The Limitations of Off-Chain Data Storage in NFTs
Non-fungible tokens (NFTs) have gained immense popularity in recent years, particularly on the Ethereum and other Ethereum Virtual Machine blockchains. However, NFTs require off-chain data storage, which is typically stored on the Interplanetary File System (IPFS). This decentralized storage system is similar to the blockchain’s hard drive.
Ordinals: Directly Creating NFTs on the Bitcoin Blockchain
On the other hand, the new Ordinals protocol enables data to be added to each satoshi (or “sat”), the smallest unit of Bitcoin, with each Bitcoin consisting of 100,000,000 sats. This creates a new type of digital asset known as an “Ordinal,” which is essentially an NFT that can be directly created on the Bitcoin blockchain. Unlike traditional Bitcoin transactions, which only involve sending and receiving value, Ordinals allow for the inclusion of smart contract code within a Bitcoin transaction. This code can then be used to create non-fungible tokens (NFTs) directly on the Bitcoin blockchain, effectively combining the benefits of NFTs with the security and reliability of the Bitcoin network.
While some projects update NFT metadata to improve image quality, this reliance on off-chain data storage has been criticized for creating an incomplete digital artifact. To address this issue, the Ordinals protocol inscribes all of its data directly on-chain, making them more complete digital artifacts than NFTs. Furthermore, Ordinals do not have creator royalties attached to them, which is a departure from the norm for most NFTs. This new development in the world of Bitcoin may signal a cultural shift for the cryptocurrency, as Ordinals challenge the current standard for digital art ownership and authentication.
This advancement in the world of NFTs and blockchain technology raises thought-provoking questions about the nature of digital ownership and the role of decentralized systems in authenticating digital artifacts. As we continue to explore the potential of these technologies, it will be fascinating to see how they evolve and impact various industries.
Zodia Custody, a subsidiary of Standard Chartered and in association with Northern Trust, is a global institutional-first digital asset custody partner. Through the combination of leading technology, custody, governance and compliance, Zodia Custody satisfies the complex needs of institutional investors. The company is AMLD5 compliant and applies the same standards as Standard Chartered relating to AML, FCC, and KYC. It is also FATF Travel Rule-compliant. Zodia Custody Limited is registered with the FCA as a crypto asset business under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. Zodia Custody (Ireland) Limited is registered with the Central Bank of Ireland as a VASP under Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended).