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Bitcoin Ordinals

Welcome back to another installment of Crypto Corner! So you've heard of non-fungible tokens, now get ready for non-fungible satoshis! If you're left scratching your head after reading that, then it's time to grab your wizard hats and robes because for this installment we'll be delving into the latest development on Bitcoin aiming to Make Bitcoin Magical Again 🧙 - The Ordinals Protocol! So you might be wondering "What exactly are ordinals? The Bitcoin network doesn't have native smart contract support so how can I mint an ordinal?". These are excellent questions and all will be revealed throughout this installment!

At its core, the Ordinals Protocol allows Bitcoin holders to embed arbitrary content onto the Bitcoin blockchain. More simply, anyone can now store any piece of data forever on the Bitcoin blockchain by utilizing this protocol. One of the key features that has helped ordinals gain popularity throughout 2023 so quickly is the fact that everything needed for this protocol already exists on the Bitcoin network. Ordinals do not require a separate token, sidechain or rollup, or any major changes to the Bitcoin network. The Ordinals Protocol is based on the work of Casey Rodarmor, a former Bitcoin Core developer, and consists of two fundamental components: Ordinals and Inscriptions. We'll further expand upon each of these components below.

Ordinals

Before jumping into ordinals, let's review some Bitcoin basics. Bitcoin is the native currency of the Bitcoin network, and each bitcoin is composed of "satoshis" (named after the creator of Bitcoin - Satoshi Nakamoto). Bitcoin and satoshis (or "sats" for short) are analogous to dollars and cents, where 100 cents make up 1 dollar and 100,000,000 sats make up 1 bitcoin. With that understanding in mind, the concept of ordinals should be relatively straightforward.

According to the Ordinal Theory Handbook:

"Ordinals are a numbering scheme for satoshis that allows for tracking and transferring of individual sats. These numbers are called ordinal numbers. Satoshis are numbered in the order in which they're 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."

Due to the importance on ordering, ordinals can be represented via a few different formats:

  • Integer notation: the ordinal number, assigned according to the order in which the satoshi was mined

  • Decimal notation: the first number is the block height in which the satoshi was mined, the second number is the offset of the satoshi within the block

  • Percentile notation: the satoshi's position in Bitcoin's supply, expressed as a percentage

  • Name: an encoding of the satoshi's ordinal number using the characters a-z

Additionally, ordinals now provide a rarity tier system for every satoshi mined on the Bitcoin network, due to certain network events occurring when satoshis are mined. The network events that influence satoshi rarity are:

  • Blocks: a new block is mined approximately every 10 minutes

  • Difficulty Adjustments: Every 2,016 blocks (~2 weeks), the Bitcoin network responds to changes in network hashrate by adjusting the difficulty target to maintain the targeted 10 minute block time

  • Halvings: Every 210,000 blocks (~4 years), the amount of new Bitcoin mined per block is cut in half

  • Cycles: Every six halvings, the halving and difficulty adjustment coincide. This is called a conjunction which occurs roughly every 24 years. The first conjunction is predicted to occur sometime in 2032

Based on these network events, the following satoshi rarity tiers can be derived:

  • Common: any sat that is not the first sat of its block

    • 2.1 quadrillion common sats will ever be mined

  • Uncommon: the first sat of each block

    • 6,929,999 uncommon sats will ever be mined

  • Rare: the first sat of each difficulty adjustment period

    • 3,437 rare sats will ever be mined

  • Epic: the first sat of each halving epoch

    • 32 epic sats will ever be mined

  • Legendary: the first sat of each cycle

    • 5 legendary sats will ever be mined

As a result of these rarity tiers, there is another way to represent ordinals in addition to the formats listed above.

  • Degree notation: represents ordinal numbers in a manner that makes the rarity of a satoshi easy to recognize

  • This image describes what each position within the degree notation signifies

Ordinal Degree Notation
Ordinal Degree Notation

Inscriptions

Inscriptions refer to the act of inscribing arbitrary content onto a single satoshi. Which begs the question "Doesn't this sound an awful lot like NFTs on Ethereum?". You would be correct; however, a common misconception with NFTs is that the NFT's content is actually stored on-chain. This is not the case in most instances since the cost of doing so would be incredibly expensive per transaction. In reality, most NFTs are simply tokens on Ethereum that point to an off-chain data source such as IPFS or a centralized hosting service (such as AWS or Azure) that hosts the actual content. On the other hand, inscriptions ironically accomplish the objective of NFTs better than most NFTs do because inscribed content is always stored entirely on-chain via its satoshi. Additionally, it is possible to inscribe just about any type of content you can think of. Text, images, video, audio or even an entire video game like Doom!

However, inscriptions on Bitcoin were not always possible. The catalyst that enabled the possibility of widespread inscriptions on Bitcoin was the Taproot upgrade that occurred in November 2021. While this upgrade was very technical in nature, the main takeaway is that Taproot improved on the popular SegWit upgrade by eliminating data storage caps within blocks. With these caps eliminated, the stage was set for inscriptions mania.

Now for the burning question in everyone's mind - how do you inscribe something?? Until recently, inscribing was only possible to execute if you were running your own Bitcoin node. As you can probably guess, many Bitcoin holders don't run their own node due to technical requirements, hardware requirements and the general complexity of running your own node. However, as ordinal inscriptions have gained popularity this year, many third-party services have launched that provide a no-code solution for inscriptions, such as OrdinalsBot, Gamma and UniSat. Users simply provide the piece of content they'd like to inscribe, pay the inscription transaction fee (which can be quite large depending on the size of your content) and ensure you have a Bitcoin wallet that supports the Ordinal Protocol, such as UniSat or Xverse. These ordinal-focused Bitcoin wallets are needed as a regular Bitcoin wallet will not recognize the significance of certain satoshis within a user’s BTC balance. Without an ordinals wallet, users might accidentally destroy the UTXO containing the inscribed satoshi when executing transactions.

So to summarize, the Ordinals Protocol works because of ordinals which allow for specific ordering of satoshis in transactions and inscriptions which allow for embedding any content onto the Bitcoin blockchain. The ordinals component created rarity for certain satoshis based on periodic network events, while the inscriptions component created rarity for certain satoshis based on arbitrarily inscribed content.

So why is any of this important? Well due to the popularity and demand for these inscribed ordinals, transaction fees on the Bitcoin network have remained relatively elevated for the entirety of 2023 so far. While high transaction fees might sound like a negative consequence and much has been done about high transaction fees on Ethereum, high transaction fees on Bitcoin is a much more nuanced discussion. Due to Bitcoin utilizing the Proof-of-Work consensus algorithm, miners are needed to solve complex computations to mine each new Bitcoin block. When a Bitcoin block is mined, the miner who mined the block receives all the transaction fees within the block as well as the block reward subsidy. Typically, the block reward subsidy accounts for the vast majority of the payout (>90%) a miner receives compared to the transaction fees within the mined block. For those unaware, the block reward subsidy is the mechanism by which new bitcoin is created, with the current block rewards sitting at 6.25 BTC. Additionally, as mentioned above regarding the Halving, roughly every 4 years the block reward subsidy is cut in half due to Bitcoin's pre-programmed inflation schedule. As such, the last of the 21 million bitcoin are expected to be mined in ~2140. Without the block reward subsidy, the Bitcoin network will be left to depend solely on transaction fees to keep miners incentivized to secure the network. While 2140 is still a long way away, there has been much debate about whether transaction fees will be adequate enough to keep the Bitcoin network secured. However, with the explosion of ordinal inscriptions this year, there has been an uptick in instances where transactions fees were greater in value than the block reward subsidy for certain mined blocks. Because of this, many proponents of ordinals argue that these inscriptions could be a critical piece of securing the Bitcoin network’s future security budget. In short - high transaction fees on Bitcoin will become a necessary evil to secure the network in the future. Sidenote - Bitcoin holders can prepare themselves for a high transaction fee environment by practicing proper UTXO management and utilizing the Lightning Network.

Lastly, the popularity of inscribed ordinals has not come without its controversy, as is with most developments in crypto and Bitcoin, specifically. Many purists within the Bitcoin community believe the biggest strength of Bitcoin and what sets it apart from everything else in crypto is the simplicity of the protocol. Bitcoin does one thing and does it really well - allow for the permissionless and trustless transfer of value between counterparties. Ordinal inscriptions have caused such a visceral reaction among these Bitcoin purists because it’s the first time in Bitcoin's history where network transactions are occurring unrelated to Bitcoin's core monetary use case. Responses among these purists have ranged from simply disparaging ordinal inscriptions as "digital graffiti littering the Bitcoin network" all the way to calling for complete censorship of any transactions containing ordinal inscriptions (quite an ironic response from a community built on anti-censorship principles). But the beautiful thing about Bitcoin is whether you like a specific transaction or not, there is nothing any one person or group can do to stop them. Ordinal proponents, such as the Taproot Wizards, believe ordinal inscriptions are the catalyst to cut through the development morass Bitcoin has experienced over the past few years and help ignite the passion and mysticism Bitcoin inspired way back in the early 2010s. Additionally, throughout 2023, ordinal inscriptions have helped dramatically increase the number of non-zero Bitcoin wallets on the network, increase miner revenue through high transaction fees, and onboard an entirely new cohort of Bitcoin users due to this new use case. All in all, it remains to be seen what the long-term impacts of ordinal inscription activity will be on the Bitcoin network, but there seems to be no slowdown in demand or activity for the foreseeable future.

In case all the above wasn't enough, below are a few additional resources to help you on your ordinals journey.

Until next time!