Ordinals are data that users affix to individual Bitcoin sats. These users inscribe data on Bitcoin using a mix of Taproot and ordinal theory. These technologies have previously been used by users to inscribe largely JPEGs on Bitcoin. These inscriptions have sparked a modest craze surrounding inscriptions and Bitcoin-native "NFTs" since they went online.

And yet, Bitcoin is changing slowly. Several people in the Bitcoin community have voiced serious concerns regarding Ordinals. The latest inscription frenzy has resulted in higher rates and larger blocks. But, the fee increase is a relief to struggling miners and may assist with Bitcoin's total security budget.

Users are coming up to utilize Bitcoin rather than merely HODL it for the first time in a long time. There are challenges to overcome since Ordinals are new. Content moderation is very challenging, the UX/UI has to be improved, and the infrastructure behind Ordinals needs to be improved. Ordinal inscriptions, on the other hand, represent a whole new use case for Bitcoin. They might attract a sizable number of users who are more interested in NFTs and digital artifacts than physical money and digital gold. Ordinals provide Bitcoin with both opportunities and issues. This article will assist readers in understanding this innovative technology.

Ordinal theory

Casey Rodarmor, a former Bitcoin core developer, created the ordinal stack by modifying Bitcoin's core stack. Understanding how Ordinals function on Bitcoin and how they vary from previous NFTs requires a comprehension of these additions.

The ordinal theory is the most important idea to grasp while working with Bitcoin Ordinals. Ordinal theory assigns a unique number to each Bitcoin sat. A sat (or satoshi) is the smallest denomination of a Bitcoin. Each BTC contains 100 million Sats. Each of Bitcoin's 2.1 quadrillion sats has a unique identification according to ordinal theory. These identifiers may have one of five forms: integer, decimal, degree, percentage, or name. Ordinals distinguish each sat, which has far-reaching implications for Bitcoin.

Ordinal sats would be intriguing enough on their own, but Rodarmor revealed further possibilities with Taproot and inscriptions. Inscriptions imprint arbitrary data on sats. Data may contain images, gifs, movies (which must be brief), and even HTML code. The majority of sats have been inscribed with images, including duplicates or versions of more popular Ethereum collections.

Since Bitcoin blocks may now hold 4MB of random data, the maximum size of an inscription is currently 4 MB. Data inscription is not free. Users must pay fees to miners in order for their data to be stored in a block. In general, the greater the file, the higher the charge. Luxor Mining, on the other hand, etched a magical inscription that almost filled a full 4MB block.

Unlike many other contemporary NFTs, inscribed data is entirely saved on-chain through Taproot path spend scripts. Ordinary inscriptions do not need the use of an L2, a separate smart contract, or a separate storage layer. These are just sats with data etched on them that is stored directly on-chain. Since they are merely satellites, they have all of the typical Bitcoin functions. They may be used in multi-signature transactions, saved on ordinary addresses, stored on hardware wallets, and retrieved using seed phrases.

Ordinals need specialized wallets, especially ones with sat control, in order to operate on Bitcoin. Bitcoin users pay miners in sats to send transactions. If a wallet cannot "freeze" a sat with an inscription, every time a user initiates a transaction, there is a danger that the inscribed sat will be spent. Only the Ord wallet has complete sat control over inscribed sats. Other wallets, such as Sparrow, may be configured to accept them.

Ordinals vs. NFTs

The current crop of inscriptions resembles Ethereum NFTs, allowing some to mistake Ordinals for Bitcoin NFTs. Ordinals, on the other hand, have a few unique traits that cause the NFT model to fall short in comprehending their potential and how they vary from more common NFTs.

Ordered

The first significant distinction between NFTs and Ordinals is that Ordinals are inscribed on Bitcoin in order. There is a 1st Ordinal — and it will always be the 1st. A 100th Ordinal, an 8888th Ordinal, and so on. The position of an Ordinal in the chronology of inscriptions has a significant impact on its worth. Many Ordinal traders make demands that are less than a specific threshold. Sub-5k, for example. The initial outbreak of Ordinal fever saw individuals hurriedly inscribing sub-10k Ordinals.

Bottleneck

The quantity of inscriptions people may inscribe on Bitcoin is limited by a sophisticated, unsolvable barrier - 4MB per block. Bitcoin blocks should theoretically be limited to 1MB in size. Ordinal users, however, may add 3MB of data to the witness using SegWit and Taproot, much to the chagrin of some Bitcoin users. Even if every Bitcoin block includes the maximum 4MB of Ordinals, Bitcoin only adds 216GB of Ordinals every year (and, in reality, much less).

The bottleneck causes a subtle distinction between Ordinals and NFTs. With smart contract-based NFTs, there is no bottleneck. In theory, a developer might create a contract with a limitless number of NFTs, and developers may deploy new NFT contracts as quickly as blocks emerge on the chain. NFTs are minted en masse by contracts in a smart contract system. Users inscribe each Ordinal independently with inscriptions. Another bottleneck is inscribing each Ordinal. Ordinal inscribing on Bitcoin is likely to alter its value or push collectors to chains with a smoother deployment experience. It's too soon to determine how this will influence Ordinals.

Concurrency

Ordinals have an odd attribute that is not currently active but will be soon. Concurrency refers to the ability of users to inscribe numerous files on the same disk. Users may accomplish unique things since inscriptions can be arbitrary data. For example, a user might inscribe an HTML file that references numerous files inscribed on the same sat – similar to directly inscribing a website on Bitcoin. We have yet to see whether the market would allocate a different price to satellites with many inscriptions.

On-Chain

Lastly, the final significant distinction between Ordinals and NFTs is that Ordinals are entirely stored on-chain. One of the most prevalent critiques leveled against NFTs is that the metadata of the NFT may live on a centralized server and may be erased, leaving the NFT pointing to nothing. Ordinals, on the other hand, are directly stored on-chain. When people add information to a sats, it remains there in perpetuity.

Inscribing data on-chain provides benefits, but it also creates a number of problems and difficulties about illegitimate or unauthorized material. Brand icons and clone Ethereum NFTs have already been submitted as Ordinals. Front ends that show Ordinals will very certainly suppress these items, but the data remains in the chain. Of course, this is something that all immutable chains capable of storing data must solve in some fashion.

Ordinal Growth Takes Bitcoin by Storm

Ordinal inscriptions started on December 17th, 2022, although just a few hundred were inscribed until January 21st, 2023. Since then, the market has gone parabolic, with over 90,000 ordinals inscribed as of the publishing of this article.

The overwhelming bulk of inscriptions is visuals. If you've been following NFTs over the previous two years, you'll recognize the present frenzy of Ordinal inscriptions: tons of PFPs, derivative projects, low-effort schemes, and a few jewels. On-chain text, images, movies, music, and even programs have been inscribed by some ambitious people. Someone even inscribed a cloned version of Doom as an Ordinal. Ordinals are arbitrary data, and although people are utilizing technology, they seem to be focused on visuals.

Source: Medium

Since Ordinals are so young, the tooling around them is rather poor. As a result, obtaining reliable trade statistics on Ordinals is difficult. There is no OpenSea alternative where auctions are ordered, nor is there a trustless DEX. Ordinal trading is presently traditional. People are buying and selling on Discord, there are Google sheets with bids and demands for collections, and anonymous users are providing escrow services for transactions. Several con artists are attempting to take advantage of the situation. Ordinal trading, even in crypto, is the wild west and not for the faint of heart

Inherited Characteristics

Sat Providence

If you only remember one item from this article, make it this: not all sats are made equal when it comes to Ordinals. When every sat has an identification and becomes unique, Bitcoin experiences an unusual type of providence. Some sats are more uncommon than others, such as the first sat after a halving, of which only 32 exist.

We haven't seen much discussion or worry about rare SATs – much of the focus has been on NFT-like collections. Still, this is an intriguing concept. With Ordinals, Bitcoin loses part of its fungibility. As a result, many individuals who see Bitcoin as a pure monetary system are unlikely to be enthusiastic about the concept.

Lost inscriptions

Users will make errors and transmit sats that they did not want to send. Missing inscriptions put Bitcoin in an odd position. Note that inscriptions are permanently attached to a spot. If a user pays a miner an inscribed sat as a fee, the miner now owns the inscription. If the miner sells it, the buyer will get the inscription. The blockchain of Bitcoin will become filled with lost and forgotten inscriptions and digital artifacts. These relics will last as long as the chain does, emulating on-chain archaeology.

Storage in Nodes

One of the most serious concerns with Ordinals is the expansion of the chain. Satoshi created Bitcoin with 1MB blocks to guarantee that users could always operate their nodes. Blocks may now be up to 4MB in size thanks to SegWit and Taproot. Nonetheless, huge blocks seldom appeared on the chain before Ordinals.

Large blocks have become considerably more prevalent. Since the beginning of February, we've observed very few sub-1MB blocks. Bigger blocks need Bitcoin nodes to store more data as the chain expands. Others are concerned that this may lead to the centralization of Bitcoin as node storage needs grow, and people are forced to shut down their nodes. Nevertheless, chain bloat will not affect those that prune their nodes. Therefore individuals with restricted hardware options will be able to host Bitcoin nodes.

On-Chain Ramifications

Since Bitcoin was being used by such a small population, the transaction costs were very low, which caused us anxiety. As a result of low fees and adverse price movement on Bitcoin, many miners have found themselves in a difficult financial position, and some have even filed for bankruptcy.

Blockspace demand is the first major aspect of Bitcoin that will be significantly altered as a result of Ordinals. Pierre Rochard claims that inscriptions have accounted for fifty percent of the space in Bitcoin blocks over the course of the last week. Taking a look at the typical size of the mempool during the month of January is a simple way to get a clear picture of the demand for Bitcoin blockspace. During the time when inscribing Ordinals became popular in the 19th, we see a discernible increase in the size of its mempool, which eventually reached a value of 50 million bytes.

In the past, Bitcoin's mempool reached an all-time high. This often occurred during times of extreme volatility, when users tried to send coins to exchanges in order to re-collateralize or sell them. On the other hand, this surge seems to be more significant.

Source: Dune analytics

However, if we check the transaction count, we can see that even with Ordinals, Bitcoin's transaction count is still well within its 2022 trend. This is something that we can observe when we examine the transaction count. Even while there was a clear increase tendency around the time when Ordinal inscribing became popular, this development did not have a profound impact. It seems that ordinal transactions have stopped a downward trend for Bitcoin's mempool. If the mempool remains huge, there continues to be block demand from people who are subscribing to Ordinals, and the transaction count continues to climb, then this speaks well for Bitcoin miners, who may finally receive a jump in fees. Nevertheless, this is a very big "if" and it is unlikely to happen.

A new fee stream has been introduced for Bitcoin as a result of ordinal inscription. It is going to cost you a lot of money to have your data included in a block; the bigger the file, the higher the charge will be. During the race to inscribe an ordinal sub-10k, the expenses to do so were rather expensive.

Between the 1st and the 13th of February, Ordinal inscribing was responsible for about 22.5 BTC in fees, with an average daily rate of 1.75 BTC. That may not seem like much, but this charge level represents a rather significant hike for Bitcoin. Until 2022, the costs associated with Bitcoin amounted to an average of just 14 BTC per day. Hence, Ordinals, which have only been around for a few weeks, are already responsible for around 12.5% of Bitcoin's daily fees. If Ordinal inscribing is allowed to continue, this might be a huge windfall for miners who are having trouble making ends meet due to low fees, and it could even address the issue of Bitcoin's decreasing security budget.

When Ordinals became online, the fee-ratio-multiple (FRM) for Bitcoin transactions has gradually decreased to the low 40s and even into the 30s at one point. Yet, it is still too early to know whether this tendency will continue and become more widespread; still, it is something to keep an eye on. It is possible that the apparent security-budget imbalance will be reduced if Ordinal inscription fees continue to increase despite the declining rate of issuance.

Taproot adoption after Ordinal enlistment is a noteworthy development, notwithstanding the possibility that it will not have a significant impact on the ecosystem as a whole. After Ordinal inscriptions became operational, the percentage of Bitcoin Taproot transactions increased from 3% to 6%. This is a 100% increase. This expansion may be attributed to the fact that Ordinal inscriptions now save their data on-chain via Taproot-script routes. There is a possibility that Taproot has identified its use case.

Issues with Ordinals

Since Ordinals are still in its infancy, developers will need to find solutions to a wide variety of problems before they can launch the platform and begin recruiting new members.

Infrastructure

To get Ordinals off the ground, the most significant obstacle to overcome is the need for more infrastructure. If you have ever bought or sold non-fungible tokens on a smart contract chain, you are probably accustomed to using trustworthy auction platforms and auxiliary tools, such as trustworthy and customized wallets, friendly user interfaces, and straightforward explorers. Many of these technologies aimed at improving the quality of life for Ordinals still need to be developed.

In order to engrave an Ordinal, a user must first download a complete Bitcoin node, which is over 500 gigabytes in size, and then activate transaction indexing. The user must next download the specific Ord wallet with sat control in order to securely handle Ordinals. This wallet is a command line interface only and does not have a graphical user interface. Users are able to store Ordinals in a Sparrow wallet as well as receive them, although, at this time, the wallet can only accept inscriptions.

The fact that there is presently no mechanism to exchange Ordinals in a trustworthy manner is another problem with the trading process. Trading in ordinals takes place over the counter using spreadsheets for the bidding process and iffy escrow services. A definite obstacle to admission is the absence of any supporting infrastructure around Ordinals.

On the other hand, the absence of infrastructure also creates significant business potential. Ordinals will need a wallet that does not call for a complete node to function properly. An auction business that is trustless is required for Ordinals. Ordinals will not only need the same tools that regular NFTs have, but it is possible that they may also require even more. For instance, a service that monitors the history and provenance of individual satellites would fall under this category.

The infrastructure is something that we will be keeping a careful eye on. During the process of writing this article, teams have already begun to build out the necessary tooling, such as a web wallet that can swap Ordinals and a one-way Ethereum to Bitcoin bridge that burns the NFT on Ethereum and inscribes it as an Ordinal on Bitcoin. These are just two examples of the types of tools that are currently being developed.

Source: ordswap.io

The Moderating of Content

Bitcoin and inscriptions both operate without the need for authorization. Because of the lack of the required authorization to use Bitcoin, some people have utilized it for questionable reasons. Inscriptions will follow the same pattern as well. Bitcoin does not have the capability to filter the information that users keep on the chain. Illegal material, photographs that have been trademarked, and other types of content will soon be found on Bitcoin. It is not clear how the network and the community will respond to this situation.

Ordinals.com, a website that enables users to examine their own transcriptions, has solved the issue of content moderation by deleting illegal photos from the front end of the website. Nonetheless, such photographs may still be seen on the chain. On the other hand, it is likely that the expense of inscribing anything and the traceability of Bitcoin will minimize the likelihood of undesirable material being included on the chain. Nonetheless, those who are interested in Ordinal will need to give some thought to how the material should be moderated.

Culture

It should come as no surprise that Ordinals on Bitcoin have been the subject of controversy among prominent Bitcoiners. There have been a lot of notable Bitcoiners that have come out as being highly anti-Ordinal. Ordinals are seen by some as an assault on Bitcoin because they might undermine miner incentives or introduce new dangers into the Bitcoin network.

As Bitcoin users have committed new code to the main protocol, there has always been a contentious argument over how much space each block should take up in the blockchain. In the meanwhile, proponents of Ordinals assert that they are making Bitcoin interesting and thrilling once again, so revitalizing the culture of this traditionally staid cryptocurrency. Regardless of where you stand on the issue, it is clear that the debate around Ordinals is not going away anytime soon. Moreover, it is likely that a group may seek to hard-fork Bitcoin in order to eliminate the capabilities of Ordinals entirely.

Bottom lines

In conclusion, Ordinals are not merely "NFTs on Bitcoin;" rather, they are very intriguing financial instruments in their own right.

With Bitcoin's L1 network, users are able to permanently store digital artifacts and data. Not only may users retain data indefinitely, but the ordinal theory has the potential to radically alter Bitcoin's fungibility, which could have enormous repercussions for sat providence as well as the whole chain.

While this is going on, there is the possibility of expanding the experience further for Ordinals as well. In order for Ordinals to take the next step and enroll the next generation of users, it is likely going to be necessary to build light wallets, trustless trading, financialization, and other related features. The introduction of ordinals paves the way for a wide variety of new applications for Bitcoin.

Ordinals are said to bloat the chain, which in turn makes nodes bigger and reduces the capacity of users to operate their own nodes. This argument is made by critics. They are also quick to point out that the act of encoding data on Bitcoin poses a great deal of difficulty when it comes to the moderation of content. Last but not least, and perhaps most obviously, they are concerned that inscriptions would make fees more expensive and render the chain worthless for its fundamental function, which is to facilitate monetary transactions.

Ordinals, according to its supporters, attract a new kind of user to the Bitcoin network, namely users whose inscription fees will contribute to the upkeep of the chain and will assist in the development of culture on the blockchain.

Ordinal inscriptions and data will continue to exist on Bitcoin until the cryptocurrency has a hard split to eradicate them. We anticipate substantial repercussions for Bitcoin's on-chain data if Ordinal inscription maintains or gains its current level of popularity. In the short amount of time that has passed since Ordinal minting has become more popular, we have already seen positive shifts across a broad variety of indicators. Ordinals have the potential to be Bitcoin's savior in a world where people are becoming less interested in more typical narratives.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Bitcoin Ordinals: NFTs on Bitcoin chain?