Inscriptions: A Gateway to Understanding Ordinals

When Bitcoin first emerged, it introduced a revolutionary and trustless system for transferring value. Being able to send financial transactions securely and peer-to-peer was innovative and exciting, although the prospect of also supporting other activities had always been discussed.

Ordinals and inscriptions now offer a method to store information other than financial transactions. Additional information stored on the Bitcoin blockchain can now become a one-of-a-kind digital artifact, otherwise known as a Bitcoin non-fungible token (NFT).

This article explores the history, principles and potential of Bitcoin NFTs. Could it be the next big thing — or is it just another fleeting trend in the fast-paced world of blockchain innovations? 

Introducing our series Learn Web3 With an Expert on Bybit Learn, we aim to demystify these complex topics and provide insightful perspectives from industry leaders. Join us in this third installment as we invite Relationship Manager Daniel Basharimov from the Bybit VIP Team to join us for a dive into the world of Ordinals and inscriptions.

Understanding Ordinals

Ordinals are a unique system of ordering satoshis, the smallest units of Bitcoin, that allows the creation of Bitcoin NFTs. Users can inscribe data like text or images as digital artifacts onto individual satoshis.

Casey Rodarmor first started working on Ordinals in 2022 after the Taproot upgrade enabled more efficient and flexible data storage on the Bitcoin blockchain. Ordinals were officially launched onto the Bitcoin mainnet on Jan 20, 2023. They can be used for creating digital art, verifying identity, proving ownership and more. Unlike traditional NFTs on separate layers or platforms, Ordinals are directly embedded into the base of Bitcoin’s network, which makes them decentralized, rare and more secure.

Types of Ordinals

Ordinals have different levels of rarity: Common, Uncommon, Rare, Epic, Legendary and Mythic. The rarity signals the uniqueness and scarcity of inscribed satoshis, and can be determined based on factors such as block height, inscription time and overall demand. 

How Do Ordinals Work?

Ordinals serve as unique identifiers for satoshis, the smallest units of Bitcoin, and are assigned based on the chronological order in which individual satoshis are mined on Bitcoin’s blockchain. Essentially, the first satoshi ever mined is labeled as Ordinal 1, the second one as Ordinal 2 and so forth.

However, Ordinals go beyond mere numerical identification: they can incorporate additional information through a process called inscribing, which means that users can attach various data types, such as images or text, to specific satoshis. This functionality enables the creation of diverse digital assets, ranging from NFTs to meme tokens and certificates.

The creation of Ordinals involves special Bitcoin transactions following the Ordinals protocol. These transactions include the Ordinal number, inscribing data and the Taproot address of the owner. Taproot facilitates more complex and flexible transactions. Miners validate these Ordinal transactions, ensuring their inclusion in Bitcoin blocks, similar to regular transactions.

Ordinals, along with their associated data, are stored on the Bitcoin blockchain as part of their transaction history. They’re accessible and verifiable by anyone using a Bitcoin node or an Ordinal explorer. Transferring an Ordinal from one owner to another involves an additional transaction to update the Taproot address. Ordinals therefore are imbued with the security, immutability and decentralization inherent in Bitcoin itself.

What Are Inscriptions?

Inscriptions consist of arbitrary content that’s stored on individual satoshis, the smallest unit of the Bitcoin currency, using the Bitcoin network. 

This process creates Bitcoin-native digital artifacts (also known as NFTs) that can be stored, transferred and traded on the Bitcoin blockchain. Inscriptions use Ordinal theory, which assigns a unique Ordinal number to each satoshi based on its position in the transaction history, making it possible to identify and track each one.

The first Ordinal inscription was created on Dec 14, 2022 by Casey Rodarmor. Named Inscription #0, this inscription is a pixel art representation of a black-and-white skull and is permanently recorded on the Bitcoin blockchain.

What Are Recursive Inscriptions?

The term recursive inscriptions on the Bitcoin blockchain refers to a method of storing data by interlinking existing inscriptions with new ones, thus establishing networks of interconnected data sources. This approach offers several advantages for developers: It enables the execution of software entirely on-chain, facilitates the storage of extensive files and allows the implementation of advanced contracts without the need for new cryptographic techniques.

Two other notable benefits are lower transaction costs, and the reduction of storage duplication. These are achieved by minimizing the amount of data inscribed on each satoshi and contributing to the overall efficiency of the blockchain. Recursive inscriptions have been employed by projects such as OnChainMonkey, known for creating impressive 3D art under 1 KB in size. Another prominent example is Brandon Marshall’s use of recursive inscriptions to immortalize his single-page HTML website on the Bitcoin blockchain.

While recursive inscriptions offer exciting possibilities for on-chain data storage and efficient transaction processing, their implementation comes with complexities and challenges that need to be managed carefully, especially regarding the balance between centralization and decentralization within Bitcoin’s ecosystem.

How Do Inscriptions Work?

Inscriptions create digital artifacts such as images, text, audio and applications that can be stored and transferred. They become a way of imprinting information onto the Bitcoin blockchain, adding a layer of data to specific units of Bitcoin. Unlike with other blockchain platforms, Bitcoin inscriptions don't rely on sidechains or separate tokens, instead using the witness of Bitcoin transactions to embed arbitrary data. 

Inscribing can be a technical process that starts with installing Bitcoin Core, installing the “ord” client, and then committing and revealing a transaction. Thankfully, the development of inscription tools has made the process more accessible to users. These user-friendly applications simplify the creation and exchange of inscriptions on the Bitcoin network and empower users to generate and inscribe digital artifacts with ease, using low-code or no-code interfaces to support a more inclusive, user-friendly environment within the Bitcoin ecosystem.

The Future of Inscriptions

Inscriptions have sparked a dialogue as to whether they could serve as a platform for expressing creativity, establishing identity and asserting ownership on the Bitcoin network.

However, opinions within the community are divided. Some enthusiasts view inscriptions as a promising avenue for expanding the functionality and cultural impact of Bitcoin. On the other hand, skeptics express concerns about the potential drawbacks, questioning the value and utility of inscriptions. The debate centers on issues such as block space efficiency and the potential impact on Bitcoin's fungibility.

Looking forward, the future of Bitcoin inscriptions remains uncertain. Nevertheless, they could open up possibilities for innovation and experimentation within the Bitcoin protocol. According to a report published Mar 3, 2023 by Galaxy Digital’s research unit, the market for Bitcoin NFTs built on inscriptions could potentially reach $4.5 billion by 2025, signaling a significant economic aspect to this emerging phenomenon. Despite its potential, however, this market's growth may face challenges that include technical and regulatory hurdles. 

When asked to share his perspective on Galaxy Digital's analysis, Bybit’s Daniel Basharimov notes that the report presents a range of projections for the Bitcoin NFT market, with a conservative estimate at $1.5 billion in a down market and an optimistic $10 billion, should Bitcoin NFTs rival those of Ethereum and other blockchains and introduce novel use cases. The report underscores the influence of major NFT players and evolving infrastructure on these forecasts. Notably, the NFT market has seen fluctuations in trading volumes and activity, with a peak in early 2023 followed by a downward trend. 

Despite these changes, interest in NFTs, especially premium ones, remains robust. Future market performance will hinge upon factors such as market trends, technological development and user engagement, with the interplay of Ethereum and Bitcoin NFTs being particularly crucial.

The Expert Take

In the following section, we delve deeper into the complexities and potential of Bitcoin inscriptions, guided by insights from Basharimov as he sheds light on both the challenges and the promising future of this technology.

• Network Efficiency and Scalability Issues: Experts point out the risk of “blockchain bloat” from inscriptions, which might slow transaction processing and increase node storage requirements. This could impact Bitcoin's efficiency and scalability.

• Decentralization at Stake: There's concern that the growing blockchain size being fueled by inscriptions might hinder individuals from operating full nodes, due to increased storage and computational demands. This scenario risks ceding of network control to resource-rich entities, challenging Bitcoin's foundational principle of decentralization.

• Economic Impact on Transaction Fees: As inscriptions make block space more valuable, transaction fees could rise, potentially making Bitcoin less attractive for regular transactions.

Looking to the future, the landscape will be shaped by technological advancements, market dynamics and upcoming challenges.

• Technological Growth and Ecosystem Development: The Ordinals ecosystem is experiencing significant expansion, especially in the area of digital collectibles. This is being propelled by new developments in image-based inscription technologies and the launch of specialized wallets and services tailored for these assets. For example, Xverse, Hiro Wallet and UniSat Wallet offer features similar to Ethereum's MetaMask, illustrating a shift toward more user-friendly management of these assets. Additionally, innovative applications, such as using Ordinals for loan collateral, are broadening the scope of their use within the Bitcoin framework.

• Market Dynamics: Bitcoin Ordinals, introduced during a downturn in the crypto market, have garnered considerable attention and activity, notably in user engagement and creation. Their level of engagement, though less than that on networks like Ethereum, Solana and Polygon, still marks significant interest, indicating potential for future expansion and a stronger presence in the wider NFT marketplace.

• Adapting to Bitcoin Core Updates: The upcoming Bitcoin Core update presents a substantial hurdle for Ordinals, potentially disrupting their operations and those of BRC-20 tokens. This update aims to rectify a vulnerability currently exploited by these tokens, affecting their functionality on the Bitcoin blockchain. This necessitates an adaptive response from the Ordinals ecosystem to cope with core protocol changes, highlighting the risks of adding new functionalities atop the established Bitcoin network. Despite technological progress and interest, the Ordinals ecosystem faces significant challenges from these evolving aspects of the Bitcoin protocol and market conditions, as its future hinges on innovation and adaptability.

Bybit Inscriptions Marketplace

Bybit is set to launch its exclusive Inscription Marketplace, which will focus on trading BRC-20 assets via the Bybit Wallet. This marketplace will incorporate a variety of EVM-compatible DApps, enhancing user interaction. Additionally, Bybit plans to expand its offerings by gradually integrating marketplaces from various protocols, providing users with a broader range of trading options within the Bybit Wallet ecosystem. Stay tuned for this exciting development by following our official Bybit Web3 X (Twitter) page and tune in to our AMA with Lorenzo from UniSat and Dirk from Bybit Web3 on Jan 29, 2024, 1PM UTC.

The Bottom Line

Inscriptions using Bitcoin's Ordinal system are seen by sources such as Bybit’s Daniel Basharimov as a potential catalyst for a new era of digital creativity and ownership. This integration of non-fungible tokens into Bitcoin's core could provide a unique combination of security, decentralization and boundless possibilities. Experts suggest that, whether inscriptions become a lasting trend or a brief innovation, they represent an opportunity to delve into new creative territory within Bitcoin's robust structure.

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