What Are Bitcoin Ordinals? (Why Inscript Your BTC)
Seen as an innovation in data storage and network security by some, while others view them as a passing Bitcoin fade and drift. Let’s take a closer look at both perspectives!
Drew
May 1, 2024May 1, 20247 min read7 minutes read
Throughout 2023 and early 2024, Bitcoin ordinals have emerged as a hotly debated topic among Bitcoin enthusiasts. Proponents view them as a potential game-changer in data storage and a boon for Bitcoin network security.
However, skeptics criticize them as a deviation from Bitcoin’s primary purpose as a peer-to-peer currency.
But what are Bitcoin ordinals?
This blog post dives into Bitcoin ordinals' brief history, the network upgrades that led to its creation, and the broader implications for the Bitcoin industry.
Understanding Bitcoin Ordinals: Serial Numbers for Sats
The Concept of Bitcoin Ordinals
Bitcoin Ordinals are very similar to serial numbers. They act as a unique identifier for each unit of Bitcoin, known as a "satoshi or sat" (short for “Satoshi Nakamoto”).
Just as every U.S. paper dollar bill carries a serial number, each satoshi is assigned a serial number based on its mining order.
The Emergence of Bitcoin Inscriptions
Bitcoin inscriptions are akin to digital captions attached to individual sats. These inscriptions can include:
Text
Images
Audio
… even digital games. Their integration with ordinals leads to the creation of unique Bitcoin artifacts, which we will explore next.
Bitwise recently disclosed the wallet address for its Bitcoin ETF — a first among the top 11 issuers of spot Bitcoin ETFs.
Following this disclosure, the wallet has attracted a variety of contributions, including Bitcoin ordinals and unique satoshis and has amassed inscription donations valued at $6,083 and boasts a collection of more than 16,000 inscriptions.
Swan Bitcoin
The Mechanics of Bitcoin Ordinals and Digital Artifacts
Creating Digital Collectibles
Bitcoin ordinals and inscriptions are primarily used to create "artifacts" or digital collectibles akin to sports cards on the Bitcoin network. These artifacts, also known as Bitcoin NFTs, use ordinals as serial numbers and inscriptions for attaching an image.
They have found applications in data storage, domain names, and, most notably, the BRC-20 protocol. The BRC-20 standard opens up new possibilities for the Bitcoin network, allowing it to use decentralized finance (DeFi) protocols and various blockchain-based applications.
BRC-20 artifacts differ from traditional NFTs in several ways. Unlike Ethereum NFTs, which rely on smart contracts and centralized servers, they are stored directly on the Bitcoin blockchain.
The Bitcoin blockchain has undergone two essential modifications — SegWit and Taproot — which have since facilitated the emergence of ordinals.
SegWit Upgrade
In 2017, the Bitcoin community implemented SegWit or segregated witness data to increase network capacity and improve scalability.
Before SegWit, the OP_RETURN function included the arbitrary data on the transaction block:
Transaction time
The sender/receiver’s address
SegWit modifies storing data, separates signature information from transaction data, optimizes block space, and reduces transaction fees.
This revision modified the structure of Bitcoin transactions and boosted the block size capacity from 1 MB to 4 MB.
The Taproot upgrade, implemented on November 14th 2021, enhanced Bitcoin’s protocol by introducing Schnorr Signatures, MAST, and Tapscript, significantly improving privacy, scalability, and smart contract flexibility.
Schnorr what? WTH is a MAST?
In simple terms, Taproot:
Batches multiple signatures and transactions together, making verifying transactions on the network easier and faster.
Scrambles transactions with single and multiple signatures together. It made it more difficult to identify transaction inputs on Bitcoin’s blockchain.
Taproot Assets leverages newly created assets and their transfers in an efficient and scalable manner. Multiple assets can be created and transferred in a single Bitcoin UTXO, while witness data is transacted and stored off-chain.
What are Runes?
Runes is a fungible token protocol for the Bitcoin network that aims to be simple and UTXO-based. Rune balances are held by UTXOs, and transactions are identified using specific script conditions.
Runes officially released on Bitcoin mainnet at block 840,000 — April 20th, 2024.
Efficiency: Creates fungible tokens with minimal impact on blockchain size, unlike some BRC20 tokens that can cause congestion.
Benefits of Runes
Token Creation: Empowers users to craft various fungible tokens, such as:
Loyalty points
Community currencies
Fractional ownership of real-world assets
Security: Utilizes the inherent security of the Bitcoin network.
Versatility: Expands Bitcoin’s reach and utility beyond its core function as a digital currency.
Summary
Runes Protocol: Empowers users to create diverse tokens on the Bitcoin blockchain.
Impact: Enhances Bitcoin’s versatility while maintaining its security and efficiency.
Key Differences Between Runes and Ordinals
Runes and Ordinals have sparked a fascinating debate within the Bitcoin community. While both aim to expand Bitcoin’s utility beyond its core function, they approach it in fundamentally different ways. Here’s a breakdown of their key differences:
Fungibility vs. Non-Fungibility
Runes:
Designed for fungibility.
Each Rune of the same type is identical and interchangeable.
Ideal for applications like loyalty points or stablecoins.
Ordinals:
Non-fungible by nature.
Each Ordinal represents a unique unit on the Bitcoin blockchain, similar to a one-of-a-kind NFT.
Potentially, this leads to larger transaction sizes and higher fees.
Could impact the scalability of the Bitcoin network in the long run.
Security and Risk Factors
Runes:
Inherently secure by leveraging Bitcoin’s established security infrastructure.
Ordinals:
Introduce potential risk factors.
Permanent inscription of data onto the blockchain.
Vulnerabilities in the Ordinal protocol could expose inscribed data to security risks.
Use Case
Runes:
Ideal for representing fungible digital assets.
Applications include loyalty points, in-game currencies, or stablecoins within the Bitcoin ecosystem.
Ordinals:
Suitable for creating unique, non-fungible digital collectibles, artwork, or other digital assets.
Enables verifiable on-chain ownership.
Integration with Existing Infrastructure
Runes:
Seamlessly integrates with existing Bitcoin wallets and exchanges.
Relies on the UTXO model.
Ordinals:
May require dedicated wallets and infrastructure for managing and interacting with Ordinal NFTs.
Debating the Merits and Drawbacks of Bitcoin Ordinals
Critics' Perspective
Critics argue that ordinals and artifacts detract from Bitcoin’s original purpose as a decentralized financial system. They raise concerns about network congestion, increased transaction fees, and slower processing times, potentially undermining Bitcoin’s role as an economic system.
Advocates' Stance
Supporters tout the unparalleled security of the Bitcoin blockchain for data storage, attracting new users with diverse interests beyond money. They highlight the potential economic benefits for miners, thereby bolstering network security.
Final Thoughts
Bitcoin ordinals represent a fascinating evolution in the Bitcoin ecosystem, offering potential benefits and challenges. Ordinals are not just a technological curiosity but a development that could redefine the scope of digital assets within the Bitcoin framework.
While they promise to expand Bitcoin’s utility, they also come with a set of challenges that must be thoughtfully considered.
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Drew
Drew, a class of 2013 Bitcoiner, is a Research Analyst for Swan Bitcoin.
He has worked in institutional VC/PE, FinTech, and DLT consulting for over six years. He also brings over twelve years of experience working with national nonprofits and start-ups in education and software development in several leadership roles.
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