A Beginner’s Guide to the Bitcoin NFTs Controversy

If you’ve been paying attention to the crypto industry in recent weeks, you’ve likely seen headlines related to the controversy surrounding NFTs on the Bitcoin blockchain. Some passionate members of the Bitcoin community are upset by this development and strongly oppose NFTs hosted on the Bitcoin blockchain.

To explain this dispute, it is first necessary to provide some background on how Bitcoin and blockchain databases work. A traditional bank spends huge amounts of money maintaining a database of customer assets and transactions. Bank of America’s IT department, for example, has a database that tracks all the money held by the firm’s 54 million customers.

In contrast, no bank, corporate IT department or government organization maintains a cryptocurrency. A cryptocurrency runs on a shared blockchain database maintained by a community of developers and enthusiasts around the world. A distributed community maintains a copy of the blockchain and keeps track of cryptocurrency transactions.

It is also important to know that the dispersed global community that maintains a blockchain database periodically decides to make updates to the code. The community agrees 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 societies. The Bitcoin community is generally very conservative, and tends to favor stability and network reliability (ie the Bitcoin network is always online and never down). The Bitcoin community generally makes relatively infrequent code updates and tends to ignore calls to make the network as fast or feature-rich as some rival cryptocurrencies. Maintaining the security and stability of Bitcoin is the number one priority.

In contrast, a cryptocurrency like Solana is at the opposite end of the spectrum. Solana’s “move fast” mentality focused on shipping new features has caused the project to suffer from relatively frequent network failures. The mentality of the founder of Solana is very different from the Bitcoin community.

Considering another example, Ethereum falls between Bitcoin and Solana thinking. 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 about Bitcoin NFTs? To understand the roots of this dispute, it is necessary to go back to the November 2021 upgrade of the Bitcoin blockchain. This was called Taproot update. This update was primarily focused on increasing privacy, efficiency, and better support for smart contracts and the Bitcoin Lightning Network. Crucial to today’s conversation and controversy, however, the Taproot Update made it easier to enter a larger amount of data on a single Bitcoin transaction.

Fast forward to January 31, 2023 and a new service was launched called Ordinal Protocol. The Ordinal Protocol leverages the Taproot update to allow people to trade NFTs on the Bitcoin blockchain. The ordinal protocol links the NFT data to Bitcoin transactions.

Mostly, some passionate Bitcoiners are upset about NFTs on the Bitcoin blockchain. NFTs are not at the heart of what many Bitcoiners perceive as the main mission of Bitcoin. Bitcoiners tend to believe that Bitcoin should only focus 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 a combination of ridiculous, unnecessary or a scam. However, it is important to remember that the vast majority of humanity does not live in countries with stable currencies, reliable banks, democratic governments and the rule of law.

Imagine you are one of the 84 million citizens of Turkey, a country with an inflation rate of 200% and a government that freezes the bank accounts of opposition parties before an election. Or maybe you’re one of the 225 million people in Nigeria, a country with an inflation rate somewhere between 21% and 52%, a recent failed attempt to switch to new banknotes, an active violent insurgency in the northeastern part of the country, and a government freezing the bank accounts of protests against police brutality. Or you could be one of the 45 million citizens of Argentina, who live 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.

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 capture and take market share 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 say. 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 has survived through a difficult bear market is the community aspect, since many Ordinals in my opinion are just copy pastes of Ethereum NFTs, it is hard for me to believe that they will have any lasting community value. That said, it could be valuable to own early editions (low serial numbers) and perhaps there is 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 risks of clogging up the Bitcoin blockchain with NFT data. On the one hand, creating more transaction activity increases the fees generated by the community that maintains the Bitcoin database. Without going too deep 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. Additionally, the way surplus data (such as NFTs) is tied to Bitcoin transactions means that some data can be pruned. Some members of the Bitcoin community feel that concerns about the strain on the network may eventually be overblown.

On the other hand, some members of the Bitcoin community are concerned that if Bitcoin NFTs become popular, the amount of space they take up on the Bitcoin blockchain could increase the price of Bitcoin transactions. This would hurt users in developing countries the most, and those are the users where decentralized money is currently most needed. A user trying to send Bitcoin in Nigeria will be charged a $5 transaction fee, which is a significant cost in many low-income countries.

Which side is right? It is hard to say. According to Milan De Reede, a long-time 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 safe money and nothing more. Yet these NFTs lead to that more fees are paid, which actually increases security. Some of the big names in Bitcoin were strongly opposed to this idea initially, but I think we’re already seeing a turn towards some enthusiasm as the ramifications sink in.”

Ultimately, Bitcoin NFTs may weaken. Previous non-core projects on the Bitcoin blockchain that caused some consternation at the time (such as the gambling service SatoshiDice) ultimately did not negatively affect the long-term trajectory of Bitcoin. Regardless, if Bitcoin NFTs catch on and the naysayers are right about the negative consequences, the Bitcoin community is likely to react. The community can agree to update the code to either better accommodate NFT data or block (or at least discourage) NFTs on the Bitcoin blockchain. Blockchain databases change over time. Regardless, Bitcoin’s long-term mission of developing sound, decentralized money will continue to move forward.