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Ordinal Inscriptions have enabled fungible tokens, non-fungible tokens, and other applications to be stored directly on the Bitcoin blockchain, creating a huge wave of speculation similar to the NFT bubble of 2021.

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Bitcoin inscriptions have experienced a remarkable transformation, evolving from a “probably nothing” moment in early 2023 to over 10,000,000 inscriptions today. Notably, the trading volume for Bitcoin inscriptions has even surpassed that of other prominent Non-Fungible Token (NFT) platforms like Magic Eden. While comprehensive overviews of the evolving applications, NFT, and token ecosystem on the Bitcoin network have been covered elsewhere, this paper aims to delve into the journey that led us here and explore the potential implications for the future.

**What are Ordinals and Inscriptions?**

Ordinals is a system of individually identifying and numbering satoshis, commonly referred to as “sats.” Satoshis are the smallest unit of accounting in Bitcoin (100 million sats make up one Bitcoin). The official Ordinals wallet software, known as “ORD,” is a protocol client and wallet that incorporates a unique feature. It assigns an ordinal number to each Satoshi based on the specific details of when, where, and how it was mined.

The ORD wallet is the canonical way to perform inscriptions. It involves a two-step process involving a commit transaction and a reveal transaction which are utilized to write data or metadata to the signature area of a taproot transaction. This process serves the purpose of creating NFTs, and in certain cases, fungible tokens.

The Ordinals system of rarity is arbitrary, meaning assets such NFTs, security tokens, accounts or stablecoins can be attached to Ordinals. Alternative approaches have been suggested, including the recognition of “early” satoshis mined in blocks within the first year of Bitcoin’s launch or prioritizing Satoshis that possess distinctive mathematical properties, such as being prime numbers or exhibiting other unique characteristics. Recently, a market has emerged for “uncommon” satoshis, specifically the first satoshis in ordinary blocks, with a current selling price of 0.03 BTC or $750.

**Time is a Flat Circle**

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Despite its revolutionary nature, applications built on the Bitcoin blockchain itself have not taken center stage for several years within memory. However, this changed in late 2022 when Casey Rodarmor — Inspired by previous work, numerology, and the fractal rhythms of the Bitcoin network — introduced the Ordinals Theory. The official implementation “ORD” wallet suddenly allowed anyone running a Bitcoin node to inscribe ordinal inscriptions. It represents a fusion of blockchain technology, digital artifacts, and numerical identification, dramatically redefining the landscape of NFTs and propelling Bitcoin into a new era of utility and adaptability. Many Bitcoiners suggested that such innovation made Bitcoin once again fun, including Casey himself.

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Not all Bitcoiners have been enthusiastic about applications on Bitcoin. It was perceived negatively due to the potential to undermine the goal of Bitcoin as a fundamental peer-to-peer money. Nevertheless, in the past few months, the Ordinals have gained significant traction and attention in space. As a result, we believe that it is important to explore it further even from the perspective of an observer.

**In Retrospect it was Inevitable**

Despite the prevailing culture displayed on crypto twitter at the start of 2023, interest in applications on Bitcoin has existed since its early days. Even before Bitcoin was launched, there was interest in digital collectibles deep within the cypherpunk community. In the screenshot below, the legendary Hal Finney discusses the possibility of trading cards tied to cryptography back in *January 1993*:

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The early Bitcoin client itself featured applications right from the start, including an initial version of a peer-to-peer poker game. In other notable cases, legendary Bitcoiners Satoshi Nakamoto and Hal Finney were early supporters of a decentralized DNS application blockchain, BitDNS, which eventually became Namecoin — a fork of Bitcoin. Namecoin Itself came to play an important role in the world of digital collectibles, as cyber-archeologists discovered arguably the first instance of NFT art which was deployed on Namecoin in 2014.

However, the landscape underwent a transformation with the introduction of the Counterparty Protocol, also known as XCP, in 2014. This platform was built on top of Bitcoin and specialized in the issuance of both fungible and non-fungible tokens. Counterparty Protocol utilized a unique non-spendable transaction known as OP_RETURN that could commit data to the blockchain. XCP gained significant recognition for its later publication of the renowned Rare Pepes collection — a satirical collection that doesn’t take itself too seriously, in line with the playful crypto culture of the past. The collection featured the WIZ character, a poorly drawn mascot associated with the Bitcoin Wizards meme, during a time when Bitcoin was affectionately called “magic internet money.”

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Suddenly, there was pushback from the developer community. Seemingly Bitcoin wasn’t ready for this, at least not on the L1, leading to what became known as the “OP_RETURN Wars”. XCP was using 80 bytes to write state information including hashes of its state, and Bitcoin developers — in a seemingly hostile move — reduced the OP_RETURN maximum width to 40 bytes, a limit that would remain until 2016. Although the XCP developers could have worked around this limitation, the reality of building an application on a platform where developers are hostile began to sink in, ultimately halting further innovation.

Since the launch of Ethereum, most of the interest in decentralized or blockchain applications has moved to platforms offering a welcoming stance and official support for applications. So what changed recently? Anyone who’s attended even the most Bitcoin steak-eating, gun-shooting, “maximalist” conferences in the last few years has got to admit there are many average Bitcoiners with the attitude “yeah I don’t like many altcoins, but NFTs are cool”, often admitting to owning several of the latter.

Despite the attitudes of Bitcoin influencers, the average Bitcoiner had received a taste of digital collectibles on other platforms during the intervening years. With the activation of Segwit (2017) and Taproot (2021), both Bitcoin soft forks, the enabling technology was in place. What happened next was incredible to watch unfold at breakneck speed.

**Inscriptions > Ordinals**


What’s perhaps more interesting than the Ordinal Theory system for enumerating Satoshis, is the phenomenon of inscriptions that have arisen in its wake, which can be described as a gold rush to claim digital real estate on the Bitcoin blockchain for all sorts of digital artifacts. There are over eleven million inscriptions with users storing videos, games, music, and books as inscriptions, at the time of this writing. At least some of the attention was due to the novelty of storing the digital artifacts directly on-chain, as opposed to links to content stored on centralized servers (the most common pattern for Ethereum NFTs).

Clearly, the users who described the Ordinals inscriptions as unironically “probably nothing” have been proven wrong to say the least, as demonstrated by the pent up demand for other activity on Bitcoin over and above purely monetary transfers. Among the first and most famous NFT inscription collections are Taproot Wizards and Astral Babes.

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The Bitcoin Ordinals initially gained popularity as a means for Bitcoin NFTs, digital artifacts, and collectibles. However, intriguingly, recent observations reveal that since April 2023, the majority of Bitcoin inscription transactions have predominantly consisted of text inscriptions rather than images. What was driving this shift in usage patterns within the Bitcoin inscription ecosystem?

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**Enter BRC-20**

On March 8th, the BRC-20 standard was introduced, taking its name after the famous ERC-20 fungible token standard. However it is important to note that BRC-20 tokens are fundamentally different from ERC-20 tokens in several ways. BRC-20 tokens are essentially ordinal inscriptions with a specific type of text embedded into them, providing a set of rules and specifications for creating and managing fungible (semi-fungible, technically) tokens. BRC-20 tokens do not make use of smart contracts like popular token standards on EVM blockchains. Instead, they enable users to store Ordinal inscriptions of JSON (JavaScript Object Notation) transactions to deploy token contracts, mint, and transfer tokens. The blockchain serves to order and timestamp transactions. The transactions themselves are interpreted by the client software which rejects any invalid transactions according to the rules of the protocol (such as minting more tokens than the maximum supply).

The market cap of all BRC-20 tokens is over $404 million as of June 14. Although initially the boom was mostly on the NFT inscriptions, ever since memecoin mania, the capitalization of fungible tokens on Bitcoin grew exponentially. The largest token,ORDI, has over $200M in market capitalization at the time of this writing. A few weeks ago NFT transactional volume on Bitcoin surpassed volume on chains such as Ethereum, albeit for a brief period.

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Although not all Bitcoiners are happy with this development, leveling a range of accusations ranging from spam to scams. However, one group of stakeholders — the miners — involved in securing the PoW chain are likely very happy with the rise in transaction fees generated by the Ordinals phenomenon. After the 25th of April, the miners revenue significantly grew due to the rise of Bitcoin Inscriptions. This was an important development, as transaction fees began to exceed inflationary block rewards, which has been rare in Bitcoin’s history (hence the screenshot above).

On the other hand, it wasn’t all smooth. The Bitcoin network began to experience noticeable congestion due to this increase in activity. This influx led to a significant surge in transaction fees, posing a challenge for some users and applications that relied on permanent low transaction fees. The efficiency and affordability of transactions was impacted, thereby casting a shadow over the otherwise promising developments.

**Challenges exist**

So far, the application ecosystem is being rapidly built out with new projects popping up seemingly every day who are building wallets, tools, marketplaces, launch-pads, and even DAOs and governance tooling.

As with any nascent ecosystem there are several challenges to solve. Wallet support for inscriptions is limited, and even where supported, documentation is often sparse making it easy to make mistakes. Notably, at the time of writing the canonical ORD wallet does not fully support BRC-20 token sending (or at least, some functionality like sending only half of a particular BRC-20 token balance is not yet documented). These factors make it easy to accidentally burn inscriptions especially where wallet support is nonexistent or undocumented. Expert knowledge on working with Bitcoin UTXOs is recommended when managing inscriptions using the basic tools. Fortunately, keys are portable between wallets using common BIP-39 seed phrases.

**Questions**

The main questions that remain to be answered are:

*Is this the beginning of a resurgence of applications on the Bitcoin network?*

There’s clearly demand for digital collectibles, or artifacts, so far — these were a key driver of value creation in the last bull cycle albeit mostly on Ethereum. However, smart contracting capabilities on the Bitcoin platform are currently limited in terms of expressiveness. An upcoming soft fork is expected this year or next to deliver a smart contract upgrade by introducing cryptographic covenants. In the meantime layer two solutions such as RGB or BIP-300 could provide additional functionality as well as improve scalability.

*Are Ordinals “too big to fail” in that any attempt by Bitcoin devs to ban them would get backlash from miners?*

There has been increasing concern over the security budget of Bitcoin dwindling with every halving. The renewed on-chain activity brought by Ordinals has demonstrated that demand for blockspace can support mining. It will be difficult to justify blocking this activity entirely, especially with the next inflationary block-reward halving expected in 2024.

*Will another standard supplant BRC-20 or even Ordinals/Inscriptions?*

There are several competing standards being introduced as noted here; however, as with the ERC-20 token standard itself, the best technological solution is not necessarily the one that gains market traction or a position of dominance.

*Will interest in on-chain Bitcoin digital collectibles persist?*

It’s anyone’s guess, really. Certainly more and more people were made aware of digital collectibles in the last cycle, although the term “NFT” has soured with consumers, somewhat.

The legacy of inscriptions could very well be:

- Increased understanding of the UTXO model by average users;
- More people running Bitcoin nodes;
- Wider awareness of Satoshis (sats) as a unit of account;
- Progress towards addressing the long term security budget of the underlying Bitcoin network
- Only time will have the answers.


*Warning: it’s early and as pointed out support for this nascent protocol is not universal. At the time of writing the technology is new, so it’s very easy to make mistakes such as burn inscriptions if you are not an expert with the software. Please be careful out there and of scams. None of this is financial advice.*

— Authors: @fla1white, @RegularMarek

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