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TL;DR
Every bitcoin consists of 100,000,000 satoshis (sats). The Ordinals protocol allows for each individual satoshi to be identified and transacted with extra data attached (through a process known as an inscription).
Ordinals have created another use case for Bitcoin beyond the simple transfer of value, making Bitcoin NFTs a reality.
Introduction
Until recently, NFTs have primarily been minted and used on blockchains like Ethereum, Solana, and BNB Smart Chain. However, the team behind Ordinals believes that non-fungible tokens also have their place on the Bitcoin blockchain. Consequently, this has led to the emergence of the Ordinals project.
History has proven that changing a piece of Bitcoin’s code is extremely difficult. This issue is mainly due to the decentralized network of nodes and developers who don’t want to risk network security. As such, Bitcoin NFTs have not gained as much traction. Nevertheless, the growth of the crypto ecosystem has opened the gates to more innovative minds for whom the creation of Bitcoin NFTs is part of the future of Web3.
As of February 2023, Inscriptions using ordinals exceeded 100,000 as users poured images, video games, and other content onto the network. Let’s see how it works.
What Are Bitcoin Ordinals?
The Ordinals protocol is a system for numbering satoshis, giving each satoshi a serial number and tracking them across transactions. Simply put, ordinals allows users to make individual satoshis unique by attaching extra data to them. This process is known as “inscription”.
A satoshi – named after Bitcoin's pseudonymous creator Satoshi Nakamoto – is the smallest denomination of bitcoin (BTC). A single BTC can be subdivided into 100,000,000 satoshis, meaning each satoshi is worth 0.00000001 BTC.
Satoshis are numbered based on the order in which they were mined and transferred. The numbering scheme relies on the order satoshis are mined, while the transfer scheme relies on the order of transaction inputs and outputs. Hence the name, “ordinals”.
While traditional NFTs are similar to ordinals in some ways, there are a few key differences. NFTs have typically been made using smart contracts on blockchains such as Ethereum, Solana, and the BNB Smart Chain, and sometimes, the assets they represent are hosted elsewhere. Conversely, ordinals are inscribed directly onto individual satoshis, which are then included in blocks on the Bitcoin blockchain. Ordinals reside fully on the blockchain and do not require a sidechain or separate token. In this sense, ordinal inscriptions inherit the simplicity, immutability, security, and durability of Bitcoin itself.
Ordinal Theory and Inscriptions
In the context of Bitcoin, Ordinal Theory is a proposed methodology for identifying each satoshi via a serial number and tracking them in the Bitcoin coin supply, from first minting through their entire lifespan of transactions. This process is referred to as “inscription”. Thus, ordinal inscriptions are digital assets, similar to NFTs, inscribed on a satoshi in the Bitcoin network. This process has been made possible thanks to the Taproot upgrade, launched on November 14, 2021. Because of this, ordinal inscriptions do not require a sidechain or separate token.
As Ordinal Theory allows the tracking and transfer of individual satoshis, it has opened the possibility of collecting them. Based on the total supply of Bitcoin, the following ranks have been prescribed to denote the rarity of different satoshis:
Common: any sat other than the first sat of its block (2.1 quadrillion total supply).
Uncommon: the first sat of each block (6,929,999 total supply).
Rare: the first sat of each difficulty adjustment period (3437 total supply).
Epic: the first sat after each halving (32 total supply).
Legendary: the first sat of each cycle* (5 total supply).
Mythic: the first sat of the genesis block (1 total supply).
*A cycle represents the period between conjunctions, which occur when a halving and a difficulty adjustment coincide. In theory, this happens every 6 halvings, but the first conjunction is yet to occur (expected to occur in 2032).
Ordinals Pros and Cons
Ordinals have created another use case for the Bitcoin network beyond simple transfers of value. However, the Ordinals protocol has been met with controversy as it precipitates a fundamental issue among the Bitcoin community. On one side are those who believe that the relative simplicity of Bitcoin in its limitations to storing and transferring value should be preserved. On the other side are those who believe that Bitcoin should evolve to include new features and use cases.
Inscribed satoshis are now competing for block space with regular BTC transactions, which increases network fees. This has caused some controversy in the Bitcoin community, but some Ordinals supporters argue that this could be positive as fees are a crucial incentive for miners to secure the blockchain. In the future, as block rewards dwindle over time, network fees will become the primary incentive for committing hash power to Bitcoin. The crypto community seems divided on the topic, but the project certainly brought innovation to the Bitcoin space.
Closing Thoughts
Ordinals are changing the world of blockchain art by providing an entirely new way to store information on Bitcoin transactions. They are adding extra utility and have increased the number of non-zero Bitcoin addresses to an all-time high. We are witnessing a unique moment in Bitcoin history where innovation is generating network activity beyond the typical use cases of investment and monetary transfer. Does this mean that Ordinals will continue to grow? Not necessarily. We will have to wait and see.
Further Reading
What is an NFT?
What Is Taproot and How It Will Benefit Bitcoin
Bitcoin Halving Countdown
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