Bitcoin ordinals were one of the most hotly debated topics in the cryptosphere in the first half of 2023. Supporters believe they can become a revolutionary way to store data, and may help boost the Bitcoin network's security. Detractors call it wasteful and believe it strays too far from Bitcoin's original intended use as a form of currency.
So why have ordinals been such a big deal in the crypto community? Let's dive into what they are and how they work.
What are bitcoin ordinals?
Ordinals are like serial numbers for bitcoin.
Every paper bill (e.g., a $100 bill) that the Department of the Treasury prints carries a serial number. If you still carry cash, look at a bill in your pocket and you'll notice a serial number printed twice on the front of any US bill. In a similar way, ordinals assign serial numbers to units of bitcoin in the order they were mined. The unit that's used is a "sat" (short for "Satoshi Nakamoto," the pseudonym used by Bitcoin's creator), which is equivalent to 0.00000001 BTC.
Ordinals were not part of the original Bitcoin vision, and are not a feature of the core Bitcoin network, which views all sats equally. Instead, they're an artificial add-on created by software engineer Casey Rodarmor, and run on special software separate from the core Bitcoin network. They are also the foundation for Bitcoin NFTs (more on that later).
What are bitcoin inscriptions?
Bitcoin inscriptions are pieces of data that are attached to individual sats.
They're a little bit like image captions. For example, when you upload a picture to social media, you might add a line of text as a description. In a similar way, bitcoin inscriptions allow you to attach text, images, audio, or even a digital game to individual sats.
Inscriptions are a key aspect of the ordinals discussion, because they combine with ordinals to create bitcoin artifacts. We'll talk about this below.
| ORDINALS | INSCRIPTIONS | |
|---|---|---|
| Use case | Tracking individual Satoshis | Storing data |
| Data type | Unique identifier | Various data types (text, images, etc.) |
| Analogy | Sports jersey number (e.g. #1) | Name, sponsors, and other content added to individual jerseys |
How do bitcoin ordinals work?
A popular usage for bitcoin ordinals and inscriptions is to create digital collectibles on the Bitcoin network called "artifacts." Think of them like traditional collectibles—for example, sports cards. A sports card can be valuable based on a variety of factors, including its creation date, commonly identified via a serial number (in many cases, the earlier it was printed, the more valuable it may be), and its rarity.
Artifacts are similar, only they use ordinals to establish a serial number, and inscriptions to attach an image. This allows creators to build collectibles on the Bitcoin blockchain. If this concept sounds familiar, it might be because they're similar to NFTs. In fact, artifact collectibles are known as Bitcoin NFTs.
In addition to collectibles, use cases for artifacts are expanding and have been used to support data storage and domain names, among other functions. Currently, the most popular use case is the BRC-20 protocol, which enables crypto tokens and cryptocurrencies to be built with ordinals.
How are Bitcoin NFTs different from regular NFTs?
There are a few differences between artifacts and traditional NFTs.
First and foremost, artifacts are stored directly on the Bitcoin blockchain. Alternatively, most Ethereum NFTs often use smart contracts, and are stored on centralized third-party servers.
Both artifacts and Ethereum NFTs are used to create collectibles, but Ethereum NFTs allow creators to earn royalties when their items are sold, artifacts currently don't support this function.
Beyond collectibles, their use cases cover different ground. Artifacts are typically used to store text, images, and other data, while Ethereum NFTs are used to support a wider spectrum of functions, including collectibles, supply chain management, ticketing, and more.
It's also worth noting that Ethereum NFTs offer a higher maximum storage size of 100 MB, whereas inscriptions are currently limited to a smaller size of 4 MB.
Potential disadvantages of bitcoin ordinals and inscriptions
The ability to create digital collectibles may seem pretty harmless, so what's all the debate about?
Let's start with the opposition's arguments. Critics see ordinals and artifacts as distractions from the original vision for Bitcoin. Some believe Bitcoin was created for a grand, humanitarian purpose: to build a decentralized financial system open to all. In the eyes of critics, use cases like digital collectibles and data storage are comparatively unserious, and believe slapping them on top of the Bitcoin blockchain could muddle its message.
Another critique is that the logistics of ordinals, inscriptions, and artifacts may complicate things. For example, the increase in artifact transactions has, at times, congested the Bitcoin network, driving up transaction fees and slowing processing times. Critics argue that if Bitcoin is meant to serve as a functioning financial system, it doesn't make sense to bog it down for the sake of data storage.
Potential advantages of bitcoin ordinals and inscriptions
Advocates believe ordinals and artifacts can become the world's most secure way to store data. Supporters argue that the Bitcoin blockchain is the most decentralized network in existence. It's verified and updated by millions of independent computers across the globe, and once a piece of data is recorded on its blockchain, it can't be changed. Supporters say this makes it a reliable way to record a wide spectrum of information beyond just financial transactions.
Some also see ordinals and inscriptions as an opportunity to attract new users to the Bitcoin network. For example, there may be potential users who don't care about revolutionary new currencies, but do find digital collectibles interesting. Advocates acknowledge the potential downside of higher transaction fees and slower processing times mentioned earlier, but believe they will eventually be solved as the space evolves.
Another point to note is that not everyone sees the increased transaction fees as a negative. In particular, miners benefit from higher fees as it increases the revenue they generate for updating the blockchain. Some advocates argue that this in turn increases the network's security, because it incentivizes more miners to keep the system running properly.
What to consider if you decide to buy a Bitcoin NFT or ordinals
Just like with buying other crypto-related assets, make sure you thoroughly understand how Bitcoin NFTs work before you jump in. As we saw with the broader NFT market, many digital collectibles didn't hold their value during 2022's crypto market decline, and dropped significantly in price. Also note that as of July 2023, the Bitcoin NFT market is smaller in both popularity and transaction volume than many other NFT markets. This could make it harder to find a buyer if you want to sell a Bitcoin NFT you own.
The Ethereum and Solana NFT markets have also seen their fair share of scams and theft. Be aware that these scenarios are risks with Bitcoin NFTs as well.
In general, remember that crypto and crypto-related assets are highly volatile, and may experience more market manipulation than securities. Holders don't benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for these securities is currently uncertain.
These assets are also not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). In light of these caveats, you should only buy Bitcoin NFTs with an amount you're willing to lose. This may help prevent irreparable damage to your portfolio if your assets drop in value.