The Hot Topic from BTC Miami — Ordinals!
The crowd might have been half the size of last year’s Bitcoin event in Miami Beach, but excitement over new development was just as buzzy as ever.
Every year the event showcases advancements in mining and ASIC technology, wallet hardware, data and investment tooling, and more recently interesting work with Lightning and nostr, but the hot topic of 2023 was undoubtedly ordinals.
Ordinals are a new development on Bitcoin, and are quickly becoming one of the most used transaction types on Bitcoin. Ordinals “Inscription” (both image collections and “BRC-20” tokens) trading volumes even surpassed NFT and ERC-20 token trading volume on other chains at one point recently. There is heated debate online within the Bitcoin community about whether ordinals belong on Bitcoin or if they should be developed elsewhere (leading to a lively main-stage debate between Udi Wetheimer and Eric Wall of “Taproot Wizards” fame, Matt Corallo, and Shinobi Monkey), though opinions in Miami largely ranged from indifferent to positive.
Below, we’ll break down what ordinals, inscriptions, and BRC-20 tokens are, why they’re blowing up right now, and why some people would prefer if they just went away.
What is ordinal theory?
Put simply, “ordinals'' are just a labeling system for specific satoshis (or “sats”), the smallest divisible unit of Bitcoin. They are labeled according to the order they were minted. If you think about sats as physical pennies, the ordinals protocol allows for the labeling of specific pennies - a coin collector could be interested in owning the first penny ever minted in the year 2000, the 33rd penny minted in the month of their 33rd birthday, etc. Likewise, an ordinal collector might be interested in owning the first sat minted on a particular block number, or any sats that were ever owned by developer Hal Finney. The point is that individual sats can be labeled and indexed.
What are inscriptions?
If sats are pennies, then inscriptions can be thought of as etchings “inscribed” into a copper penny, only digital and made possible thanks to clever use of the 2021 Taproot upgrade. Any type of file can be inscribed onto a sat, with text and image files being very popular choices. The ability to inscribe images onto sats in particular has led to a wave of ordinal “collections” similar to NFT collections on other chains being created directly on-chain on Bitcoin. Some people have inscribed HTML files, creating entire webpages on Bitcoin that can be displayed by clients like ordinals.com.
While storing data on Bitcoin isn’t new, the ability to choose exactly which sat you want to send to another address made possible with ordinal theory makes collecting data stored on-chain (notably, digital art) easier than ever.
What are BRC-20s?
Aside from digital art, a particularly popular type of inscription is a json file used in the experimental “BRC-20 standard.” If the name “BRC-20” sounds somewhat familiar, it’s because the name is a play on the ERC-20 token standard on Ethereum used for creating fungible tokens such as SHIB and USDC. The standard is used to create “tokens” on Bitcoin, but the similarity to ERC-20 tokens ends there.
A BRC-20 json file might look like this:
Here, a token called “ordi” is deployed with a max supply of 21 million, and a “limit” of 1000 which allows only up to 1000 tokens to be minted at a time. If you wanted to mint 950 ordi, you would then inscribe another json file that looks like this:
Balances are tracked on-chain, but by third-party data providers who read in all of these json files in the order they were inscribed and then calculate balances.
Why don’t some people like inscriptions?
Ordinals allow for a lot of interesting use cases, but they come with a few drawbacks as well. For one thing, because ordinal inscriptions take up far more blockspace than typical “financial” transactions, the cost of running a full Bitcoin node is higher in terms of both storage requirements and the initial time needed to sync the full chain. The additional storage space required and the extra waiting time to sync the full blockchain can be deterrents to new nodes being spun up. However, while that may be true for some, there have been many new full nodes spun up since ordinals became popular by those who maybe spent a lot of time in NFT ecosystems on other chains but who now want to inscribe and trade on Bitcoin.
Ordinals have also created large, temporary fee spikes. The rush to create one of the first 100k inscriptions in February caused a dramatic fee spike as inscribors rushed to ensure their transactions made it into the “sub-100k club”. Another spike occurred in early May during the early rush to deploy and mint BRC-20 tokens. Transaction order is very important in BRC-20 land, and we saw that by many diehards paying enormous fees to ensure their transactions were picked up quickly by miners. In fact, the fees in May got so high that Binance temporarily paused Bitcoin withdrawals on its platform, and there were up to 350k unconfirmed transactions stuck in the mempool at the peak of the rush.
On one hand, fee congestion certainly makes it more difficult to use Bitcoin in the short term. On the other, high fees on the Bitcoin network incentivize miners to participate, and ultimately anything that encourages more miners to set up their ASICs is good for Bitcoin’s security, decentralization and longevity. As Luxor’s Charlie Spears put it in Miami, “one man’s network congestion is another man’s answer to Bitcoin’s fee problem.”
Inscriptions vs NFTs
Image inscriptions on Bitcoin and image-based NFT collections on other chains may seem really similar, so you may wonder why anyone would bother switching to Bitcoin when NFT collections have flourished on Ethereum, Solana and other chains for years.
Proponents of using ordinals and inscriptions argue that most of the time, image files are not stored on Ethereum directly, but rather a URL or pointer to an image file is actually what’s stored while the image itself is stored on another hosted server. This means that the image files can disappear from a holder’s wallet if the server owner decides they no longer want to host the image. Images inscribed on Bitcoin, on the other hand, tend to be fully stored on-chain, utilizing file storage that’s as permanent as Bitcoin itself. However, it’s possible to store images directly on-chain on Ethereum and other chains as well, so the question of permanent file storage comes down to how likely is a chain to still be around in the future.
Other use cases for ordinals and inscriptions
Ordinal theory has only been around since the very end of 2022, and people are still actively discovering and experimenting with the protocol. PSBT’s (partially-signed Bitcoin transactions) allow elegant dex creation that doesn’t rely on complex, potentially insecure contracts or implicit trust assumptions, and startups like Deep Lake are using PBST’s and DLC’s to make DeFi and Ordinal lending possible on Bitcoin. Cursed inscriptions (inscriptions that didn’t go through correctly due to an early bug) are all the rage right now for collectors. Every day there are more new and exciting developments. In 2023, this is definitely the space to watch!