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bitcoin ordinals

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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.

Understanding that Ordinals is not the first protocol to utilize Bitcoin’s metadata is essential. Although Bitcoin maximalists are critiquing Ordinals, 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. Casey Rodarmor developed it. He previously worked on the development of the Bitcoin Core software.

Ordinals is a protocol or add-on built on top of Bitcoin. Ordinals is not a hard or soft fork of the Bitcoin Core software like the famous SegWit and Taproot updates. According to Casey Rodarmor, 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 shortly.

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 now stored in the Bitcoin blockchain. You can also call them Bitcoin NFTs.

bitcoin ordinals inscriptions

The Ordinals protocol was initially 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 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.

The Taproot update removed certain data restrictions from the Bitcoin blockchain. The maximum block size remained unchanged, though. 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, thousands of Ordinals inscriptions data, i.e., “Bitcoin NFT mintings” per day have been recorded. 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 unsurprising, as Bitcoin maximalists have always been critical of other cryptocurrencies, especially the NFT sector. According to Bitcoin maximalists, NFT means the same thing as a scam.

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

Another thing that annoys Bitcoin fundamentalists is related to the cost of inscription data. It is very cheap because Ordinals leverages witness data from the Bitcoin blockchain. 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 is 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 inscription 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 browsing the Bitcoin blockchain using the standard block explorers.

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

Understanding that Ordinals is not the first protocol to utilize Bitcoin’s metadata is essential. Storing metadata in the Bitcoin blockchain has been possible 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 originally moved to the Omni Layer protocol built on 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, Satoshi Nakamoto himself had already shot down the BitDNS idea. “Piling every proof-of-work quorum system in the world into one dataset doesn’t scale,” he wrote in 2010.

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

The SegWit update in 2017 was an essential step in Bitcoin’s history. In it, the Bitcoin block size was increased from 1MB to 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 divided into 1MB of transaction data and 3MB of witness data. Although SegWit separated the 3MB of witness data from the block, you could store very little additional data about one transaction. You certainly couldn’t store images that are several megabytes in size.

The Taproot update changed the limitations of the witness data. This opened the possibility for the implementation of the Ordinals protocol. The metadata size 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 Bitcoin maximalists are critiquing Ordinals, 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 think Bitcoin’s current monetary policy is unsustainable. The network’s hash rate (mining power) is constantly increasing, but the mining rewards are simultaneously 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 many 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 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 by the Taproot update will remain on the Bitcoin blockchain. Even the most die-hard Bitcoin fundamentalists can’t prevent NFT images from being stored.

However, using the Ordinals protocol and the inscriptions feature can be hindered. The solution would be to remove the discount for using witness data, making 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 nodes, i.e., the network nodes that run the Bitcoin software, hold the final voting power. Broad support must be provided for new updates, or the nodes will not simply download the latest version.

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

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

Ordinals have sparked many interesting discussions about the future of Bitcoin. Although the article was only published two weeks ago, we will update it in the future as we see how the use of Ordinals evolves.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.