The Bitcoin Magic Trick
Ordinals kicked off a flurry of interest in Bitcoin NFTs. Crypto always finds a way to surprise.
Hello friends,
Boy, we’ve had quite a good start to 2023. Can you believe it’s only been a month? I’ve been busy with work and other endeavors but want to pen down a couple of thoughts.
I compile the NFT highlights every month to keep a running record of the sentiment, key developments, and “meta” for NFTs at that particular point in time. When someone new to the industry looks at this, they’ll be able to see how the entire space evolved over time.
Ethereum is up 30% from my 2023 Market Outlook post where I explained why I think it was time to consider positioning more aggressively. NFT markets haven’t caught on though. Daily NFT volumes have been relatively sluggish as most people’s attention turned to fungible tokens which were jumping 30% on a daily basis. Many altcoins are up 3 - 4X from the beginning of January.
The slow march of progress toward mainstream adoption continues, with Instagram, Amazon, Adidas, Shopify, and Starbucks making moves. January was also the month of Open Editions, where artists had their first sweet taste of the degenerate NFT audience who bulk buy NFTs to trade and speculate.
In this post, I’m going to touch on two particularly interesting trends.
#1 — Ordinals Fever Catches On
Last week, a new protocol launched on Bitcoin mainnet that has become the talk of the town. Called Ordinals, it turns each Satoshi (1 Bitcoin = 100,000,000 Satoshis) into an NFT by giving it a unique number. Leveraging on Taproot, one can now inscribe data onto each Satoshi. People have already inscribed JPEGs, audio files, short videos, and simple games — all of it is stored on-chain, forever.
It’s nice to see Bitcoiners finally have some fun with NFTs. More importantly, it’s gotten new people to interact with the Bitcoin network and learn how it works. Many folks are downloading Bitcoin core and running a full node (500+GB), just so they can inscribe monkey pictures or dickbutts.
I spent the last couple of days going down this rabbit hole and digesting the implications of Ordinals. Here are my thoughts:
All of the activity right now is from (1) tinkerers experimenting with new tools available to them, and (2) crypto speculators trying to grab a piece of what they believe is going to be a valuable historical artifact in the future.
The “historical artifact” thesis has some merit, in my opinion. In the NFT world, we place an outsized level of importance on an object’s historical provenance. This is why Autoglyphs and CryptoPunks are so expensive today. In this manner, I think the greatest historical value will accrue to interesting Ordinals < #1000.
Anything beyond #10,000 is unlikely to be particularly valuable purely based on provenance. And inscription counts are moving fast: I first saw Ordinals early last week at ~500 inscriptions; Now we’re already past 40,000 inscriptions.
The programmability of Ordinal NFTs is minimal compared to Ethereum NFTs, severely limiting its use cases. Bitcoin has no NFT community and almost zero NFT infrastructure & tooling. While exploring, I felt like I was transported back in history to re-live the early days of Ethereum NFTs circa 2017
Intuitively, the only type of NFT which makes sense on Bitcoin are store-of-value NFTs, such as high-quality art. Putting the data on Bitcoin block space is expensive — minting a 10k PFP collection would cost a 6-figure sum in fees alone.
I expect the Ordinals hype to simmer down shortly, once the rose-tinted glasses are removed and people realize that the use cases today are limited to PFPs / static art. The speculators will lose interest once it’s clear they’ve missed the land grab and are no longer early enough to make life-changing money. Trading is limited to OTC deals at the moment, making it difficult to buy and sell NFTs. Ordinal-focused wallet solutions are being built out and once reasonably usable wallet + marketplace infrastructure are available, it could give this a second wind.
When the hype dies off, it’s going to be crunch time! Are there enough builders on Bitcoin who want to create innovative things using these NFTs? The next wave of users will come only IF someone creates something actually novel on it. My guess is it will more likely be a social innovation — such as a unique community or DAO utilizing these NFTs — rather than a technical innovation. I’ve highlighted the limitations of the Bitcoin chain, which presents a very difficult challenge for enterprising builders.
To be frank, it’s hard to see any mainstream interest in these NFTs. Ordinals could very well remain a niche, hobbyist thing. Like collecting old stamps.
NFTs carrying Bitcoin?
NFTs have a way of polarising communities. Ordinals are shining the spotlight on Bitcoin’s sustainability model. Bitcoin absolutely needs a sustainable fee market to survive in the long run. Applications like Ordinals and NFTs give people a real reason to want to use the network, generating fees in the process.
It’s amusing to see some Bitcoiners (a vocal minority probably) hold onto their puristic idealism that only financial transactions deserve to be on Bitcoin. They are hating on NFTs, calling it spam, asking miners to censor them, and fear-mongering about blockchain bloat.
Another thing worth noting is how Taproot Wizards (by Udi Wertheimer) collaborated with Luxor Mining to inscribe a full 4MB block for an Ordinal. For technical reasons, it’s usually impossible to do so without working directly with a miner. There was probably an over-the-counter payment to the miner to do this. Should there be sustained demand for Bitcoin NFTs, it could open up a new business model for miners who have been struggling with the recent drawdown in crypto prices.
In short, I think there’s something magical going on here. Crypto always finds a way to surprise everyone.
Before we continue, I wanted to give a quick shoutout to The Metadata, a free 3X-a-week newsletter that gives the alpha on everything in NFTs and the metaverse in a concise, easy-to-read format. Give it a look and subscribe if you like it!
#2 — NFT teams are utilizing creative and fun distribution models
Lately, there's been more sophistication in how NFT teams are distributing their tokens. A whitelist mint or airdrop? Boring! Now they're injecting a healthy dose of fun into the process while giving themselves more flexibility.
Here's how they're doing it:
Example #1: Yuga Lab’s Sewer Passes
Sewer Passes are part of an upcoming interactive skill-based mint, the next story arc in the Bored Ape universe titled “The Trial of Jimmy the Monkey”. Sewer Pass holders can play a simple, runner-type game called Dookey Dash to earn a high score. You can even burn APE tokens to buy booster packs in the game — over $1M APE has been burned in the game.
The expectation is that the higher your score/skill, the rarer and more valuable NFT you get in February mint. I tried the game myself, but unfortunately for me, I sucked at it. As expected, a professional gamer, Mongraal, eventually won 1st place in the game.
Yuga Labs has been deliberately hush-hush about their next mint in Feb. This gives them optionality: they can observe user behaviors during these weeks and tweak the mint design accordingly — rewarding their fanatical community members the most, instead of speculators.
Garga’s tweet (co-founder of Yuga Labs) shows how closely Yuga is watching user actions. All of the data feeds into a much better-designed future mint. They've learned a lot from what happened with the Otherside mint, which was plagued by heavy gas wars and poor distribution → most ppl got burnt.
Example #2: PROOF Collective’s GRAILS 3
PROOF collective is a community of art collectors and investors founded by prolific tech entrepreneur & investor Kevin Rose.
PROOF collective members each received an airdropped GRAILS 3 mint pass. In this art drop, members can mint pass to mint a piece of artwork of their choice. There are 20 pieces of art to choose from, but the catch is this: no one knows who the artists are until after the burn has closed.
What I like about it: It's a gamified way of distributing art, different from the usual Open Edition or Art Blocks style mint. It adds a fun and social element to collecting art — people trying to predict which artwork belongs to which artist, studying the art in depth and looking for clues, and sharing their findings with one another.
And those who are able to do this well get to “win” i.e. reap the rewards financially: Matt Kane’s Picture of the Planets is worth 10 ETH each, 3X the sale price of a mint pass. It’s almost like a skill-based mint
Example #3: Blur’s Airdrop
Blur is the most popular NFT marketplace aggregator on Ethereum. It is launching its token on February 14 (yes, Valentine's day). Over the past 3 months, it has used a "bid points" and "care packages" system to represent its airdrops, but no one knows how many tokens these things actually translate into. Everyone will only find out when the token launches. That's a really smart move, in my opinion.
Despite not releasing any details about BLUR's tokenomics yet, the airdrop has been able to incentivize users to take activities on the platform, contributing to the rise in NFT volumes and liquidity in recent weeks.
It gives Blur the opportunity to see how people react to incentives in real-time. The team can then design and modify their actual token distribution based on this data. The significance of this is underappreciated by most people — once a token is live and distributed, it is extremely difficult to make changes to its supply. Nailing the tokenomics, and finding the right level of incentives to reward actual usage, is probably one of the most important things a team can do. Because this data is not on-chain (listings/bids), this is also a highly valuable, proprietary data set that other marketplaces like OpenSea will not have access to.
I’ve outlined 3 examples here, but trust me we're going to see many more unique and interesting distribution models for NFTs and tokens in the coming months.
Stay safe and thanks for reading,
Teng Yan
You can find and DM me on Twitter (@0xPrismatic). I love getting your feedback.
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This is super cool!