Introduction
Recently, an unexpected trend has emerged on the Bitcoin network where data files such as images, audio clips, and even a version of the video game Doom are permanently and immutably inscribed directly into the Bitcoin’s blockchain.
This event has sparked a lot of discussion and debate around the implications of this non-monetary use of blockspace. With the surge of interest in NFTs on other blockchains in the past two years, it’s expected that the emergence of NFT-like collectibles on Bitcoin will experience a similar growth trajectory.
This article aims to examine the fundamental properties of Ordinals and Inscriptions and analyze how this trend is being expressed within the Bitcoin on-chain data.
Ordinals Protocol — Inscriptions on Bitcoin
Source: ordinals.com/inscriptions
Background
Casey Rodarmor, a software engineer, conceptualized the idea of Bitcoin Ordinals, which became a reality due to the implementation of Bitcoin’s ‘Segregated Witness’ and ‘Taproot’ upgrades in 2017 and 2021, respectively.
Segregated Witness upgrade that was enacted in 2017 reorganized transactions by moving the signature data (witness) to the end of the transaction. This change resulted in an effective block size increase. Following that, in 2021, Taproot upgrade brought many improvements to the network, including the ability to create more complicated scripts in the witness section of a transaction. Taproot also removed the size limit for witness data, among other changes. The combination of SegWit and Taproot upgrades made it possible to store significant arbitrary data and made it cheaper than standard transaction data. This set the stage for Inscriptions.
Launched on the mainnet in January 2023, Ordinals allow users to inscribe various types of data, such as JPEG images, on satoshis, creating an Ordinal.
Inscriptions are pieces of arbitrary data and associated metadata in the network. The metadata tells Bitcoin nodes how to display such data, whether it’s an image or text. Inscriptions are similar to Ethereum’s calldata, which is used to store read-only data. Bitcoin’s Taproot upgrade and the Segregated Witness upgrade in 2017 allow for inscriptions as large as 4mb, making them ideal for storing large amounts of data.
The inscriptions are included in the witness data of a Bitcoin transaction, which stores the transaction signatures. Full archival Bitcoin nodes that run the ORD software can decode the inscriptions and view the content.
Ordinals are individual units of satoshis, which are the smallest denomination of Bitcoin. They are labeled and tracked using the concept of Ordinals Theory, which allows users to see when sats were mined and in what order. This methodology provides an interesting way to look at the history of Bitcoin’s supply and to apply rarity traits to individual sats based on various criteria.
The concept of tokenization on the Bitcoin network predated the creation of NFTs on Ethereum. Bitcoin’s first foray into NFT culture began in 2012 with the Colored Coins open-source project. This project introduced a new approach to Bitcoin by attaching real-world assets or services to a set of unspent transaction outputs (UTXOs).
As recent as 2021, the Stacks blockchain launched its own layer 1 blockchain to add NFT and DeFi capabilities to Bitcoin. The Stacks blockchain operates in parallel with Bitcoin’s blockchain, similar to a Bitcoin sidechain. However, the buying and selling of NFTs on Stacks can only be done using the native Stacks token (STX). As a result, some consider referring to Stacks as “Bitcoin NFTs” controversial, as the assets do not exist on the native Bitcoin blockchain and are not transacted using BTC.
How Do They Work?
Inscriptions are native digital artifacts on the Bitcoin’s blockchain and do not require a separate token, side chain, or changes to Bitcoin itself.
Inscriptions are created by including content such as images, text, or HTML in an inscription transaction’s witness. When mined, the inscription is made on the first satoshi of the first output of the transaction, marking it permanently and making it an intertwined component of human art and culture.
Using ordinal theory, the ownership and movement of an inscribed sat can be tracked across time and transactions, allowing inscriptions to be traded, gifted, bought, and sold. Inscriptions can be sent to normal Bitcoin addresses in regular transactions, benefiting from Bitcoin’s infrastructure.
While this might sound like a way to create NFTs on Bitcoin, there are important differences between NFTs and Ordinals.
NFTs vs Ordinals
Source: decrypt.co
Not all NFTs are created equal. While all digital artifacts are NFTs, not all NFTs are digital artifacts. A digital artifact NFT must meet specific criteria, including being decentralized, immutable, on-chain, and unrestricted.
Inscriptions on Bitcoin are true digital artifacts, as they are on the oldest and most secure blockchain, and are not plagued by off-chain data storage or smart contract audits.
In contrast, many NFTs on Ethereum point to off-chain data on the Interplanetary File System, which can be changed using dynamic metadata. This alludes to a deficiency that the new Ordinals protocol aims to improve, creating complete NFTs by inscribing all data directly on-chain.
How Are the Traditional NFTs Stored?
Non-fungible tokens are, ultimately, a form of digital media and not all NFT storage techniques are created equal. Indeed, some NFT holders may not own much more than a URL or token ID, so it’s worth taking the time to understand how NFT storage works.
On-chain vs Off-chain Storage
Storing an NFT on-chain means that the entire NFT — the image and all its metadata — exist directly on a blockchain. Conversely, off-chain stored NFTs means that some or most of the NFT is stored outside of the blockchain.
Source: hashkey.com
On-chain storage is best, because it means that users can verify all facets of the NFT. However, very few NFT projects opt for this method of storage. Most NFT projects opt to store the actual images off chain and many well known NFT projects like Bored Ape Yacht Club opt for off-chain storage.
In the case of off-chain storage, the NFT’s smart contract contains information that points to some off-chain location where the actual NFT JPEG image is stored.
While many NFT projects utilize decentralized solutions like the Interplanetary File System for off-chain hosting, others rely on centralized hosting providers such as Amazon and Google. The downside to centralized hosting is the risk of owner’s NFT being lost, if the provider shuts down unexpectedly.
Immutability
Ethereum NFTs can be immutable, but many are not, and can be changed or deleted by the NFT contract owner.
In order to make sure that a particular Ethereum NFT is immutable, the contract code must be audited, which requires detailed knowledge of the EVM and Solidity semantics.
It’s very hard for a non-technical user to determine whether or not a given Ethereum NFT is mutable or immutable, and Ethereum NFT platforms make no effort to distinguish whether an NFT is mutable or immutable, and whether the contract source code is available and has been audited.
Overall, the creation of Ordinals represents an attempt to refine and improve the NFT concept, bringing it closer to the ideal of a true digital artifact that is decentralized, on-chain, immutable, and unrestricted.
However, it must be stated that unlike NFTs, Ordinals on Bitcoin do not have creator royalties attached to them.
Impact On Bitcoin
Miners
With the Ordinals hype causing inscriptions to regularly take up over half of Bitcoin’s block space, Bitcoin miners have intuitively been able to cash-in on the new flurry of activity.
Since the launch of the new controversial Bitcoin-based NFT protocol Ordinals, Bitcoin miners have made over $1.2 million in BTC transaction fees, according to on-chain analytics.
Source: dune.com — dataalways
Through this, many view Ordinals as a scheme that’s introduced ‘miner extractable value’ (MEV) to proceedings — a concept that indicates the maximum value in which miners can obtain from producing new blocks beyond the block rewards and transaction fees.
Source: dune.com — dataalways
According to data from Dune Analytics, as of today a total of 172,321 Ordinals have been inscribed into the Bitcoin network. Majority of inscriptions make up image and text files, with 82% of all inscriptions being completely unique.
Source: glassnode.com
The analysis of the average size of an inscription transaction reveals that image type data density is still low, with each transaction contributing 21kB to the chain size. On the other hand, text inscriptions have the smallest data footprint, with an average transaction size of 8kB.
While audio, video, and other inscription types have a relatively insignificant presence in the total Inscription footprint, they tend to have larger average transaction sizes than their counterparts.
Bitcoin Addresses
Source: glassnode.com
The adoption of the Ordinals protocol has led to a surge in user engagement, resulting in a notable increase in the number of non-zero Bitcoin addresses. In fact, the total number of unique addresses holding a positive balance has exceeded 44 million, reaching an all-time high.
This metric, which indicates the number of addresses with a non-zero amount of Bitcoins, reflects the network’s expanded usage beyond traditional monetary transactions. This marks a significant milestone in Bitcoin’s history.
Block Size
Source: glassnode.com
The Ordinals protocol has caused some competition for block space demand and are already taking up 50% of Bitcoin’s block space. As per on-chain data, Bitcoin’s mean block size has increased from 1.4MB to 2MB. In addition, Bitcoin achieved a significant milestone on February 1st, 2023, by mining its largest block ever recorded in its 14-year existence.
Source: mempool.space
The block in question, 774628, was 3.96MB in size, which is close to maximum block size limit of 4MB, contained the Ordinal that made up 3.94MB, or about 99.5%, of all transactions.
Blockchain Size Projection
Source: glassnode.com
One topic of discussion regarding inscriptions is how a larger data footprint could affect full node sync/validation times and data storage requirements in the long run. Regarding the latter, it’s possible to project the impact of an additional 14 years of Bitcoin history based on different assumptions for the average block size, including: 1.35MB🟣 for pre-inscription peak, 2.50MB🟠 for post-inscription peak, and 4.00MB🔴 as a theoretical upper limit.
Assuming a constant cost of data storage at $0.014/GB (Backblaze, Nov 2022) for hard drives, the maximum cost of a hard drive in 2037 would be around $120, which is still considered within the range of commodity hardware and doesn’t take into account the effects of technology deflation over time.
Network Congestion (Mempool)
Source: glassnode.com
The presence of inscriptions has resulted in congestion in the mempool and has caused fees to steadily increase. However, at this point, the impact of this increase seems to be primarily affecting the competition in the lowest fee rate bands. It appears that inscription creators are paying close attention to the actual BTC value of the fees they pay. As such, there is not yet a strong indication that inscriptions are displacing monetary transactions, but rather they are slightly raising the minimum fee rate required for block inclusion.
Taproot Utilization
Source: glassnode.com
Taproot is a Bitcoin upgrade, which made Ordinals possible, introduced some changes to how transactions are processed, making them faster and more efficient. The upgrade went live back in the November of 2021.
The reason behind this sudden surge in Taproot utilization is the rise of Ordinals in the market, since Ordinals makes use of Taproot to inscribe data into the witness portion of a BTC transaction.
As the Bitcoin NFTs have been rapidly gaining popularity, it’s not surprising that Taproot is also experiencing increased usage. The adoption and utilization of Taproot have reached all-time highs of 19.42% and 9.75%, respectively, due to the impact of Ordinals.
Ordinals — New Business Opportunities
The race is on to develop more seamless methods of inscribing on Bitcoin and wallets that make it possible to view the Bitcoin NFT once it is created.
Looking to create a seamless way for collectors to create Ordinal Inscriptions, Gamma, a Bitcoin NFT marketplace on Stacks, began offering a paid service that allows users to inscribe images and text. Other projects providing this service include Oridalsbot from the creators of the Satoshibles NFT collection.
Total Addressable Market
The market for inscriptions could grow significantly by attracting new participants and taking market share from other blockchains. According to Galaxy Digital, in order to determine the potential market value of inscriptions, one can look at the current market for Ethereum NFTs and consider three scenarios:
Source: galaxy.com
Source: galaxy.com
In the bear case scenario, it’s suggested that inscriptions will only make up 13% of the total Ethereum NFT market, with a cumulative market value of $1.5 billion.
The base case scenario suggests that inscriptions will become more mainstream and will be used for PFPs, memes, and utility projects. In this case, the total addressable market (TAM) for inscriptions is estimated to be $4.5 billion.
In the bull case scenario, the base case is expanded by increasing the number of projects in each category by 33% and adding new categories such as real-world assets. This would result in an even higher market value for inscriptions.
Source: galaxy.com
Galaxy Digital predicts that within 2 years (by 2025), Bitcoin inscriptions could achieve a cumulative market capitalization of $4.5bn with $1.6bn in trading volume, which is a reasonable projection.
Addressing Concerns
Ordinals are an innovation that operates directly on the Bitcoin mainnet, without the need for a separate sidechain or protocol. This approach, however, comes with potential downsides. As Ordinals gain in popularity and more users adopt them as time goes by, the increased transaction volume could create congestion and result in high fees in the future.
This has sparked a debate among the development community about the impact of storing all this data directly on the Bitcoin blockchain, and the challenges that users may face when running a full archival node. Inscriptions, which are larger files, take up more space within each Bitcoin block, further adding to the strain on the network.
As the use of Ordinals continues to grow, it will be important to find ways to mitigate the impact on the network and ensure that Bitcoin remains accessible and affordable for all users.
Dynamic Fee Market Economy
Bitcoin’s transaction fee market has seen periods of high fees due to significant numbers of transactions filling up the mempool. This dynamic fee market creates a cycle of high fees resulting in efficient use of block space, which then leads to low fees and inefficient use of block space, and the cycle repeats.
Whether or not inscriptions should be considered an acceptable use of Bitcoin is a matter of debate, but the market will ultimately decide the appropriate fee pricing for those who want to include this data in each block. If transaction fees rise enough, smaller and less important Bitcoin transactions may be priced out of the market and move to Layer 2 protocols, such as Lightning. These additional layers were always part of the game-theoretical hypothesis of Bitcoin’s fee structure, as predicted by Hal Finney in 2010.
Source: bitcointalk.org
It’s possible that inscriptions may be seen as less important uses of Bitcoin’s block space and fall by the wayside as fees increase. However, the use of inscriptions and other potential uses of block space will depend on the overall demand for Bitcoin transactions and the willingness of users to pay the associated fees. As Bitcoin continues to evolve and grow, it will be interesting to see how the fee market and the use of additional layers like Lightning will shape the ecosystem.
The Most Notable Ordinals Inscriptions
Let’s look at some of the most interesting Ordinals inscriptions:
Inscription 0 — “It’s really simple, but I’m proud of it” — Casey Rodarmor, Ordinals creator.
Source: Ordinals.com
The very first Ordinal to be minted on Bitcoin, inscription 0, is simply a black skull with white markings. Rodarmor’s Genesis inscription, which is the first Ordinal inscription — or inscription 0 — was some “tiny pixel art” of a skull that marked the beginning of it all. The image was timestamped on December 14, according to the Ordinals website. It pays homage to the first block to be mined on the Bitcoin blockchain, which is commonly known as the Genesis Block.
Inscription 9978 — On The Edge of Oblivion
Source: Ordinals.com
On the Edge of Oblivion is a collection comprises 555 pieces, with the floor price starting at just 0.015 ETH ($23) on February 7 for inscription 9,978. However, a day later, the floor price surged to 3.59 ETH ($5,550), before settling back down to 0.7999 ETH ($1,236) on the OpenSea marketplace. The NFTs have had a substantial trading volume on OpenSea, with 1,199 ETH changing hands, and the collection has seen 1,158 sales in the last week.
Inscription 661 — My Name Is Dan
Source: Ordinals.com
Inscription 661, entitled “I Existed,” is an unexpectedly touching voice recording of an individual that simply goes by the name Dan, in which he relates autobiographical information to a future alien or artificially intelligent race of beings.
Inscription 661 — King James Bible
Source: Ordinals.com
Somebody took the King James Bible, split it into 5 .RAR files and inscribed them on Ordinals.
Inscription 466 — Cloned “DOOM” Game
Source: Ordinals.com
Another user has uploaded a cloned version of the 30-year-old video game classic DOOM on Bitcoin as an inscription. Its fully playable.
Inscription numbers from 356–377 — Timechain
Source: Timechain Collectibles Ordinal NFTs
Timechain Collectibles is a collection of 21 highly-limited Ordinals that showcase different forms of timepieces, such as ancient calendars, pocket watches, cyberpunk watches, and more. The collection was inscribed on January 30, 2023.
There are various rarity levels within the collection, with some of the pieces being rarer than others. The project’s Discord is where the auctions for the NFTs are being held. One of the NFTs, inscription 364, also known as Timechain Collectible 6, sold for 3.08 BTC/43.59 ETH ($67,000).
Bored Ape’s Yuga Labs
Source: twelvefold.io
Yuga Labs, the $4 billion company behind Bored Ape Yacht Club (BAYC), has announced TwelveFold, the first NFT project on Bitcoin. It’s a collection of 300 NFT Generative Art Ordinals that will go up for auction this week. These pieces are 12×12 gridded and combine 3D graphics and hand-drawn strokes.
In this regard, Yuga Labs co-founder Greg Solano said: “We’re excited about Ordinal inscriptions and what the future holds for digital artifacts on Bitcoin.”
Summary
The emergence of Ordinals has been unexpected, but it represents a new and unique moment in Bitcoin’s history. It demonstrates the versatility of the Bitcoin network beyond the traditional investment and monetary transfer use cases. As Ordinals continue to grow in popularity, it will be fascinating to see what other innovative use cases will emerge and how they will shape the future of the network.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.