What are Bitcoin Ordinals? Bitcoin NFTs Explained

Selected statistic:

• Bitcoin transaction fees doubled after the launch of Ordinals.
  

Bitcoin Ordinals, created by Bitcoin developer Casey Rodarmor, is a term used to describe a new type of non-fungible token (NFT) that is native to Bitcoin. Since their launch in January 2023, Bitcoin Ordinals have been making headlines and taking over the market.  

Even if you are a newcomer to the crypto space, you probably heard of Bitcoin several times. While there were some forms of cryptocurrencies before Bitcoin saw the light of the day, they didn't manage to get any public attention. The 2008 white paper by Satoshi Nakamoto, Bitcoin's mysterious creator, revealed the blockchain technology that would be the backbone of the crypto market.

If you want to understand the dynamics of the cryptocurrency market from the invention of Bitcoin, take a look at our 'What is Bitcoin dominance?' article.

Ordinal inscriptions are used for the creation of the so-called ‘digital artifacts' or 'Bitcoin non-fungible tokens (NFTs)'. A digital artifact is referred to as a new type of NFT but these artifacts differ from traditional Ethereum NFTs since they are arguably more complex. Even though the value of each Ordinal is entirely unique, they don’t store any data off-chain, do not use smart contracts, and are not programmable. 

Since we are going to compare Ordinals and NFTs in this article, we suggest reading this article to expand your knowledge of NFTs: ‘How Does an NFT Have Value?’ .

The new Web3 project has spread a heated debate, excitement, and even confusion across the crypto community. For example, some thought that Bitcoin, a permissionless and globally available network, shouldn't have gone down that path and that NFTs on Bitcoin are only a distraction from the network's main purpose.

However, Bitcoin Ordinals have been perceived by the broader Bitcoin ecosystem as a great innovation that can highlight various applications unique to the chain. It is ultimately up to the Bitcoin community to collectively decide whether or not Ordinals are here to stay.

What are Ordinals?

Bitcoin Ordinals are basically pieces of Bitcoin inscribed with data, such as an image or text. Similar to NFTs, Ordinals live on the blockchain and their value is dependent on the information they include rather than as token themselves. As a token, a Bitcoin Ordinal always equals one satoshi, but its true value depends on its inscription. 

For example, imagine doing a piece of art on a one-dollar bill. The dollar bill is always going to be worth exactly one dollar, but the art created on it could be worth much more. In other words, a Bitcoin Ordinal is a satoshi that has its own inscribed value. 

The new type of digital asset was launched in January 2023. Bitcoin Ordinals act as an extension to the Bitcoin blockchain and may be used to prove ownership of digital assets.  

What is a satoshi?

Bitcoin is divisible to the eighth decimal (1.00000000 bits) which means that each Bitcoin can be split into 100,000,000 pieces. Therefore, a satoshi is one hundred millionth of a Bitcoin; a satoshi is the smallest unit of Bitcoin.  

If this sounds confusing, we suggest reading our 'Why newbies assume you have to buy a whole bitcoin' article to learn more about Bitcoin's divisibility.

The satoshi was named after the anonymous founder of Bitcoin, Satoshi Nakamoto. Even though satoshi is officially Bitcoin’s smallest unit, there is also milisatoshi which equals one thousandth of a satoshi or one hundred billionths of one Bitcoin. 

If you are interested more in the pseudonymous founder of Bitcoin, Satoshi Nakamoto, why not read this article: 'The Legacy of Satoshi Nakamoto'.

Each satoshi has a number based on the order in which it was mined, and this ordinal number is what defines it in a unique manner. This unit can be used as a form of digital currency or can be inscribed with data, such as text, images, audio, and more for use in applications, games, and digital art. 

The History of Ordinal NFTs

Even though Ordinal NFTs have been launched recently and finally unlocked through the realisation of the ordinal theory, Bitcoin NFTs as they are today have been enabled by past upgrades to the Bitcoin Protocol: Segregated Witness (SegWit) and Taproot. 

Initially these updates were not created for the specific purpose of launching new types of non-fungible tokens. In fact, Ordinal NFTs were unintentionally made possible because each update expanded the amount of arbitrary data able to be stored on-chain within a block. In other words, there was new space created for images, videos and games. 

Segregated Witness (SegWit)

Segregated Witness is a 2017 update that efficiently managed to segregate a Bitcoin transaction into two sections by laying down a ‘witness data’ section that can support arbitrary data. 

The update was initially created to bypass the limitations of the block size limit and to enable arbitrary data transmission. In a technical sense, the implementation of this update meant that Bitcoin transactions didn’t need to include witness data anymore, such as the sender’s digital signature. Instead, the update created an additional space for witness data. 

In terms of the Bitcoin Ordinals creation, the SegWit update helped because it enlarged the limits of how much arbitrary data could be included within a single transaction. 

Taproot

The Taproot update was implemented in 2021 to enhance Bitcoin’s privacy, security and scalability. The update enabled the use of an easier system for storing arbitrary witness data. The main objective was to upgrade Bitcoin-based smart contracts. 

Bitcoin NFTs store NFT data in Taproot script-path spend scripts. Because of this upgrade, a single transaction can hypothetically fill up an entire block up to the block size limit of 4MB.  This adds up to the widespread notion that Ordinals make good use of block space.

What is an Ordinal Inscription?

Let’s take this term and break it down into segments to make it easier for you to understand. When we talked about satoshis as Bitcoin’s official smallest unit, we mentioned that each one has a serial number. Ordinals are usually known as numbers assigned to a list of inputs (for example, first, second, and third). 

 In the context of Bitcoin, ordinals are serial numbers of each satoshi. Each satoshi’s ordinal number would be a number between 0 and 2x1010, depending on the time when it was minted. For instance, the 500th satoshi would have the ordinal number of 500. 

Now that we know what ordinal numbers in the Bitcoin context are, let’s take a look at what inscription means. Inscription basically means something is inscribed on an item. For example, you can inscribe text on stone. However, in the Bitcoin context, an inscription refers to a piece of metadata inscribed on a satoshi. 

Finally, what are then ordinal inscriptions? Ordinal inscriptions are metadata attached to each satoshi that already has an ordinal number and is on the Bitcoin blockchain. Thanks to the Bitcoin upgrade that contributed to the creation of Bitcoin ordinals in the first place, Bitcoin inscriptions can be in any format under 4MB. 

By introducing Ordinal NFTs, Bitcoin expanded its decentralised and immutable database beyond financial transactions. Since ordinals are fully valid in today's Bitcoin software, removing the ability to create ordinal inscriptions would require an additional update to the Bitcoin protocol.

How do Ordinal NFTs work?

 Bitcoin Ordinals work by using the Ordinal theory. Rodarmor has proposed the Ordinal theory as a methodology that enables people to track and transfer individual satoshis. In simple words, the theory works by keeping track of and ordering satoshis based on the order they are mined. 

Each of these satoshis can be tracked, transferred, and injected with value by Bitcoin node operators. Through a process called inscription, one can attach text, images, and videos to a satoshi to create an inscription. Therefore, this function enables text, images, video, and audio to be inscribed and linked into each of the individual satoshis.  

Inscribed content is permanent and immutable. In other words, it cannot be altered. Inscriptions are Bitcoin-native digital artifacts, and the Bitcoin community has decided to refer to them as Bitcoin NFTs. Additionally, digital artifacts are on-chain, decentralised, and unrestricted.  The Ordinal theory rewards satoshis with numismatic value, allowing them to be collected and traded as rarities.

Using the Ordinal theory, anyone can identify and track the movement and digital ownership of an inscribed satoshi. They may also send it to a normal Bitcoin address as long as it is Taproot-enabled. This basically means that it is easy to trade inscriptions. The Ordinals market is entirely trustless as it uses the secure, partially signed bitcoin transactions (PSBT) technology.

What is the Rarity System?

Since satoshis can now be tracked and transferred it is natural that users are going to collect them. There are six possible levels of satoshi rarity such as ‘common’, ‘uncommon’, ‘rare’, ‘epic’, ‘legendary’ and ‘mythic. 

You probably wonder how to determine which satoshi is, for example, rare. Ordinal theorists can decide for themselves which “sats” are rare and desirable, but there are some hints. 

In other words, Bitcoin has periodic events that naturally lend themselves to a system of rarity. Let’s take a look at these periodic events. 

• Blocks: A novel block is mined approximately every 10 minutes, from now until the end of time. 
• Difficulty Adjustments: Every 2016 blocks (approximately every 2 weeks) the Bitcoin network responds to changes in hashrate by adjusting the difficulty target that blocks have to meet in order to be accepted. 
• Halvings: Every 210,000 blocks (approximately every 4 years), the amount of new satoshis created in every block is cut in half. 
• Cycles: Every 6 halvings, the halving, and the difficulty adjustment clash. This event is known as a conjunction, and the time that passes between conjunctions are merely cycles. A conjunction occurs approximately every 24 years, and the first one should happen in 2032. 

How are Ordinals different from Ethereum NFTs?

Ordinals and NFTs are both non-fungible and typically linked to digital art. The key difference between them can be seen in the Ordinals' fluid nature.

While Ordinals on the Bitcoin network and Ethereum NFTs share a number of similarities, they are not the same thing. Let’s explore some differences between these two technologies to gain a better understanding of how they work. 

You can refresh your memory and find out more about the Ethereum blockchain by reading our 'Crypto Basics: What is Ethereum?' article.

a. Inscription vs Tokenization

 At first glance, Ordinals, also referred to as Bitcoin NFTs, are practically NFTs. Technically, an Ordinal is still only a satoshi. Unlike NFTs which are minted as entirely new tokens, Bitcoin Ordinals have the raw file data inscribed directly onto the Bitcoin blockchain. 

Ordinal NFTs do not contain separate metadata files. For the sake of comparison, a typical Ethereum NFT contains a separate metadata file that references the token itself (whether it is a digital image, audio file, or video), encompasses a link to the content the NFT represents and displays proof of digital ownership. 

Such a separation cannot be found when it comes to Ordinals. Bitcoin Ordinals store such files within the witness signature field of the satoshi transaction. 

b. On-chain vs Off-chain

Bitcoin Ordinals exist only on-chain and never off-chain. They are entirely immutable, meaning they cannot be changed in any way. Ordinals can be minted directly onto the chain in the same manner as Bitcoin coins.  

On the other hand, NFTs can also exist off-chain. For example, NFTs on other chains can contain reference points to files that are not even hosted on the actual blockchain.  

 Even though Ethereum NFTs themselves are immutable as well, the metadata is often stored off-chain in a centralised server, and connected to the NFT through its token ID. Such metadata can include information about the owner, its image, audio or video, and similar attributes. Since this metadata is stored off-chain, it can be updated by the creator or the owner of the NFT. Therefore, the metadata can be altered by the creator or the owner. 

This is the reason why Rodarmor, the Ordinals’ creator, refers to Ordinals as digital artifacts instead of Bitcoin NFTs. In Rodarmor’s estimation, NFTs are incomplete since many of them require off-chain data. Rodarmor explained that Bitcoin Ordinals are complete in that sense because all the data is inscribed directly on-chain. 

c. Block size limit

One of the main differences between these two technologies is linked to data storage. A Bitcoin block size is capped by the 4MB limit and the hard cap of 21 million coins. In a hypothetical case where all block space on the Bitcoin blockchain were to be used for Ordinals, this would cap the amount of Bitcoin NFT mints that can happen. 

Other chains are less restricted. Most NFTs are created using the Ethereum blockchain through the ERC-721 non-fungible token standard. Once you create one contract for a transaction, it can define any number of NFTs. In simple words, a single transaction could hold a large number of these tokens because the contract doesn't need to hold the data, yet point it to it off-chain. On the other hand, to create ordinal inscriptions you need to do a Bitcoin transaction and hold such content on the Bitcoin's blockchain.

d. Inscriptions are more secure

Since Ordinals Inscription transactions inherit Bitcoin's transaction model that allows a user to see exactly which inscriptions are being transferred by a transaction before they sign it. Therefore, it is easy to track inscription activity. Inscriptions can be offered for sale by using partially signed transactions which do not require a third party, such as an exchange, to transfer them on the user's behalf.

The problem with most NFTs is that they might encompass certain end-user security vulnerabilities such as interacting with complex smart contracts and granting third-party

e. Bitcoin network and the Royalty Dilemma

Since Bitcoin is generally incapable of accounting for royalties, sales are permissionless and Bitcoin NFTs are instantly liquid. There are two reasons behind this notion.  

First, Bitcoin transactions are irreversible, and it is impossible to modify a transaction’s record once it is done. Because of that it is difficult to implement mechanisms for managing long-term royalties. 

 The second reason is linked to Bitcoin’s scripting language which is unsuitable for implementing and managing complex contracts regarding digital assets and automated payments. Bitcoin’s scripting language can support basic smart contracts, but it is not able to support more complex smart contracts as the scripting language used in other blockchain platforms such as Ethereum. 

For creators this amounts to two solutions. Either they can rely on on-chain mechanisms and price their initial sale accordingly since they wouldn’t be able to get royalties on secondary transactions, or additionally rely on off-chain mechanisms. 

The NFT scene was focused on royalties back in 2021 since it aided in levelling up many aspects of modern industries. While technically possible, a heated debate took place challenging the core concept of NFT royalties and whether they should be removed.

If this topic interests you, we suggest reading this article: 'NFT Royalties: Are They Going Away?'.

How to buy Bitcoin Ordinals?

Since Ordinals have been launched recently, there was no designated wallet interface such as MetaMask for Bitcoin users that wanted a place to store and transfer their Ordinals Inscriptions. One option is to set up a Bitcoin wallet such as the Sparrow wallet that enables enough customization to receive Ordinals Inscriptions. 

Sparrow wallet is a desktop application that requires the user to go through a number of steps to make it compatible with Ordinals Inscriptions. However, Sparrow is only for receiving Ordinals. There are other options though that may be more suitable. Since the lack of Web3 infrastructure has begun to change for the better, three wallets just recently announced Bitcoin Ordinals-supported functionalities such as the Ordinals Wallet, Xverse, and Hiro. 

When you set up the wallet, the next step is to check out Ordinals marketplaces. Since the technology has been launched in January, we suggest keeping track of new marketplaces. For example, Gamma has launched a new trustless Ordinals marketplace, along with integrations with secure third-party wallet extensions and creator tools. On Gamma, you can create inscriptions and trade Ordinals. Another new marketplace has also been launched recently by Magic Eden. 

Most popular Ordinals inscriptions

 Even though Ordinals have been created recently, their numbers have been closely watched. There are already some notable collections and high-priced sales. Let’s highlight some of the most popular Ordinal inscriptions. 

a. Ordinal Punks

An exclusive collection of only 100 ‘Bitcoin NFTs’ is a tribute to the popular NFT collection Crypto Punks. New Bitcoin Punks were minted within the first 650 ordinal inscriptions on the Bitcoin blockchain and produced using an open-source algorithm by the pseudonymous Web3 creator FlowStay.

Since Bitcoin’s infrastructure requires users to operate a full Bitcoin node to create an ordinal inscription, bids and asks for the new collection are taking place on a Google Sheet run by the creator. The Bitcoin community is basically using the project creator as an escrow on Discord. 

b. Taproot Wizards

Starting with inscription number 652, Taproot Wizards is a Bitcoin Ordinal collection of hand-drawn wizards created by Udi Wertheimer, a Web3 developer. The collection’s initial Ordinal is claimed to have made history as it was the largest block and Bitcoin transaction taking up 4MB of space. 

Due to Bitcoin’s infrastructure that requires users to operate a full Bitcoin node to make an ordinal inscription, Taproot Wizards transactions take place on the blockchain and are publicly visible on a block explored.  

c. Bitcoin Rocks

Bitcoin Rocks is another collection that was inspired by one of the early Ethereum NFT collectibles. It pays tribute to Ether Rocks. The collection created by the pseudonymous creator Ordrocks contains only 100 ordinals. 

Being another collection that paid tribute to NFTs and its early days, it illustrates the intersection between the NFT and Bitcoin community. As the market continues to develop, it will be interesting to see all the ways creators are going to pay tribute to the early days of NFTs. 

d. Power Source by Ripcache

The crypto artist Ripcache created a tiny collection of only four pieces that pay homage to Avatar: The Last Airbender. These pieces of digital art are named after one of the four elements: fire, water, air, and earth. 

Even though the collection is still pretty new, it already gained attention from Avatar fans, Bitcoin users, and the NFT community.  

e. TimeChain collectibles

The new collection’s Series 1 Timepieces is a highly-limited set of only 21 Ordinals that depict timepieces in many forms such as pocket watches, cyberpunk watches, ancient calendars, and more. All of the pieces were minted into a single block and they encompass consecutive inscription numbers from 356-377.  

The entire collection is anchored by a genesis ordinal inscription at Inscription 356. Rarity levels in the collection are: eight Pocket Watches, three Ancient Sundials, one Monolith, and one Grandfather clock. 

f. Ordinal Loops

Due to their low-numbered ordinal inscriptions on the Bitcoin blockchain, starting from Inscription 452, the Ordinal Loops collection became very popular. The Bitcoin NFT, also known as Object 0, represents a rotating mathematical torus and is one of seven similar animations that form the first of three planned series drops. 

This collection basically pays tribute to crypto. The first set in the collection illustrates the project’s narrative known as ‘Do Not Fiat’ in which Bitcoin ASCII fights the army of five main government currencies. There are no direct buying opportunities, but interested users can take part in auctions.