Bitcoin On-Chain NFTs Are A Thing But There Are Potential Tradeoffs – CryptoMode



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When people think of NFTs, they will often look at the Ethereum, Solana, or Layer-2 networks. However, few realize that it is possible to use non-fungible tokens with the bitcoin network. It is not through a traditional approach, and Taproot may be the “culprit” for this side effect.

Bitcoin, NFT and OP_RETURN

Those familiar with the Bitcoin network can remember how Omni, Counterparty and Veriblock created a heated debate about OP_RETURN. The result of the transaction probably cannot be spent, although it has its use to burn BTC. Additionally, developers and users can take advantage of OP_RETURN to store arbitrary data on the blockchain. Technically, it would make it possible to build decentralized apps, though it never really gained traction. Many worried about how arbitrary data could inflate bitcoin transaction fees.

Although the discussion about OP_RETURN has died down, for the most part, a new battle has arisen. After activation of Main root on the Bitcoin network, a new “threat” became apparent. Taproot went live on November 12, 2021 and provides three major protocol updates. It was widely received as a way to scale network transactions. However, it also affected the size limit of OP_RETURN in a negative way.

Instead of the old size limit, Taproot allows for almost unlimited data storage in Bitcoin. The only requirement is if the transaction fits into a network block. None of that may sound alarming, although there is growing concern about the Ordinals NFT protocol. While it might be beneficial to use and secure on-chain NFTs over Bitcoin, it will have some unattractive consequences.

The Ordinals protocol helps users to mint NFTs in Bitcoin. However, these are not just images as it also supports PDFs, videos, and audio formats. A very exciting frontier and one that may increase Bitcoin’s dominance in the broader crypto sphere. However, an NFT transaction through ordinals can: In the worst case – occupying a whole block of 4 MB thanks to the implementation of Taproot. That would be problematic and create much higher network transaction fees, which no one wants or needs.

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Proper on-chain NFTs have offsets

On the one hand, one should welcome the perspective of proper on-chain NFTs. Contrary to what most people think, the current generation of NFTs is not on-chain. They have a pointer to an image hosted elsewhere. The property is tied to the block chain, but the artwork, or the file it refers to, is on a different server. That hasn’t been a huge problem so far, but it’s something to pay attention to moving forward.

On the other hand, on-chain NFTs can be very problematic. By incorporating NFT directly into the chain, all full nodes in the network will download the data. That process will occur for each string non-fungible token, since they must all be stored on each full node forever. It can be argued that this is perhaps a crucial legitimate use case for Bitcoin technology. However, its potential impact on filling up network blocks, and increasing network fees, is a concern.

Also, the network would store NFT data such as “witness data“. That means it’s much cheaper to store than traditional transaction data. Additionally, it reduces the effect (often cheaper transfers) of token data on today’s market for transaction fees. Some may welcome a world where NFT “witness” data represents more volume than transaction “witness” data, but it’s not necessarily an ideal outcome.

This is an unexpected development, regardless of what “field” you belong to. While Taproot is a standout update, it also has a curious trickle-down effect. Nothing stops users from doing a big OP_RETURN and sending transactions directly to a miner. That’s been possible for a while now, but it hasn’t caused any persistent problems. However, given the popularity of NFTs, there may be cause for concern behind Pourteaux’s findings. You can find more information on this topic here, and it’s all worth reading.

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