NFTs and Tokens on Bitcoin

For most of Bitcoin's first fourteen years, there was a clean consensus: Bitcoin is for money. Other blockchains might support tokens, games, and digital art, but Bitcoin's block space was for financial transactions. That consensus broke decisively in early 2023.

Today, Bitcoin hosts tens of millions of inscriptions — images, text, audio, and token definitions written directly onto individual satoshis. Markets trade Bitcoin-native NFTs. Protocols issue fungible tokens on top of the Bitcoin blockchain. Whether you think this development is exciting or misguided, you need to understand it — both because it affects Bitcoin's fees and network characteristics, and because it represents a real set of opportunities and risks.

What are Ordinals?

Ordinals are a protocol for numbering and tracking individual satoshis.

Casey Rodarmor launched the Ordinals protocol in January 2023. The key insight: Bitcoin has processed billions of transactions since 2009, and the order in which satoshis were mined is deterministic and immutable. Ordinal theory assigns every satoshi a unique sequential number based on its mining order, which makes each satoshi individually identifiable and transferable.

This turned what was previously a fungible unit (one sat is interchangeable with any other sat) into something trackable. Combined with the ability to inscribe data onto individual sats, this created the foundation for Bitcoin-native non-fungible tokens.

Critically, Ordinals require no changes to Bitcoin's core rules. They run on top of the existing protocol using features already present since the SegWit upgrade (2017) and the Taproot upgrade (2021). SegWit introduced the witness portion of transactions where inscription data is stored. Taproot made storing larger amounts of data in witness more economically practical.

In plain terms: Ordinals turn a satoshi into a uniquely numbered collectible that can be sent, received, and tracked like any other Bitcoin.

What are Inscriptions?

An inscription is the data written onto an individual satoshi — the "content" that makes an Ordinal NFT valuable or interesting.

Inscriptions can contain almost any type of file: images (JPEG, PNG, SVG, GIF), text, audio files, code, HTML pages, or 3D models. The data is stored permanently in the witness field of the transaction. Unlike most Ethereum NFTs — which store only a pointer to a file hosted elsewhere on a server or IPFS — Bitcoin inscriptions store the actual content on-chain.

This means a Bitcoin inscription is as permanent and uncensorable as Bitcoin itself. As long as the Bitcoin blockchain exists, the inscription exists. No server to go offline, no IPFS gateway to become unavailable, no company to shut down.

The practical limitations: block space is finite. Larger files cost proportionally more in fees. A small text inscription might cost a few dollars to create. A high-resolution image inscription during a fee spike can cost significantly more. When inscription activity is high, the entire Bitcoin fee market rises — affecting all users, not just those involved in Ordinals.

There is also a wallet compatibility issue. Bitcoin wallets that do not understand Ordinals will not treat inscribed sats as special. If you accidentally send an inscribed sat to an exchange or spend it as part of a normal transaction without using an Ordinals-aware wallet, you can lose the inscription permanently. The sat itself still exists; the inscription it carries is spent, and its special status is gone.

What are Runes?

Runes are a protocol for issuing and transferring fungible tokens on Bitcoin, launched by Casey Rodarmor in April 2024, timed to coincide with the fourth Bitcoin halving.

Before Runes, the primary token standard on Bitcoin was BRC-20, which used text inscriptions to define and transfer token balances. BRC-20 was technically inefficient: each token transfer required multiple transactions and generated significant blockchain bloat.

Runes take a cleaner approach. Token information is encoded in a small OP_RETURN output — a type of transaction output that Bitcoin already supports and that carries no spendable value. The actual token balances are tracked using standard UTXOs. This means Runes transactions look and behave more like regular Bitcoin transactions, with less overhead.

A Rune token can have a defined total supply, a minting schedule (open or controlled), a name, and a symbol. Once defined, Runes can be transferred in a single transaction, even for complex multi-party operations.

The Runes launch in April 2024 was dramatic. In the days around the halving, Runes transactions briefly made up the majority of all on-chain Bitcoin activity. Fee rates spiked to historic highs. Miners earned record revenues. Regular Bitcoin users saw fees surge to levels that made small transactions impractical.

This episode illustrates the tension: Runes and similar protocols generate genuine economic activity on Bitcoin, benefiting miners and protocol developers. They also impose externalities on everyone who needs to use the base layer for ordinary payments during these fee spikes.

How Bitcoin NFTs Compare to Ethereum NFTs

Both networks now have NFT ecosystems, but the architectures are fundamentally different.

Storage: Bitcoin inscriptions store the actual content on-chain, permanently. Ethereum NFTs typically store only metadata and a reference URL pointing to a file stored elsewhere — usually on IPFS or a centralized server. This means Bitcoin inscriptions are more durable but more expensive to create. Ethereum NFTs are cheaper to mint but depend on external storage remaining available.

Contract logic: Ethereum NFTs are defined by smart contracts — code that executes on the blockchain and can enforce complex rules including royalties, transfer restrictions, and governance. Bitcoin Ordinals have no smart contract layer. The inscription simply exists. Trading rules are enforced at the marketplace level through PSBTs (Partially Signed Bitcoin Transactions), not by code running on-chain.

Royalties: Ethereum NFT contracts can enforce creator royalties automatically on every sale. Bitcoin has no native royalty mechanism. Whether or not a creator receives a royalty on a secondary sale depends entirely on whether the buyer uses a marketplace that honours it voluntarily.

Market infrastructure: Bitcoin Ordinals trading happens primarily through PSBTs on platforms like Magic Eden, Ordinals Wallet, and Gamma. Ethereum NFT markets are more mature, with deeper liquidity and more standardized tooling.

Security model: Bitcoin inscriptions are simpler. There is no contract logic to exploit, no upgrade proxy that can be manipulated, no admin key that a hacker can steal. Ethereum NFT contracts offer more flexibility but introduce contract-level attack surfaces.

Neither approach is strictly better. They reflect the design philosophies of their respective networks.

Key Definitions

Satoshi (sat): the smallest unit of BTC. 1 BTC = 100,000,000 sats.

Ordinal: a satoshi assigned a unique sequential number by the Ordinals protocol, making it individually trackable.

Inscription: data (image, text, code, or other file) permanently written onto a specific satoshi in the transaction witness.

BRC-20: an early fungible token standard on Bitcoin using text inscriptions. Less efficient than Runes.

Runes: a fungible token protocol using OP_RETURN data and standard UTXOs, launched April 2024. Cleaner and more efficient than BRC-20.

PSBT: Partially Signed Bitcoin Transaction — a format used in Ordinals marketplaces to coordinate trades before full signing.

Risk Note

Fees rise sharply during inscription and token activity spikes — affecting all Bitcoin users, not just participants in these markets. NFT and rare sat markets are illiquid and speculative; valuations can fall as fast as they rose. Using an Ordinals-incompatible wallet can result in permanent loss of inscriptions. Some content in inscriptions may raise intellectual property questions under European law. The tools are still maturing — expect bugs, protocol changes, and evolving market standards.

Reader Takeaway

• Ordinals make individual satoshis trackable and tradeable. Inscriptions write permanent data onto those sats.
• Runes are a cleaner fungible token protocol than BRC-20 — less blockchain bloat, more like native Bitcoin transfers.
• Bitcoin NFTs store content on-chain permanently; Ethereum NFTs are more flexible but typically rely on external storage.
• Bitcoin has no native royalty enforcement. Smart contract logic on Ethereum offers more programmability but introduces contract-level risk.
• Start with small amounts. Use an Ordinals-compatible wallet. Watch fees carefully during high-activity periods.

Chapter Summary

• Ordinals assign unique sequential numbers to satoshis, making them individually trackable and suitable for use as unique digital assets.
• Inscriptions store actual file content permanently on the Bitcoin blockchain — in contrast to most Ethereum NFTs, which reference externally hosted files.
• Runes launched in April 2024 as an efficient fungible token protocol using OP_RETURN data, replacing the less efficient BRC-20 approach.
• Bitcoin NFTs differ from Ethereum NFTs primarily in storage architecture, absence of smart contract logic, and lack of native royalty enforcement.
• High Ordinals or Runes activity raises fees for all Bitcoin users. Thin markets, tool immaturity, and fee risk are the primary hazards for participants.

References

• Casey Rodarmor: Ordinals documentation and specification
• Bitcoin Optech newsletters on Ordinals, Inscriptions, and Runes
• Magic Eden: market data and PSBT trading documentation
• Mempool.space: fee history and block analysis
• Ethereum.org: ERC-721 and NFT standard documentation (for comparison)