Scenius Insights: Bitcoin Ordinals
Bitcoin Ordinals are a new type of NFT that is created on the Bitcoin blockchain using inscriptions.
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Bitcoin Ordinals – A New Narrative for the OG Blockchain Network?
Image Source: CoinMarketCap
Most readers understand that Bitcoin was created to establish a digitally native asset and payment system removed from the established legacy system and its reliance on opaque centralized actors. Bitcoin’s use case since that time has arguably evolved into more of a store of value than a payments system, but its development has largely been conservative and narrow by design, focused on optimizing for censorship-resistant, decentralized money. The recent banking crisis has once again highlighted the importance of self-sovereign financial assets and self-custody, but the hottest topic in crypto and bitcoin lately has been Bitcoin Ordinals.
What are Bitcoin Ordinals, why does this new phenomenon matter, and why is the Bitcoin community meeting this craze with mixed feelings?
Although NFTs and other tokenization use-cases have existed on Bitcoin for years, Bitcoin Ordinals are a new type of NFT that is created on the Bitcoin blockchain using inscriptions. Launched in January 2023 and founded by software engineer Casey Rodarmor, the Ordinals Protocol is an open-source project that allows users to inscribe digital content such as art, text, security tokens, or video to a unique satoshi. A satoshi, or “sat,” is the smallest divisible unit of one bitcoin with one sat equaling 100 millionth of a bitcoin. Individual satoshis can be inscribed with these digital files and broadcast to the bitcoin blockchain, thus creating unique Bitcoin-native digital artifacts that can be held in Bitcoin wallets and transferred using Bitcoin transactions. This was accomplished using a loophole from the Taproot upgrade in 2021, which enabled practically unlimited (capped by blocksize up to 4MB) storage. Since Ordinals use existing infrastructure available on Bitcoin, they do not require a sidechain, a separate token or any changes to Bitcoin, blocks, transactions or network protocols. Unlike most NFT projects which can be modified or removed by the smart contract’s developer, inscriptions cannot.
Per the Inscriptions’ mainnet announcement post:
Inscriptions are digital artifacts native to the Bitcoin blockchain. They are created by inscribing sats with content using ord, and can be viewed with the ordinals explorer. They do not require a separate token, a side chain, or changing Bitcoin.
Inscriptions are created by including content, like an image, text, SVG, or HTML, in an inscription transaction. The content is included in the transaction witness, which normally contains signatures and other data proving that a transaction is authorized.
Along with the content, the inscription transaction contains a content type, also known as a MIME type, identifying the type of content to be inscribed.
When mined, the inscription is made on the first sat of the first output of the transaction, permanently and inexorably marking it, distinguishing it from its fellows. It is no longer just a sat, it is an intertwined component of the long and confusing tale that is human art and culture.
Using ordinal theory, the unspent output containing an inscribed sat can be found, and its movements and ownership tracked across time and transactions, allowing inscriptions to be traded, gifted, bought, and sold.
Ordinals refers to a numbering scheme for satoshis that allows tracking and transferring individual sats. These numbers are called ordinal numbers. Satoshis are numbered in the order in which they are mined and transferred from transaction inputs to transaction outputs first-in-first-out. Both the numbering scheme and the transfer scheme rely on order, the numbering scheme on the order in which satoshis are mined, and the transfer scheme on the order of transaction inputs and outputs. Thus the name, ordinals. Ordinal numbers are stable, trackable, have transferable identifiers, and allow content to be linked to a specific satoshi. Casey Rodamor even created a taxonomy of rarity for different satoshis allowing users to apply different rarity traits to individual sats based on certain criteria. The project has suggested six rarity levels: Common, Uncommon, Rare, Epic, Legendary and Mythic. These criteria are based on things such as when the block was mined, whether it participated in a famous transaction, was the first in a block, the first block in a difficulty cycle, the first in a halving epoch, etc. Inscriptions are a way of aesthetically enhancing already rare or interesting satoshis; however, common sats can be rendered more valuable due to the content that is inscribed on them. Ultimately, users will decide which sats are worth a premium, but a market is already emerging for such collectibles as Bitcoiners seek out rare sats.
The media in Ordinals mints is stored entirely on the Bitcoin blockchain. There are no external dependencies such as those that exist in the current NFT implementation on various smart-contract blockchains where the file may exist on private servers or IPFS with a reference to the file path added to the NFT. If that file storage service deletes the image, fails, or the file is corrupted, that NFT could be irretrievably lost. In contrast, Bitcoin Ordinals are permanent parts of the Bitcoin blockchain that must be downloaded by all full nodes. They are forever retrievable from Bitcoin, the oldest, most decentralized, and most secure blockchain in the world. They are fully on-chain and cannot be faked which, in a time when many NFTs are scams or fakes, is attractive. In that sense, they are true “digital artifacts.” This also means their use cases could extend beyond digital artifacts to include file storage for any sensitive important information that could benefit from immutable and censorship resistant publication. Moreover, Bitcoin Ordinals do not include copyright fees, unlike most current NFT projects, which is why Rodarmor refers to ordinals as digital objects, not NFTs.
Image source: galaxy.com
Bitcoin Ordinals have been a major hit since launching, bringing thousands of new users to the Bitcoin blockchain and an explosion of Ordinals collections fetching meaningful sums. Ordinal Punks, a collection of 100 PFPs made in tribute to the famous CryptoPunks collection, quickly became wildly popular on the Ordinal Protocol fetching prices in the hundreds of thousands of dollars. At the time of writing in late June, the floor price (ie: the lowest listed price) for an Ordinal Punk is 2.9 bitcoin (~87k USD). Yuga Labs, the company behind Bored Ape Yacht Club, generated $16.5 million from its auction of 288 NFTs in its TwelveFold collection based on the Ordinals Protocol.
While the Ordinals Protocol was initially used to mint images as NFTs, users quickly realized that they could use text-based inscriptions to create fungible tokens in a similar way to those minted via the ERC-20 token standard on Ethereum. Moreover, while inscribing is costly, transferring an inscribed ordinal is no more costly than any other bitcoin transaction. For this reason, Ordinals NFTs are likely to be vintage or valuable NFTs with limited collection sizes rather than common profile picture series with 10k+ NFTs. Popularized as the BRC-20 standard, these text-based inscriptions have been a major contributor to the massive uptick in Ordinals inscriptions on Bitcoin, and are now by far the most prominent Ordinal inscription type. The combined market cap of all BRC-20s in existence today is slightly over $145m. Put into context, however, this is about .025% of bitcoin’s total market cap of $580bn and illustrates how small the BRC-20 ecosystem is and how much it can still grow.
According to data from Glassnode, 2.39 million inscriptions had been added to the Bitcoin blockchain as of April 30th, adding 9.3GB in data and paying 212 bitcoin in fees. Thanks to Ordinals, on Sunday April 30th Bitcoin processed more transactions in a single day than at any point in its 14-year history, surging beyond 568,3000—nearly 78,000 more than its previous peak during the 2017 bull run. Over 307,000 of those transactions were Ordinals. The very next day, May 1st, a new record was set with 682,000 transactions with Ordinals accounting for over 372,000. This means Ordinals contributed about 54% of Bitcoin’s daily transactions at its all-time high.
Source: Dune.com
Potential Impacts & Criticisms of Bitcoin Ordinals
At the time of writing in late June, nearly 13 million Ordinals have been inscribed to date, paying 1,745 bitcoin in fees (~50m USD). The emergence of inscriptions has been criticized, but it offers a window into how Bitcoin block space may evolve and has created a burgeoning ecosystem that was not previously thought possible. It seems probable that Bitcoin Inscriptions will be a large market. In fact, a recent research piece by Galaxy Digital estimated a base case for the market of Bitcoin NFTs built on inscriptions and ordinals at $4.5bn by 2025.
The ecosystem around Inscriptions and Ordinals is nascent, but inscriptions have clearly created an enthusiastic narrative shift for Bitcoin. The infrastructure and tooling necessary for a functioning market is quickly being built. As illustrated in the below graphic, it already includes inscriptions and escrow services, wallets, marketplaces, listings, directories, DeFi platforms, and other services. Lending and borrowing services are beginning to appear. Ordinals have been bridged over to the Ethereum ecosystem. “Teleburns,” or the act of burning often valuable NFTS on other chains and transporting them to Bitcoin as Ordinals, has been achieved. The possibilities are limited only by the imagination and innovation of users.
Image Source: D-Core; representing ecosystem as of March 2023
The amounts and type of revenues received by miners of a blockchain grows as demand for block space and the number of applications with real-world users grow. Bitcoin block space has historically been in demand by users who spend UTXOs (Unspent Transaction Outputs, referring to Bitcoin’s accounting method). Ordinals introduce creative reasons to demand block space and lowers the barrier to entry for new use cases for block space. This ultimately forces competing users to meet in the fee market for the limited space inside of a block and drives up demand. Ordinals supporters believe that Bitcoin’s blockspace is a free market and Bitcoin is, of course, permissionless. No one should judge transactions as legitimate or illegitimate so long as the fee is paid. If you can pay the fee to be included in a block, you should be entitled to the block space regardless of the size of the transaction or what the transaction includes.
Bitcoin block sizes have increased as satoshis using Ordinals protocol carry extra data on the blockchain. This is a benefit to Bitcoin miners, who previously only received rewards for money transactions, but now receive additional income from the network being used for non-monetary purposes, an increase in transaction volume, and a potential increase in fees per transaction. Increased demand for block space could therefore be considered a positive for the long-term sustainability of securing the network as it generates more fees for miners as the block subsidy decreases with each halvening, resulting in lower fees to miners before eventually reaching zero. Though Bitcoin’s security is not a concern for the time being, at some point the Bitcoin Network will need to be able to survive only on transaction fees. Increased transaction activity along with a potential rise in miner fees per transaction could serve to preempt any security budget problems as miners stand to gain from a healthy inscription ecosystem.
Community members have been torn on whether Bitcoin’s distributed ledger should simply be a place to record financial transactions or a data store for different applications. Not everyone thinks that Ordinals are exciting or positive for Bitcoin. Their dramatic ascent has been a contentious subject in the larger Bitcoin community, with Bitcoin maximalists heavily criticizing them for deviating from Bitcoin’s initial purpose as a peer-to-peer electronic money and cluttering up precious block space.
Diehard Bitcoin supporters believe that block space should be reserved for sending Bitcoin rather than storing data or for speculative transactions that marginalize the use of the blockchain intended as a monetary network for its native currency. Although Bitcoin blockspace is cheap today, it has the potential to become constrained if Bitcoin were to grow into the world’s financial network. If speculative transactions marginalize the general use of the chain, it could push users away and lead to higher technical requirements to run a full node. Although it is possible to prune (discard rather than store in perpetuity) inscription data, many node operators are not keen at the idea of needing to download data that could be seen as problematic, objectionable, or potentially illegal given that any type of data can be inscribed, limited solely by block size. Moreover, should entire blocks be filled with witness data for Ordinals transactions, this could delay confirmation of so-called legitimate financial transactions, thus undermining Bitcoin’s credibility as a trusted financial network. Ordinals can also taint the fungibility of standard satoshis as Ordinal satoshis can contain imagery or information people may not want to have public. There is an argument that this taints bitcoin’s fungibility and ability to be used as money, however, the overall impact given the number of sats inscribed is extremely low.
Ultimately, Bitcoin the blockchain does not care and, in the midst of a tumultuous bear market, an objectively intriguing alternative use for Bitcoin block space emerging is a major positive not to be ignored. NFT culture and adoption has been an area where crypto appears to have achieved a durable product-market fit, and it has been a major tailwind for the digital asset space, in particular Ethereum. Despite the differences in Bitcoin’s design, the explosion of inscriptions and Bitcoin Ordinals has inspired creativity and brought previously unanticipated revenue to miners. It also has brought new developers innovating in new ways on the Bitcoin blockchain exploring things like bridges and integrations between Bitcoin and other protocols which, if successful, will drive even more innovation. If nothing else, for those of us in crypto, it’s been fun to see a new narrative around typically boring Bitcoin, and Ordinals NFTs aren’t going anywhere.
Notes & Further Reading:
1.https://docs.ordinals.com/
2.https://rodarmor.com/blog/inscribing-mainnet/
3.https://github.com/ordinals/ord/blob/master/bip.mediawiki#user-content-Abstract
4.https://metaversal.banklesshq.com/p/bitcoin-nfts?ref=bankless.ghost.io
5.https://hashrateindex.com/blog/ordinal-nfts-inscriptions-digital-artifacts-oh-my/
6.https://thebitcoinmanual.com/articles/bitcoin-ordinals/
7.https://bitcoinmagazine.com/culture/bitcoin-ordinals-can-change-mining-revenue
8.https://www.investopedia.com/terms/u/utxo.asp
9.https://blockworks.co/news/cant-ignore-bitcoin-nfts
10.https://blockworks.co/news/bitcoin-transactions-record-ordinals
11.https://read.pourteaux.xyz/p/illegitimate-bitcoin-transactions
12.https://www.galaxy.com/research/whitepapers/bitcoin-ordinals-inscriptions-5-billion-nft-market/
13.https://www.coindesk.com/web3/2023/03/06/yugas-bitcoin-nft-collection-fetches-top-bid-of-nearly-160k/
14.https://decrypt.co/145172/95k-cryptopunk-nft-burned-by-bitcoin-bandits-revived-as-ordinals-inscription
15.https://decrypt.co/resources/how-are-nfts-stored-on-chain-off-chain-and-decentralized-storage
16.https://www.brc-20.io/
17.https://ycharts.com/indicators/bitcoin_transactions_per_day#:~:text=Basic%20Info,registered%20on%20the%20Bitcoin%20network.
18.https://dune.com/dgtl_assets/bitcoin-ordinals-analysis
19.https://d-core.net/weekly-recap-7-13-march-2023/
Some of the BTC Core Developers hate the success of Ordinals, regard it is spam, and may seek to destroy it with another Taproot update, potentially setting up a conflict with miners and reigniting the block size wars. Note that Ordinals has a much better and less costly implementation on the original Bitcoin protocol, Bitcoin SV, with its unbounded block size and near zero transaction costs.