Are Bitcoin Ordinals the next big innovation in the Bitcoin space, or an attack on Bitcoin's fungibility?
Are Bitcoin non-fungible tokens (NFTs) the long-lost solution to Bitcoin's security model conundrum? Some Bitcoiners say they are:
But ordinals, as "Bitcoin NFTs" are called, have also kicked off a veritable storm in the BTC community. This article analyzes:
- What are Bitcoin Ordinals?
- How do Bitcoin Ordinals work?
- How are Ordinals different from NFTs?
- What are the effects on the Bitcoin network?
- How do you buy Ordinals?
- What are the most important Bitcoin NFT collections?
- What do Bitcoiners think about ordinals?
Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for?
What Are Bitcoin Ordinals?
Bitcoin Ordinals are “sats” or satoshis that have been ordered and inscribed with a piece of information, such as text or an image. This piece of information makes the sat unique and turns it into a de-facto NFT.
Sats are the smallest unit of Bitcoin with a value of 0.00000001 BTC.
Here's an easy-to-understand analogy: imagine two one-dollar bills. Both are completely fungible but have a serial code, which allows us to identify each dollar bill as unique. But if one bill was signed by Muhammed Ali and George Foreman, it becomes a "dollar NFT" of sorts. You could still spend it as a regular dollar, but the signatures make the bill's value skyrocket.
Ordinals work in the same manner. They take advantage of the fact that each individual satoshi can be uniquely identified by its equivalent of a "serial code.”
How Do Bitcoin Ordinals Work?
Bitcoin Ordinals arise from an age-old argument in the Bitcoin community:
Should Bitcoin be only for processing financial transactions?
Or should we also use it as a secure and decentralized network to store data?
If Bitcoin is to become the next world reserve currency, it would be only a global financial network. But that would most probably leave no room for experimental use cases like inscribing data onto its block space. On the other hand, increased usage of Bitcoin block space as storage space could fix the security budget problem the blockchain faces.
In its first few years, Bitcoin only enabled messages of up to 80 bytes to be encoded onto blocks through a function called OP_RETURN. This was barely enough to encode short text messages like hashes. Two significant hard fork updates, Taproot and Segwit, raised the block size limit to 4MB. In simple terms, these updates introduced, among other things, a different way of measuring block size, which allows transaction data to be arranged in a more efficient way.
Read also: Bitcoin’s Taproot Upgrade and the Possibility of DeFi on Bitcoin
So, where do Ordinals come in?
According to Ordinals developer Casey Rodarmor, the position of a sat in the Bitcoin blockchain can be identified according to four parameters:
- The Index of Sat in the Block.
- The Index of the Block in the Difficulty Adjustment Period X/2016
- The Index of Block in Halving Epoch X/210,000
- The Cycle Number
Using this mental model, the first sat in a block would be rarer since, well, it's the first sat. Similar to how some coins used to be valued among collectors for being part of a rare mint, this would allow sats to be ranked ordinally.
Side note: Not all Bitcoiners agree with this. See the final paragraph for more info.
In technical terms, Ordinals repurpose codes and use them as "envelopes" for data inscribed onto sats. Since the block size limit on Bitcoin is 4MB, this is the ceiling for data that can be inscribed. For example, pourteaux minted his CryptoPunk onto Bitcoin in a sat from 2009.
At the protocol level, sats are still fungible. Just like our "Dollar NFT," you can still spend them. At the social level, each inscribed sat would be unique because it carries an extra piece of information.
How Do Ordinal Inscriptions Work?
Inscriptions are like digital artifacts and don't require a sidechain or a separate token. They are stored in taproot script-path spend scripts (think: a special type of Bitcoin transaction). Creating an inscription is a two-step process.
First, you create a taproot output with the inscription content. Then, you spend the output, revealing the inscription content on the blockchain. The inscription content is wrapped in something called an "envelope," which is a type of no-op that doesn't change the script.
For example, if you wanted to store the string "Satoshi rules" on the blockchain, you would wrap it in an envelope and then store it in a taproot output. You can then track the inscription using the rules of ordinal theory, which means you can transfer it, buy it, sell it, or recover it if it gets lost.
How Are Ordinals Different from NFTs?
Inscription Over Tokenization
As you may be able to tell, Ordinals are "de facto NFTs." But not really. Technically they are still "only sats." Unlike NFTs, which are minted as completely new tokens, Ordinals have the raw file data inscribed directly onto the Bitcoin blockchain.
On-chain Nature
On the one hand, Ordinals are "not really fungible" since they use a workaround to create an NFT-like construction. On the other hand, NFTs on other chains can contain reference points to files that are not even hosted on the actual blockchain. Ordinals, however, contain the actual raw file data directly written into the Bitcoin blockchain.
Block Size Limit
Bitcoin block size is capped by the 4MB limit and by the hard cap of 21M coins. If suddenly all block space on the blockchain were to be used for Ordinals, this would cap the amount of "Bitcoin NFT mints" that can happen. Other chains are less restricted in this regard. However, this is mostly theoretical since Ordinals would have to become so popular as to consume all the block space on Bitcoin.
Concurrency
One interesting feature mentioned by a Delphi Digital report on Ordinals is that sats could carry several inscriptions. Even though that has not happened yet, this could potentially create multi-vector NFTs on Bitcoin.
Lack of Smart Contract Functionality and Infrastructure
Since Bitcoin does not have smart contracts like Ethereum, trading Ordinals is a unique beast. For instance, there is no decentralized exchange, no easily accessible wallets, and poor UI. Ordinals can only be traded OTC. As you'll see below, this has not markedly hindered a short-term gold rush into Ordinals.
Lost Inscriptions
NFTs can be lost if you lose access to your wallet. But inscribed sats can be accidentally spent. Then the miner processing the transaction would be, knowingly or unknowingly, in possession of the Ordinal. As a consequence, the Bitcoin blockchain could become scattered with "sats with artifacts," almost like damaged or tainted currency bills are in circulation.
Content Moderation
Since Bitcoin is truly permissionless, inscriptions on sats cannot be censored. That means illicit and copyrighted content could end up on the blockchain without the option to ever remove it again. The potential need for “content moderation” is one reason why Bitcoin purists wholeheartedly reject the idea of Ordinals.
How Do You Buy and Create Bitcoin Ordinals?
Here it gets technical. There are two types of Bitcoin wallets that can process Ordinals.
The first is a Sparrow wallet. Sparrow wallets can only receive Ordinals. You do not have to run a full Bitcoin node to create a Sparrow wallet. Here is a guide on how to create a Sparrow wallet.
The other option is an Ord wallet. You need a full Bitcoin node and 500 GB to run one. Ord wallets can create inscriptions. They are also capable of "freezing" the individual sats to avoid spending them accidentally. Here is a guide on how to create an Ord wallet. And here is a video tutorial:
The trading of Bitcoin Ordinals takes place mostly in dedicated Discord servers, with escrows serving as middlemen.
Popular Bitcoin NFT Collections
Needless to say that you should proceed with caution in this red-hot market, but here are some popular "Bitcoin NFT" collections.
Ordinal Punks
A collection of 100 NFTs minted within the first 650 Inscriptions on the Bitcoin chain, with the highest Inscription in the collection taking up spot #642. The lowest bid is 3.7 BTC, and the highest asking price is 50 BTC.\
Taproot Wizards
An Ordinal collection of hand-drawn NFT wizards created by Udi Wertheimer. There are currently only a handful of Taproot Wizards inscribed on Bitcoin.
Bitcoin Rocks
A collection of 100 supply-capped NFTs that channels the spirit and aesthetic of Ether Rocks, one of the first NFT collectible projects on the Ethereum chain.
Timechain Collectibles
A highly-limited set of just 21 Ordinals that depict timepieces in various forms. The whole collection was minted into a single block on January 30, 2023, with rarity levels including Pocket Watches, Ancient Sundials, Wristwatches, Wall Clocks, Cyberpunk Alarm Clocks, Clock Towers, Monolith, and Grandfather clock.
Ordinal Loops
A collection of some of the lowest-numbered Inscriptions among Bitcoin Ordinals, starting at Inscription 452. The NFT, known as Object 0, is a rotating mathematical torus and is one of just seven similar animations that form the first of three planned series drops from the Ordinal Loops team.
What Are the Effects on the Bitcoin Network?
The run on Bitcoin NFTs came suddenly and all at once. Fees for inscribing Ordinals surged but seem like they have plateaued at the time of writing:
Most of the inscriptions were images (88%), as people rushed to recreate successful Ethereum NFT collections on Bitcoin:
Mean block size increased from between 1.5MB - 2MB to more than 3MB. In other words, demand for block space picked up significantly:
However, the debate in the community continues: is this block space going towards a "productive cause" or is it going to clutter the network? The mempool is busier, but the value of the transactions is lower than it was during big liquidation events:
Moreover, if we look at the fee share of security spend, Ordinals are a blip in a graph that has been down only for a long time:
In conclusion:
- Fees spent on Ordinals have surged, but they are mostly low-value transactions.
- Miner revenue hasn't meaningfully increased.
- Blocks are "less empty" than they used to be.
- Without further data, it's hard to say whether this is a short-term hype or a change of direction.
What Do Bitcoiners Think About Ordinals?
Uhh, here we get to the really spicy part of the story.
Of course, Ordinals kicked off a huge debate in the Bitcoin community. Bitcoin maxis are not amused. For them, 1 sat = 1 sat:
Ordinal naysayers argue Ordinals are an attack on the Bitcoin network:
- They prematurely grow block data, implying it will still be needed when hyperbitcoinization hits.
- They prematurely increase fees before Bitcoin has onboarded enough people.
- They normalize miner collusion and MEV.
- They misuse the OP_RETURN function for something it was not intended to be used for.
- They bloat nodes.
- They enable malware, copyright, and privacy violations to be stored on Bitcoin.
- Worst of all, they connect Bitcoin to "shitcoin crypto scams in the popular consciousness (and normies getting rugged by buying fake NFTs, etc)."
When Bitcoiners were proudly proclaiming that Bitcoin is not crypto during the FTX bankruptcy, that is not what they had in mind.
Neutral bystanders observe the dumpster fire with amusement. Maybe Bitcoiners are just not used anymore to someone rattling their cage?
However, some in the Bitcoin community see Ordinals, and their possible sudden fall from grace, as evidence that the Bitcoin security model is broken and needs fixing:
With Ordinals kicking off such a s**tstorm, it's hard to see how Bitcoin could fulfill its function as "arbiter of truth." Balaji Srinivasan promoted this idea in his Network State book, claiming that the Bitcoin blockchain could be used to store data in a verifiable and decentralized manner. But that does not seem too likely at this point.
Conclusion
If nothing else, Bitcoin Ordinals have properly rattled the cage in the Bitcoin community. Without more data, it’s impossible to tell whether Ordinals will have a significant impact on Bitcoin besides the usual infighting in the community over the network. But it’s good to see something is happening on Bitcoin.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap.
