Bitcoin ordinals are digital asset inscriptions on the Bitcoin blockchain.The Ordinals protocol enables Bitcoin users to attach information to individual satoshis, the lowest denomination of Bitcoin.
Launched in January 2023, the Bitcoin Ordinals protocol is the technology that enables blockchain inscriptions on Bitcoin.The protocol was developed by Casey Rodarmor, a programmer and artist who wanted to replicate the success of NFTs on Ethereum and other chains on the Bitcoin blockchain.
In this article, we are going to explain how Bitcoin ordinals work, how they differ from regular NFTs, and examine the “Bitcoin NFT” market.
Bitcoin ordinals are inscriptions of text, audio, image, and other types of digital information on the Bitcoin blockchain.Source: Ordinals Wallet
What are Bitcoin ordinals?
Bitcoin ordinals refer to text, image, audio, and other types of inscriptions on a satoshi (“sat”), the smallest unit of
Bitcoin.
From a technical standpoint, satoshi inscriptions were first made possible on November 14, 2021, when the Taproot upgrade for Bitcoin launched.However, it wasn’t until January 2023 that a programmer and artist by the name of Casey Rodarmor released the Bitcoin Ordinals protocol, a platform that allows the broader community to inscribe information on the Bitcoin blockchain.
Due to their nature of storing text, image, and other types of information on the blockchain, Bitcoin ordinals have become known as Bitcoin NFTs.While there are several differences between “regular”
NFTs, i.e.
tokens that are not fungible and minted (for example, ERC-721 tokens on Ethereum), and Bitcoin NFTs, they both allow users to leverage the immutability of the public ledger as the proof of ownership for various digital items.
“Satoshi” refers to the smallest unit of measurement used to represent a fraction of a Bitcoin.
The term “Satoshi” is named after the pseudonymous creator of Bitcoin,
Satoshi Nakamoto.One Bitcoin is equivalent to 100 million Satoshis.
How do Bitcoin ordinals work?
Ordinal Inscriptions (digital assets inscribed on a satoshi) work by leveraging the Bitcoin network and different pieces of blockchain functionality that were introduced to Bitcoin in past upgrades.The process of inscribing digital assets on Bitcoin requires access to the Bitcoin blockchain and the knowledge of using the Command Line on Windows or Terminal on Mac/Linux systems.Once created, Bitcoin ordinals can be transacted on the network using software or
hardware crypto wallets that support Bitcoin.
One of the major reasons why Ordinal Inscriptions are possible at all is the Segregated Witness (SegWit) protocol upgrade from 2017.
SegWit was s controversial update at the time, causing a rift in the Bitcoin community that ultimately resulted in the hard fork that produced
Bitcoin Cash and Bitcoin SV.
Before SegWit, the witness data, which includes the digital signatures of Bitcoin transactions, was stored within the transaction data itself.With SegWit, a new data structure called the witness is introduced, which separates the transaction data from the witness data, allowing for faster transaction times and more transactions per block.The witness data is stored outside the transaction and is referred to as the witness function.It includes digital signatures and other related information – this is where Bitcoin ordinals inscriptions are stored.
By far the most popular type of Bitcoin inscriptions are text-based, followed by images.
Image source: Dune Analytics (@dgtl_assets)
The second protocol upgrade that made Ordinals on Bitcoin possible is the
Taproot upgrade that went live in 2021.Taproot introduced a slew of security-focused improvements and made transactions more private while reducing their size, which was essential in making Bitcoin ordinals a reality.
When speaking to Decrypt earlier this year, Ordinals founder Rodarmor explained: “One thing that people don’t understand is that in order for Bitcoin to be secure, blocks must be full.That is part of the coin security model.” He added, “If blocks are not full, then nobody has any reason to pay more than the minimum fee rate to have their transactions included in a block.”
What are the differences between Bitcoin Ordinals NFTs and regular NFTs?
There are several differences between NFTs on Ethereum, Solana, and other smart contract blockchains and Bitcoin NFTs.Let’s take a look at the most notable areas where they differ.
For starters, Ordinals are inscribed on the witness of the Bitcoin transaction, which was introduced in the SegWit upgrade in 2017.This means that Ordinals are part of the Bitcoin transaction itself, not a separate token or contract, as are NFTs.
Second, Ordinals use a unique Inscription number to identify each NFT, which is derived from the transaction ID and the output index of the satoshi that holds the data.
This number is also used to retrieve the data from a decentralized storage network called IPFS.
Third, it could be argued that Ordinals are more private and efficient than regular NFTs, because they use Schnorr signatures and Taproot scripts to make complex transactions look like standard ones.This reduces the amount of data needed and makes it harder to identify transaction inputs on Bitcoin’s blockchain.
Finally, the total number of Ordinals is limited by the number of satoshis available on the Bitcoin network.There can only be 21 quadrillion ordinals at most, and each ordinal costs at least one satoshi to create.
Bitcoin ordinals market analysis
The total number of Ordinals inscriptions surpassed 12 million after the January launch of the Orrdinals protocol.
Image source: Dune Analytics (@dgtl_assets)
Following the release of the Bitcoin Ordinals protocol in January, the number of inscriptions skyrocketed.According to Dune Analytics, more than 12.8 million inscriptions have been made to date, with the total ordinals fees amounting to
1,745 BTC (or roughly $46 million at current market prices).
It is worth noting that the rise in the popularity of Bitcoin ordinals resulted in a noticeable spike in Bitcoin fees.At their peak popularity back in May, the average fee for a single Bitcoin transaction surpassed $31, which is multiple times higher than the regular fee amount of $1 to $2.Since the sudden increase in May, the average Bitcoin fee has retraced to the $2 to $6 range, but is still considerably higher than before the launch of Ordinals.
The launch of Bitcoin Ordinals has led to a noticeable increase in transaction fees.
Image source: Blockchain.com
The bottom line: Bitcoin ordinals bring NFT-like functionality to the Bitcoin network
The Ordinals protocol has introduced the ability to store and transfer digital items on the Bitcoin network.This has brought new functionality to the world’s oldest blockchain and created new NFT marketplaces and digital art venues.At the same time, Bitcoin ordinals contributed to the increase in transaction fees, which many Bitcoin users strongly dislike.
Following the launch on Bitcoin, the Ordinals protocol launched on Litecoin and Dogecoin, two of the most popular Proof-of-Work (PoW) networks next to Bitcoin.
Love them or hate them, Bitcoin ordinals have contributed to an
increase in the popularity of NFTs in recent months, which have otherwise seen a serious decline in trading volume.If you want to read more about NFTs, find out whether NFTs are a good investment in 2023..
