Analyses
09
Feb
bitcoin ordinals
bitcoinadmin February 9, 2023 No comments Analyses permalink

This website has affiliate links. We may receive compensation if you visit partners we recommend. Read more about our advertising principles from the About Us page.

Bitcoin NFTs with the Ordinals Protocol

ORDINALS is a protocol launched in January 2023 that brings new features to Bitcoin. The inscriptions feature of the Ordinals protocol became possible after the Taproot update. The Ordinals protocol has created an uproar among Bitcoin maximalists.

It is good to understand that Ordinals is not the first protocol to utilize Bitcoin’s metadata. Although the Ordinals protocol getting criticism from Bitcoin maximalists, it could help solve one of Bitcoin’s critical problems in the coming years. Whatever one may think of the Ordinals protocol, its use cannot be prevented.

What is Bitcoin’s Ordinals Protocol?

Ordinals is a protocol launched in January 2023 that brings new features to Bitcoin. The Ordinals protocol was developed by Casey Roadmor. He has previously worked in the development of the Bitcoin Core software.

Ordinals is a protocol or add-on built on top of Bitcoin. Ordinals is not a hard fork or a soft fork of the Bitcoin Core software like the famous SegWit and Taproot updates. According to Casey Roadmor, the protocol is like a lens through which the data on the Bitcoin blockchain can be viewed. The Ordinals protocol lets you see things you wouldn’t otherwise know existed in the blockchain.

If you want to get a good understanding of the Ordinals protocol, watch this Youtube video. It goes through the history and technology of Ordinals with potential effects on Bitcoin in the near future.

Technically, Ordinals consists of two layers: the actual Ordinals protocol and the inscriptions feature. The word inscription means engraving or markings. It is this feature that has caused quite a stir among Bitcoin maximalists. The image below shows examples of inscriptions that are now stored in the Bitcoin blockchain. You can also call them Bitcoin NFTs.

bitcoin ordinals inscriptions

The Ordinals protocol was originally developed to track the movement of individual satoshis on the Bitcoin blockchain. A satoshi is one hundred millionth of bitcoin and the smallest sendable unit in the Bitcoin blockchain. Ordinals can be used to tag a single Satoshi and make it unique or non-fungible.

The Taproot update made Ordinals possible

The inscriptions feature of the Ordinals protocol became possible after the Taproot update. Taproot was a soft fork of the Bitcoin blockchain completed in the fall of 2021. It was the first major Bitcoin software upgrade since the SegWit in 2017. We have written a comprehensive guide about Taproot if you are more interested in the topic.

With the Taproot update, certain data restrictions were removed from the Bitcoin blockchain. The maximum block size did remain unchanged, though. But thanks to Taproot, it is now possible to utilize the so-called witness data more freely. This enabled the inscriptions feature of Ordinals.

Inscriptions are metadata that can be attached to a single satoshi. This data can be text, image, or video. In other words, you can create an NFT and tag it to one satoshi. The limitation for inscription data is the block size of Bitcoin, which is currently four megabytes.

In February 2022, the largest block in Bitcoin history was mined. The size of the block was 3.94 megabytes. The reason, of course, was the Ordinals.

The block in question contained a Taproot Wizards image (NFT) that filled the block almost to the max.

According to Dune Analytics, there have been thousands of Ordinals inscriptions data, i.e. “Bitcoin NFT mintings” per day. At the same time, the average size of Bitcoin blocks has increased from around 1.6-1.7 megabytes to 2.5-3.5 megabytes.

Ordinals vs. Bitcoin maximalists

The Ordinals protocol has created an uproar among Bitcoin maximalists. This is not surprising, as Bitcoin maximalists have always been very critical of other cryptocurrencies and especially the NFT sector. According to Bitcoin maximalists, NFT means the same thing as a scam.

Ordinals brings this “hated technology” to the Bitcoin blockchain. On top of that, the digital artwork is indeed stored in Bitcoin blocks. Some of the crypto projects have implemented NFTs in such a way that only a link to the file location is stored in the blockchain.

Another thing that annoys Bitcoin fundamentalists is related to the cost of inscriptions data. Because Ordinals leverages witness data from the Bitcoin blockchain, it is very cheap to use. Thus, the Bitcoin blockchain can be “clogged with data that does not belong there” at a relatively small cost.

The criticism related to costs is valid from the perspective of volatility. If Bitcoin’s blockchain will be increasingly used for other than its original purpose, the network is guaranteed to see huge spikes in transaction fees. This has been well noticed in Ethereum during the strongest NFT rallies.

Various polls suggest that the nagging section of Bitcoin maximalists is a minority. Most Bitcoin supporters have a positive or neutral view of the Ordinals technology. If users follow Bitcoin’s rules and pay the required transfer fee, there should be no problem.

One should remember that the inscriptions data (Bitcoin NFT) is not visible to the ordinary Bitcoin user in any way. This metadata can only be read using the Inscriptions Explorer, which supports the Ordinals protocol. The NFT images are not visible to anyone who is browsing the Bitcoin blockchain by using the standard block explorers.

Ordinals is not the first protocol to use Bitcoin’s metadata

It is good to understand that Ordinals is not the first protocol to utilize Bitcoin’s metadata. It has been possible to store metadata in the Bitcoin blockchain since the beginning. However, there have been severe limitations in the number of bits available for storing non-transactional data.

The most well-known example of utilizing the Bitcoin blockchain metadata is probably Tether. USDT tokens moved originally on the Omni Layer protocol built on top of the Bitcoin network. This implementation was previously known as Mastercoin.

In the early years of Bitcoin, there was even talk about storing domain names in the Bitcoin blockchain. However, the BitDNS idea was already shot down by Satoshi Nakamoto himself. “Piling every proof-of-work quorum system in the world into one dataset doesn’t scale,” he wrote in 2010.

There has been a debate about the data limits of the blockchain throughout Bitcoin’s history. The Bitcoin community also fought a civil war for years over increasing the block size. In the end, this battle ended with the SegWit update and the implementation of scaling with the lightning network.

The SegWit update in 2017 was an important step in Bitcoin’s history. In it, the Bitcoin block size was increased from 1MB -> 4MB by separating the witness data from the transaction data. This witness data can be thought of as signatures of Bitcoin transactions.

The Bitcoin block is therefore divided into 1MB of transaction data and 3MB of witness data. Although 3MB of witness data was separated from the block with SegWit, there was very little additional data you could store in relation to one transaction. You certainly couldn’t store images that are the size of several megabytes.

The Taproot update changed the limitations of the witness data. This opened the possibility for the implementation of the Ordinals protocol. The size of metadata was previously limited to such a marginal size that there was only room for small text messages.

The benefits of Ordinals to the Bitcoin ecosystem

Although Ordinals is getting criticism from Bitcoin maximalists, it could help solve one of Bitcoin’s critical problems in the coming years. However, the seriousness of the problem and its existence are debatable. What is it really about?

More and more analysts are of the opinion that Bitcoin’s current monetary policy is not on sustainable basis. The hash rate (mining power) of the network is constantly increasing, but at the same time, the mining rewards are halved every four years. This process is called Bitcoin halving. The next halving will take place in 2024.

The halving of block rewards is not a problem if the price of Bitcoin continues to grow in the same proportion. Until now, Bitcoin’s price increase has kept miners profitable. However, the year 2022 revealed a large number of bankruptcies in the mining industry.

In December 2022, the Bitcoin price was lower than five years earlier. What will happen if we see even longer and darker bear markets in the future? If too many Bitcoin miners go bankrupt and the hash rate drops, it poses a security risk to the network.

The inscription feature of the Ordinals protocol enables miners to sell full block-sized “NFT blocks” for tens of thousands of dollars. A similar transaction was also carried out in the previously described example, where a Bitcoin block of four megabytes was mined.

Bitcoin NFTs can bring additional income to miners in the future and help solve a potential security problem. For now, however, this is all at the level of speculation.

The future of the Ordinals protocol

Whatever one may think of Ordinals, its use cannot be prevented. A feature created as a byproduct of the Taproot update is and will remain on the Bitcoin blockchain. Even the most die-hard Bitcoin fundamentalists can’t prevent NFT images from being stored.

The use of the Ordinals protocol and the inscriptions feature can be hindered, though. The solution would be to remove the discount for the use of witness data, which would make Bitcoin NFTs significantly more expensive. At the same time, it would limit their popularity. There will probably be a heated debate on the topic in the future.

Bitcoin’s development is done globally through a distributed organization. The final voting power is held by the nodes, i.e. the network nodes that run the Bitcoin software. Sufficiently broad support must be obtained for new updates, or the nodes will not simply download the new version.

So far, it seems that Ordinals’ naysayers are in the minority. However, the protocol brings its own risks. What happens when someone stores too sensitive or even illegal information in the Bitcoin blockchain? Everyone can imagine what such data would be. Copyrighted material is also part of the potential issue.

There are no filters for using the Ordinals and its inscriptions feature. No one can control what kind of data is saved on the blockchain. It is quite likely that this problem will be discussed very soon. So far, individual images have been manually censored from the Ordinals Explorer.

Ordinals have sparked a lot of interesting discussions about the future of Bitcoin. At the time of writing the article, it has only been two weeks since its publication. We will update this article in the future as we see how the use of Ordinals evolves.