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Bitcoin Beyond Payments: NFTs

14 March 2023

 

Ordinals, Rollups, Inscribing, and a lot of other new terms entirely new to the Bitcoin ecosystem. The same could be said about its ecosystem, which was lacking due to its limited functionality. This has changed since the Taproot upgrade has been activated. In February over 236K Bitcoin NFTs have been minted (inscribed).

What is Taproot?

The Taproot upgrade batches multiple signatures and transactions together, making it easier and faster to verify transactions on Bitcoin's network. Digital signatures are required on Bitcoin's network to verify transactions. They are generated using private keys and are validated against public keys. It also scrambles transactions with single and multiple signatures together and makes it more difficult to identify transaction inputs on Bitcoin's blockchain. Taproot could help scale the number of transactions occurring on Bitcoin's network.

How did Taproot Enable NFTs?

Taproot on a very fundamental level could be seen as a mechanism to push large data payloads into a block through a new type of signature called the Taproot. It also makes it possible for multiple parties to engage in transactions without revealing the details of their transaction to the public. Taproot also makes it easier to create more complex and powerful smart contracts on the Bitcoin network. A common misunderstanding is that it enables NFTs or smart contracts on the Bitcoin network. Actually, NFTs on Bitcoin have been possible already for a long time (for example, the Rare Pepe collection). So why has it gained popularity only now? Let’s dig further.

Introducing Ordinals

In a nutshell, ordinals are immutable and complete digital artefacts. Unlike traditional NFTs, they cannot be tampered with and they reside completely on-chain. For these reasons, the creator of the Ordinals Protocol, Casey Rodarmor, believes that these digital artefacts are “intended to reflect what NFTs should be.” So what is next for Bitcoin NFTs? The race is on to develop more seamless methods of inscribing on Bitcoin and wallets that make it possible to view the Bitcoin NFT once it is created. For example, Gamma and Hiro are rolling out NFT functionalities to anyone with a Bitcoin address.

What Kind of Data is “Inscribed” on the Bitcoin Blockchain?

What Kind of Data is “Inscribed” on the Bitcoin Blockchain?

Source: https://insights.glassnode.com/ordinal-theory-and-the-rise-of-inscriptions/

Effects of Taproot (and Ordinals) on Bitcoin

Effects of Taproot (and Ordinals) on Bitcoin

Source: Glassnode.com

On-chain analysis is more than just about the market or investor behaviour. It can also be used to understand the real-world effects of an update (also known as a soft or hard fork) of the blockchain. A blockchain software update is usually performed by updating the dominant node software in the network, to make up for bugs or introduce new features. One of these updates is Taproot for Bitcoin. Two things are going on: demand for block space significantly increased and mean transaction size has increased. This can only mean one thing: transaction fees must be up as well. Mean transaction fees have gone up from 0.629 USD (01/01/23) to 2.465 USD (15/02/23).

Bitinfocharts.com

Source: Bitinfocharts.com

Block Size Share refers to the share (in percentage) a particular subset of transactions occupy on the blockchain.

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