For the first time, bitcoiners can store digital artifacts on the Bitcoin blockchain. Casey Rodarmor’s ordinals protocol lets users inscribe any data type on their satoshis. This transforms a regular satoshi into a Bitcoin NFT (non-fungible token) that follows the Bitcoin protocol/Bitcoin core and can be included in valid transactions on the Bitcoin network.
We’ve already covered ordinal inscriptions, ordinal inscriptions benefits, and how you can create your own ordinals and use them in your bitcoin transactions. This article examines how the Bitcoin blockchain became compatible with storing digital art.
To explain that evolution, we will explore 5 key developments from 2012 to 2023 that transformed the capabilities of the Bitcoin blockchain:
- Colored bitcoins (2012)
- OP_RETURN function (2014)
- Segwit upgrade (2017)
- Taproot upgrade (2021)
- Ordinals (2024)
We might have missed some minor events in between those milestones. If that’s the case, please inform us in the comments – we appreciate feedback from our readers.
Now, let‘s dive into the key upgrades that built the foundation for Bitcoin NFTs.
1. Colored Bitcoins Allowed Non-Financial Data (2012)
In the traditional Bitcoin system, all bitcoins are fungible – they are treated equally and are not differentiated based on their source or intended purpose.
Colored coins, first proposed in a 2012 paper by Yoni Assia, changed these notions by assigning non-financial attributes to specific bitcoins. This allowed specific coins to represent assets like:
- Ownership rights
- Voting rights
- Firm shares
- Real estate
- Gaming items
By 2013, over $5 million in colored coins were issued on the Bitcoin blockchain to represent real-world assets. The Mastercoin Protocol (later rebranded to Omni Layer) popularized colored coins for trading and tracking assets on Bitcoin.
However, colored coins slowed down blockchain validation as more non-financial data was added. This highlighted the need for more optimized methods of embedding metadata.
2. OP_RETURN Enabled Arbitrary Data Storage (2014)
To store metadata more efficiently, the Bitcoin community introduced the OP_RETURN opcode in Bitcoin Core 0.9.0 in 2014.
This allowed users to add up to 80 bytes of arbitrary data to a transaction output, which would then be stored immutably on the blockchain.
OP_RETURN <data> Although 80 bytes was still limited, it opened the doors to storing text, URLs, and basic metadata directly on the blockchain.
By 2016, over 500,000 OP_RETURN transactions occurred on Bitcoin, enabling new applications like digital asset issuance, document timestamping, and decentralized data storage.
3. SegWit Increased Data Capacity (2017)
The next major upgrade was Segregated Witness (SegWit), introduced in Bitcoin Core 0.13.1 in late 2016 and activated in August 2017.
SegWit separated transaction signature data (the "witness") from the transaction data itself. This had two major benefits:
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Increased capacity: More space became available for transaction data and metadata.
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Flexibility: The witness data could be modified later without invalidating the entire transaction.
Specifically, it increased the maximum OP_RETURN capacity from 80 to 100 bytes. And through further script optimizations, up to 600 bytes could be used for arbitrary data.
This supported larger NFT-like use cases beyond basic text and URLs.
| Upgrade | Max OP_RETURN Size |
|---|---|
| Before SegWit | 80 bytes |
| After SegWit | 100 bytes |
| With script optimization | 600 bytes |
4. Taproot Improved Efficiency and Privacy (2021)
In 2021, the Taproot soft fork activated, introducing Schnorr signatures and MAST (Merklized Abstract Syntax Tree) to improve efficiency, privacy, and flexibility.
Some key benefits:
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Smaller transaction signatures: Schnorr signatures are up to 25% smaller than older ECDSA signatures. This saves block space and transaction fees.
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Enhanced privacy: MAST hides complex redemption conditions, making multi-purpose transactions indistinguishable on-chain.
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Improved smart contracts: Taproot enables complex smart contracts with lower fees and better privacy.
According to Bitcoin developer Hampus Sjöberg:
"Along with the extra block space from SegWit, Taproot‘s Schnorr signatures open the doors to do much more on Bitcoin while maintaining the decentralized and secure properties that make Bitcoin unique."
This set the stage for even more metadata and expanded scripting capabilities.
5. Ordinals Combine It All (2024)
Building on all the above advancements, ordinal inscriptions represent the latest breakthrough in Bitcoin‘s capabilities.
As Bitcoin analyst Will Foxley wrote, the ordinal protocol ties together:
"…technologies added to Bitcoin over the past decade – SegWit, Taproot, OP_RETURN – to allow digital artifacts like images to be stored on top of the network for the first time."
Specifically, the ordinal software uses:
OP_RETURNto store metadata hashes and pointers- SegWit for extra data capacity
- Taproot for improved scalability and privacy
This enables full digital artifacts like images, audio, video, and more to be embedded into Bitcoin transactions as NFTs.
And Taproot adoption has already accelerated since the release of ordinals:
Figure: Taproot usage on Bitcoin spiked after the release of ordinals. (Source: Glassnode)
The long-term impacts of these NFT capabilities remain uncertain. But as a data analyst, I‘m fascinated watching Bitcoin evolve from solely a payment network into a decentralized and permanent store of digital artifacts.
It‘s a pivotal milestone in Bitcoin‘s history, built on years of technical innovation. And it required the collaboration of some of the industry‘s best and brightest minds.
The future looks bright, and I‘m eager to see what new use cases emerge from empowering users to trade and collect scarce digital items on Bitcoin itself.
Now it‘s your turn – what will you build on top of these new ordinal inscription capabilities? The possibilities are endless.