3.

Out of the Ordinals explosion, Bitcoin NFTs – images inscribed onto sats – have found the strongest resonance so far. But the response has been polarizing. Many, especially those with tribal affiliation to other blockchain ecosystems, dismiss Bitcoin NFTs as a fad. We, however, think Bitcoin NFTs are underestimated and have a legitimate chance to accrue long-term value. Here's why.

The Case for Bitcoin NFTs

Pre-Existing Blockchain Legitimacy

Newly launched blockchains cultivate NFT ecosystems in order to establish the legitimacy and quality of their blockspace. The premise being that a thriving NFT ecosystem on a new blockchain is a sign of (and will attract more) users, developers, liquidity, and attention – all essential ingredients for a durable blockchain.

Unlike a newly launched blockchain, however, Bitcoin's blockspace is perhaps the highest quality blockspace in existence (in terms of brand recognition, lindyness, and economic security). Bitcoin's quality imbues durability into anything that occupies its blockspace. There's no blockchain-NFT legitimacy chicken-and-egg hurdle for a Bitcoin NFT.

Fully Onchain

NFTs (including many of the most valuable ones) do not store their associated image data onchain. Rather, the image is hosted offchain with the NFT contract itself containing a URI link as metadata. While an offchain storage dependency hasn't impeded NFT value accrual thus far, the potential for media data loss due to factors unrelated to the blockchain itself is a durability risk for NFTs4.

In contrast, Ordinals NFTs and their associated media are stored entirely onchain, avoiding the offchain storage issue entirely. Bitcoin blocks can store up to 4MB of data which is plenty for e.g. an image. And, further still, new ideas like recursive inscriptions allow creators to bypass the single-block storage bound. As long as the Bitcoin blockchain maintains its integrity, so will Bitcoin NFTs and their associated media.

BTC Unit of Account

Another underrated element of Bitcoin NFTs is that they are priced in BTC. The monetary unit of account for an NFT is the reserve currency of its blockchain. Ethereum NFTs are priced in ETH, Solana NFTs in SOL, and Ordinals in BTC. To an NFT collector, cheap versus expensive is a function of the number of cryptocurrency units an NFT costs (e.g. 0.01 vs 10) with less consideration given to the price in USD-terms5.

However, a high USD price for an NFT does alter its external perception. NFTs, like other monetary stores of value, are reflexive assets with a positive (or negative!) feedback loop between price and fundamental value. High-priced NFTs (in USD) attract attention and develop cultural significance (think of the public reaction to the sale of a CryptoPunk for over $1M). A BTC-denominated NFT gets a 19X USD multiplier over an ETH-denominated NFT due to the USD price ratio between 1 BTC and 1 ETH. A ~$10K NFT is "a mere" 0.3 BTC, but a "costly" 5.5 ETH.

Bitcoin NFTs have three powerful forces in their favor, (1) pre-existing blockspace legitimacy, (2) fully onchain storage and (3) BTC denomination, that lead us to believe they have greater potential than what many assume upon first glance. After all, as Bitcoin entrepreneur Udi Wertheimer elegantly and succinctly puts it, "if Bitcoin is digital gold, then Ordinals are digital jewelry".

But Bitcoin NFTs are just the beginning in our opinion. A trojan horse. Ordinals have ignited experimentation in adjacent categories as well. For example, fungible tokens and even DeFi protocols on Bitcoin are under exploration. These designs are primitive and inefficient but indicate a latent and bottom-up desire to build on Bitcoin. To us, the contrast is stark between the Ordinals-fueled grassroots energy and what now increasingly feel like top-down decrees on how Bitcoin should advance (e.g. Lightning). We are also seeing a number of early attempts to build Bitcoin Layer 2’s (e.g. ZK Rollups) to cater to Ordinals-specific activity and more. We see all the telltale signs of a vibrant ecosystem forming around Ordinals and it is breathing new life into Bitcoin innovation.

It’s worth noting that Ordinals and future emergent phenomena in its wake could grow to become a meaningful transaction fee driver for the blockchain, helping address a recognized challenge to Bitcoin’s long-term economic security. As the Bitcoin block subsidy declines by 50% every 4 years, the incentive to mine blocks will need to increasingly come from transaction fees (which in turn come from blockchain utilization). Many fear that a forward extrapolation of today’s fees won’t sufficiently cover the decline in block rewards, leading to a degradation in Bitcoin’s overall economic security. Ordinals and a broader return to Bitcoin dynamism could meaningfully inflect Bitcoin fee volume, saving Bitcoin from needing future (existential) hotfixes.

Ordinals are not without controversy nor potential downsides. Many Bitcoiners perceive Bitcoin’s narrow scope as a strength — Bitcoin is the soundest money ever created, and that is enough. In those Bitcoiners’ eyes, Ordinals muddy that clarity of purpose. And worse, they worry that Ordinals introduce potential technical and regulatory risks that Bitcoin has previously been immune from.

We don’t take these Ordinals criticisms/concerns lightly; however, we ultimately net out in favor of the experimentation. Bitcoin is no longer where the best and brightest in crypto spend their time and it hasn’t been for years. This is a problem. It’s a choice to consciously shirk dynamism, but losing the capacity for innovation is a death sentence.

Early Bitcoiners envisioned a blockchain that let the altcoins experiment on the fringes while bringing the best ideas back home to the mothership. Instead, we let a head-in-the-sand mentality develop that turned Bitcoin into a museum relic to be admired but never touched. Thanks to Ordinals, the sleeping giant Balrog of Bitcoin development may have just awakened. NFTs, DeFi, and L2's have attracted users, capital, and attention to newer blockchain ecosystems. It makes sense for Bitcoin to experiment in those arenas. But what's most exciting (and still unknown) to us is where Bitcoin's trajectory will differ from those of other blockchain ecosystems. The only way to find out is to keep building. It’s time to make Bitcoin fun again. 🧙

Thank you to Tyler Whittle for reviewing a draft of this post.

  1. A Satoshi or “sat” is the smallest unit of a BTC. 1 BTC = 1E8 sats.
  2. Source: Dune
  3. These are representative examples. There are a lot more apps to use Ordinals out there!
  4. Elon recently made the same point.
  5. This is because (1) NFT collectors usually hold the cryptocurrency used to purchase NFTs and (2) NFT speculators look for a return on cryptocurrency, not USD.
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This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. Specific investments described herein do not represent all investment decisions made by Standard Crypto. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. This post reflects the current opinion(s) of the author(s) and is not made on behalf of Standard Crypto Management LP (“Standard Crypto”) or its affiliates. The opinions reflected herein are subject to change without being updated.