What Are Bitcoin Ordinals?

Bitcoin ordinals explained

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If you’re new to the space or have better things to do with your time, then your first experience with NFTs has had to be the speculative mania of 2017 with games like crypto kitties or in 2021 with art NFTs going mainstream. Even though the NFT market has lost over 96% of its trading volume and the speculation around it has dried up, there remains a diehard cohort of collectors.

NFTs are marketed as “digital assets” that are provably unique merely because it is tied to a hash on a blockchain. This token or hash on the chain is then linked to an external file, content like digital art, movies, and music and used as a way to claim proof of ownership or membership in an exclusive group.

Today NFTs are a big part of the use case for altcoin and altcoin chains, allowing for markets where people can create custom tokens referencing a piece of media and try to encourage speculation around it.

Bitcoins’ history with NFTs

While most people associate the idea of NFTs with smart contract chains, you might be surprised to know that NFTs have been part of the bitcoin ecosystem for nearly a decade; however, they never really took hold, and most bitcoin holders don’t see the point of these systemically flawed form of “digital assets.”

Previous projects like Colored Coins and Mastercoin, which also centred around adding additional data to the bitcoin chain, withered away as BTC became congested, and it was uneconomical to post information that provided no additional value and kept bitcoin as a place to store essential financial transactions data.

NFT projects in the bitcoin ecosystem now live primarily on the Liquid Side Chain, which requires a wallet that supports this chain. While most NFTs available today are tokens created using a smart contract, which requires a Turing complete scripting language, something the bitcoin base chain does not offer. This safely excluded bitcoin from consideration when these NFT trends rolled around and kept it siloed in the altcoin market.

However, Rodarmor, a former Bitcoin Core contributor, has designed and deployed a new protocol called ordinals to transfer individual satoshis on the Bitcoin network and use this to create an anchor to peg to it an NFT. 

What are ordinals?

Ordinals are a numbering scheme for satoshis that allows tracking and transferring 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.

Using ordinal’s ability to identify and tag individual satoshis, the protocol then allows users to connect that satoshi to a digital file and broadcast it to the bitcoin blockchain. This was accomplished using a loophole from the Taproot upgrade in 2021, which enabled “practically unlimited (capped by block size) storage using Opcodes, an executable script in a txn (transaction) that can store arbitrary data. Since ordinals use existing infrastructure available on bitcoin, it doesn’t require a separate token, another blockchain, or any changes to the bitcoin code.

In the current NFT implementation on various smart contract blockchains, the file and the NFT live in two separate environments. The file might be hosted on a cloud server of the minting tool like OpenSea, or they could be hosted on an open file system like IPFS. Regardless of where the file is stored, the reference to that file’s path can be added in the NFT.

If that file storage service deletes the image, goes down, or the file is corrupted and path compromised, that NFT would no longer reference a live file. NFTs have merely hashed barcodes on a chain pointing to a file hosted elsewhere; this is where ordinals differ.

Ordinals store texts, images, SCG, or HTML on-chain and can be authorised through a transaction —  they can also be purchased, stored and gifted. The information added to the bitcoin blockchain using ordinals must adhere to the roughly 4MB limit, but this doesn’t mean they are links to an image, pdf white paper or a video; they are actual files of white paper and videos, which are permanent parts of the bitcoin blockchain that must be downloaded by all full nodes.

NFTs minted on bitcoin using the ordinals protocol

A free market or a fee market?

The ordinals protocol enables users to explore, transfer, and receive individual satoshis, which may include unique inscribed data such as videos and images. The process of adding assets to individual satoshis is called inscription. Once completed, or as NFT users like to call minted, the inscriptions are stored in a bitcoin transaction’s signature.

When you inscribe a file into your transaction and broadcast this larger or bloated transaction to the network, it has to compete with all other transactions in the mempool to be added to a new block. A miner would need to decide whether they fill the next block with as many standard transactions as they can or balance it with ordinal and smaller transactions.

If block space is empty, there is no real decision to make, but if competition is high, it becomes a trickier decision. With the competition for the two transaction types and limited block space, miners will have to be more selective. It remains to be seen if miners would side with basic transactions or ordinal transactions and how this would affect chain fees, especially if ordinal NFTs become generate massive speculation and require consistent transfers.

If ordinals start to price out standard transactions, it could make it even harder to get into a block, driving up fees for on-chain transfers and the creation or closing of Lightning channels.

Driving demand for bitcoin resources

Many bitcoin supporters believe block space should be reserved for sending BTC rather than storing data, or anything else, given bitcoin is supposed to be a monetary network for its native currency. If speculative transactions marginalise the general use of the chain, It could push users away from bitcoin.

Posing issues for those who require censorship-resistant transactions but don’t have the financial backing to get into a bidding war for block space.

While on the other side of the bitcoin, the argument is made that increased demand for block space could be considered a positive for the long-term sustainability of securing the network as it generates more fees for miners and could help as the block subsidy decreases with each halving.

The taint on satoshis and the bitcoin network

Since any sat can be sent to any address at any time, sats that are transferred, even those with some public history, should be considered fungible with other sats with no such history. Sure an ordinal satoshi might be fungible with a standard satoshi, and to the bitcoin blockchain, it makes no difference, but people aren’t bitcoin, and people have biases and opinions that have consequences in the real world. Suppose an ordinal contains graphic imagery or personal information people did not want out in public; that ordinal NFT could be seen as tainting the associated satoshi, breaking fungibility in the network.

On the other side of the debate, some argue that since you’re transferring actual files onto the bitcoin blockchain, some proponents claim that it shows bitcoin is simply a way to store and move data; some data might be a native currency like bitcoin, and other data might be images and text files. Giving more gravity to bitcoin being an information network that should not be banned despite competing with national currencies because it is merely an expression of speech.

Pricing out the plebs

As ordinals don’t operate on a separate sidechain or protocol and run on bitcoin mainnet, widespread usage of ordinals will increase transactions, creating congestion and hefty fees and expanding the size of the bitcoin blockchain.  

If NFTs on bitcoin were to take off, and more people began storing images on the network with op_codes, transaction fees per block would significantly increase, and full nodes will have to download much more data.

If the bitcoin blockchain continues to increase in size faster than the cost of storage comes down, over time, that leads to higher technical requirements to run a full node, and thus from a security standpoint, likely leads to further centralisation for the set of full nodes verifying the chain.

It would also require those running full nodes with limited hardware to opt for a pruned node instead and remove archived data to make space for the new transactions the node would need to validate.

Do your own research.

If you want to learn more about ordinals on bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.

Which side of the ordinals debate are you on?

Do you like the idea of bringing NFTs to the bitcoin base chain, or do you think it is a distraction? Does it bring additional utility or a new set of narrative attack vectors for bitcoin? How do you think the incentive structure around transactions will change with this new form of transaction competing for on-chain block space?

Let us know in the comments below.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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