Summary

  • Each bitcoin is made up of 100,000,000 satoshis (sats). The Ordinals protocol allows each individual satoshi to be identified and processed into transactions along with additional attached data (through a process known as "enrollment").

  • Ordinals created another use case for Bitcoin beyond simply transferring value and made NFTs on Bitcoin a reality.

Introduction

Until recently, NFTs were primarily minted and used on blockchains such as Ethereum, Solana, and BNB Smart Chain. However, the team behind Ordinals believes that non-fungible tokens also have a place on the Bitcoin blockchain. Consequently, this led to the emergence of the Ordinals project.

History has shown that changing a part of the Bitcoin code is extremely difficult. The problem is mainly due to its decentralized network of nodes and developers who do not want to risk the security of the network. As such, NFTs on Bitcoin did not gain much traction. However, the growth of the crypto ecosystem has opened the doors to more innovative minds for whom the creation of NFTs in Bitcoin is part of the future of Web3.

As of February 2023, registrations using ordinals surpassed 100,000 as users uploaded images, video games, and other content to 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 it between transactions. In simple terms, ordinals allow users to make each individual satoshi unique by attaching additional data to it. The process is known as "enrollment."

A satoshi, named after the pseudonymous creator of Bitcoin, Satoshi Nakamoto, is the smallest denomination of a bitcoin (BTC). One 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 are mined and transferred. The numbering scheme depends on the order in which satoshis are mined, while the transfer scheme depends on the order of transaction inputs and outputs. Hence the name "ordinals."

While traditional NFTs are similar to ordinals in some ways, there are some key differences. Typically, NFTs have been created through the use of smart contracts on blockchains such as Ethereum, Solana, and BNB Smart Chain; Additionally, sometimes the assets they represent are hosted elsewhere. In contrast, ordinals are inscribed directly on individual satoshis, which are then included in blocks on the Bitcoin blockchain. Ordinals reside entirely on the blockchain and do not require a sidechain or separate token. In this sense, ordinals inscriptions inherit the simplicity, immutability, security and durability of Bitcoin itself.

Ordinal theory and inscriptions

In the context of Bitcoin, Ordinal Theory is a suggested methodology to identify each satoshi through a serial number and track it in the Bitcoin coin supply, from first minting through its entire transaction lifespan. This process is called "enrollment." In this way, ordinal inscriptions are digital assets similar to NFTs, inscribed on a satoshi in the Bitcoin network. This process was made possible thanks to the Taproot update released on November 14, 2021. Thanks to this, ordinals registrations do not require a sidechain or a separate token.

Since Ordinal Theory allows for the tracking and transfer of individual satoshis, it gave rise to the possibility of collecting them. Based on the total supply of Bitcoin, the following ranges were prescribed to denote the rarity of various satoshis:

  • Common: Any satoshi other than the first satoshi in your block (total supply: 2,100,000,000,000,000).

  • Uncommon: The first satoshi of each block (total supply: 6,929,999).

  • Rare: The first satoshi of each difficulty adjustment period (total supply: 3,437).

  • Epic: the first satoshi after each halving (total supply: 32).

  • Legendary: the first satoshi after each cycle* (total supply: 5).

  • Mythic: The first satoshi of the genesis block (total supply: 1).

* A cycle represents the period between conjunctions, which occurs when a halving and a difficulty adjustment coincide. In theory, this happens every 6 halvings, but the first conjunction has not occurred yet (expected to occur in 2032).

Advantages and disadvantages of Ordinals

Ordinals created another use case for the Bitcoin network beyond simple value transfers. However, the Ordinals protocol has been the subject of controversy, as it is part of a fundamental problem among the Bitcoin community. On the one hand, there are those who believe that the relative simplicity of Bitcoin must be preserved within its limitations for the storage and transfer of value. On the other hand, there are those who believe that Bitcoin must evolve to include new features and use cases.

Enrolled satoshis now compete for block space with regular BTC transactions, increasing network fees. This sparked a bit of controversy in the Bitcoin community, but some Ordinals supporters argue that this could be a positive, as fees are a key incentive for miners to secure the blockchain. In the future, as block rewards decrease over time, network fees will become the primary incentive for allocating hash power to Bitcoin. The crypto community seems divided on the issue, but the project certainly brought innovation to the Bitcoin space.

Conclusions

Ordinals are changing the blockchain-based art world by providing a completely new way to store information in Bitcoin transactions. They are adding additional utility and increased the number of addresses with balances above zero to all-time highs. We are witnessing a unique moment in Bitcoin history where innovation drives network activity beyond the typical investment and monetary transfer use cases. Does this mean Ordinals will continue to grow? Not necessarily. We'll have to wait and see.

Further reading

  • What is an NFT?

  • What is Taproot and how it will benefit Bitcoin

  • Countdown to Bitcoin halving

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