Bitcoin has seen numerous innovations since its inception in 2009. Among the most recent developments is the concept of Bitcoin Ordinals. This novel idea has brought a new level of functionality to Bitcoin’s ecosystem, presenting a unique blend of Bitcoin’s financial capacities with the world of digital assets.
What are Bitcoin Ordinals?
Bitcoin Ordinals are fundamentally “sats” or satoshis that have been ordered and inscribed with a piece of information, such as text or an image. This inscription makes the satoshi unique, turning it into a de-facto Non-Fungible Token (NFT)1.
To put this in perspective, imagine two one-dollar bills. While they are fungible, each has a unique serial code that allows us to identify each bill separately. Now, if one bill were signed by a celebrity, its value would skyrocket due to the unique attribute added to it. In essence, this is how Ordinals work. They leverage the fact that each individual satoshi can be uniquely identified by its equivalent of a “serial code.”
How do Bitcoin Ordinals work?
The concept of Bitcoin Ordinals emerges from an ongoing debate in the Bitcoin community: Should Bitcoin be used solely for processing financial transactions, or should we also use it as a secure and decentralized network to store data?
In the early years of Bitcoin, the blockchain only enabled messages of up to 80 bytes to be encoded onto blocks through a function called OP_RETURN. This was barely enough to encode short text messages like hashes. However, two significant hard fork updates, Taproot and Segwit, raised the block size limit to 4MB, allowing transaction data to be arranged in a more efficient way1.
This is where Ordinals come in. According to Ordinals developer Casey Rodarmor, the position of a satoshi in the Bitcoin blockchain can be identified according to four parameters:
- The Index of Satoshi in the Block
- The Index of the Block in the Difficulty Adjustment Period X/2016
- The Index of Block in Halving Epoch X/210,000
- The Cycle Number
This structure allows satoshis to be ranked ordinally, akin to how some coins are valued among collectors for being part of a rare mint1.
Technically, Ordinals repurpose codes and use them as “envelopes” for data inscribed onto satoshis. With the block size limit on Bitcoin being 4MB, this is the maximum amount of data that can be inscribed. For example, one user minted his CryptoPunk onto Bitcoin in a satoshi from 2009. At the protocol level, satoshis remain fungible, but at the social level, each inscribed satoshi is unique because it carries an additional piece of information1.
How do Ordinal Inscriptions Work?
Inscriptions are like digital artifacts that don’t require a sidechain or a separate token. They are stored in taproot script-path spend scripts, which is a unique type of Bitcoin transaction. Creating an inscription is a two-step process. First, you create a taproot output with the inscription content. Then, you spend the output, revealing the inscription content on the blockchain1.
How are Ordinals Different from NFTs?
Although Ordinals share some similarities with NFTs, there are crucial differences. Unlike NFTs, which are minted as completely new tokens, Ordinals have the raw file data inscribed directly onto the Bitcoin blockchain.