When people think of NFTs, they will often look at Ethereum, Solana, or Layer-2 networks. However, few realize it is possible to use non-fungible tokens with the bitcoin network. It is not through a traditional approach, and Taproot may be to “blame” for this side effect.
Bitcoin, NFTs, and OP_RETURN
Those familiar with the Bitcoin network may recall how Omni, Counterparty, and Veriblock created a heated debate regarding OP_RETURN. The transaction output is provably unspendable, although it has its use for burning BTC. In addition, developers and users can leverage OP_RETURN to store arbitrary data on the blockchain. Technically, it would allow for building decentralized applications, although it never gained traction. Many worried about how the arbitrary data could inflate bitcoin transaction fees.
Although the discussion regarding OP_RETURN has quieted down – for the most part – a new battle has emerged. Following the activation of Taproot on the Bitcoin network, a new “threat” became apparent. Taproot activated on November 12, 2021, and provides three major protocol upgrades. It was largely welcomed as a way to scale network transactions. However, it also affected the size limit of OP_RETURN in a negative manner.
Rather than the old size limit, Taproot enables almost limitless data storage on Bitcoin. The one requirement is whether the transaction fits in a network block. None of that may seem alarming, although there are growing concerns over the Ordinals NFT protocol. While it could be beneficial to use and secure on-chain NFTs via Bitcoin, it will have some unappealing consequences.
The Ordinals protocol helps users mint NFTs on Bitcoin. However, these are not just images, as it also supports PDFs, videos, and audio formats. A very exciting frontier and one that can increase Bitcoin’s dominance in the broader crypto sphere. However, one NFT transaction via Ordinals can – in the worst case – take up a whole 4MB block thanks to Taproot’s implementation. That would be problematic and create much higher network transaction fees, which no one wants or needs.
Proper On-Chain NFTs Have Tradeoffs
On the one hand, one should welcome the prospect of proper on-chain NFTs. Contrary to what most think, the current generation of NFTs is not on-chain. They have a pointer to an image hosted somewhere else. Ownership is tied to the blockchain, but the artwork – or file it refers to – is on a different server. That has not been much of a problem so far, but it is something to pay attention to moving forward.
On the other hand, on-chain NFTs can be very problematic. By embedding NFTs directly on-chain, the data will be downloaded by every full node on the network. That process will occur for every on-chain non-fungible token, as they all must be stored on every full node forever. One can argue this is perhaps a crucial legitimate use case for Bitcoin technology. However, its potential impact on filling network blocks – and spiking network fees – is a concern.
Furthermore, the network would store NFT data as “witness data“. That means it is much cheaper to store then traditional transaction data. In addition, it reduces the effect – often cheaper transfers – of witness data on the transaction fee market today. Some may welcome a world where NFT “witness” data makes up more volume than transaction “witness” data, but it isn’t necessarily an ideal outcome.
This is an unexpected development regardless of which “camp” one belongs in. While Taproot is a prominent upgrade, it also has a curious trickle-down effect. Nothing prevents users from making a large OP_RETURN and submitting transactions directly to a miner. That has been possible for a while now, yet it hasn’t caused any lingering issues. Given the popularity of NFTs, however, there may be a reason for concern following the findings by Pourteaux. More information on this topic can be found here, and it is well worth reading through it all.
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