A new protocol has landed on the network of the first cryptocurrency. Ordinals is an innovation that allows you to create something akin to an NFT, meaning that it is now possible to host images and other types of data on the Bitcoin blockchain without using a special token or sidechain.
The technology, which was unveiled in January 2023, immediately attracted the attention of both crypto experts and ordinary users, causing a stir and generating a mixed reception among the community.
Bitcoin Ordinals: What are they and how do they work?
Ordinals is a new Bitcoin blockchain protocol created by former Bitcoin Core developer Casey Rodarmor. It is a numbering system that allows you to assign an ordinal (serial number) to each satoshi, allowing fragments of bitcoins to be tracked during transactions.
A satoshi (SATS) is the smallest unit of a bitcoin. One BTC is equal to 100 million satoshi.
The innovation also makes individual satoshi unique by adding extra data to them in the form of inscriptions. The serial numbers can be linked to pictures, videos, texts and more. The Ordinals protocol therefore allows you to create something like a non-fungible token, known as a digital artefact, on the Bitcoin blockchain.
Bitcoin Ordinals is based on three technical solutions.
- OP_return. This is a feature that adds another output to transactions, which is provably impossible to spend. Any data that doesn’t contain cryptocurrency can be stored on the Bitcoin network, since it is not included in the UTXO (unspent transaction output). This data can simply be metadata referring to an object such as an image or video.
- Taproot. A soft fork Bitcoin network update dating back to 2021. Thanks to Taproot, the blockchain has become more private and scalable, and can use more complex smart contracts. The update also lifted the limit on the amount of data that can be stored in OP_return from the original 80 bytes to 400 kilobytes.
- Ordinals. The protocol making it possible to number satoshi.
Bitcoin Ordinals and NFTs: What’s the difference?
At first glance, there are obvious similarities between non-fungible tokens and digital artefacts on the Bitcoin network, but these technologies have significant differences.
- Non-fungible tokens use certain standards for interaction with the network (ERC-721 and ERC-1155 among others), while information about NFTs is stored in smart contracts. Bitcoin "signatures" are stored directly on the blockchain, making them 100% unalterable, unlike NFTs which can be altered with new data or characteristics.
- A digital artefact is not a distinct token like an NFT – it is inextricably tied to a specific satoshi.
- The Bitcoin-based counterparts to NFTs are added directly to blocks on the Bitcoin network, while NFTs mainly contain links to information stored outside the blockchain.
The future of Bitcoin Ordinals
Ordinals created a great deal of excitement and were an instant hit. Many experts are therefore predicting that the technology will continue to be developed in the near future and we can expect improvements in functionality, a wider range of applications and the creation of infrastructure projects.
There is already growing interest in Ordinals in connection with the new BRC-20 token standard.
The BRC-20 standard and use cases for next-generation tokens
In March 2023, an anonymous developer using the pseudonym “domo” proposed the experimental BRC-20 standard, which allows new tokens to be deployed on the Bitcoin blockchain.
Unlike the ERC-20 standard on the Ethereum network, BRC-20 doesn’t use smart contracts. It is actually based on the Ordinals protocol. Tokens are created by adding JSON text files to the network, and defining various characteristics for the new cryptocurrencies including token supply and issue limit. The BRC-20 standard is far more primitive than ERC-20, as a result of the intentionally limited programmability of the Bitcoin network.
The first token to use the BRC-20 standard is ORDI. As of 12 June, it is trading at USD 4.81, with a market capitalization of just over USD 100 million. It is listed on major CEXs (centralized exchanges) including OKX, Gate.io and Huobi.
BRC-20 standard tokens can be transferred between wallets, with commissions charged in satoshi.
The ordinalswallet.com platform launched shortly after the standard, facilitating the trading of BRC-20 tokens and “inscriptions”.
These assets could also become a core component of a decentralized financial ecosystem based on the Bitcoin network. There are many potential uses for crypto assets of this kind: they could be integrated into DEXs, yield farming platforms, and landing platforms.
Network bridges between wrapped BRC-20 tokens and other blockchains should provide an important step in the development of a DeFi ecosystem on the Bitcoin network.
The hunt for rare satoshi
After developing the Ordinals protocol, Casey Rodarmor proposed a solution for identifying “special” satoshi. The method uses predetermined events in the evolution of Bitcoin, assigning a given rarity level to the first satoshi mined during these events.
This is how the Rodarmor Rarity Index came to be. It proposes five rarity levels. According to the index, the first satoshi…
- of each new block in the network is classed as “Uncommon”;
- after the network complexity level is changed (once per 2016 blocks, happens 4 times per year, representing one satoshi per 1.26 trillion) is “Rare”;
- after a halving is “Epic”;
- after each cycle, i.e. every 6 halvings is “Legendary”.
The unspent satoshi from the very first Bitcoin block (the genesis block) created by Nakamoto is assigned the status of “Mythic”.
There are other unique satoshi including, for example, those that were part of the 10 BTC sent by Nakamoto to Hal Finney in January 2009 (the first bitcoin transaction), and the satoshi from the transaction completed by Laszlo Hanyecz, who made the first purchase with crypto when he paid 10,000 BTC for two pizzas in May 2010.
The hunt for these coins is gaining momentum, and some crypto enthusiasts are willing to pay more for these satoshi than for an entire bitcoin.
A group of collectors called the Rare Satoshi Society has even sprung up online. During their treasure hunt, they have already “shovelled through” over USD 1 billion worth of Bitcoin, systematically withdrawing bitcoins from exchanges, scrutinizing them for rare coins and sending the ordinary satoshi back.
So what does the crypto community think about ordinals?
The response to Ordinals has been very mixed. Some admirers of the first cryptocurrency believe that the simplicity of Bitcoin must be preserved at all costs, and that the true purpose of the network is solely to store and transfer crypto. Others, however, are convinced that the Bitcoin blockchain needs to develop and expand its functionality.
Because the inscriptions are now competing with standard transactions for spaces in blocks, commissions are increasing. Proponents of Ordinals do not however see any issue with this, and believe that this state of affairs will incentivize miners, especially in the future when block rewards become negligible and nodes make most of their earnings through commissions.
Ordinals have a trigged a wave of negative reactions among many blockchain developers, as the protocol makes it possible for high volumes of meme tokens and NFTs to be minted on the blockchain. Some have even proposed launching a filtering system, which would work like a spam filter and block transactions involving inscriptions.
Bitcoin Core developer Ali Sherif, for example, says that the Ordinals protocol has led to the abuse of the network, given that this blockchain was never intended to be a platform for meme tokens and NFTs.
To conclude, Bitcoin Ordinals is an interesting and controversial technology that could shift stereotypes around the premier cryptocurrency. Given the polarization of opinion, it is likely that Bitcoin Ordinals will continue to provoke heated discussions in the near future.