Bitcoin ordinals leverage satoshis to bring NFTs to the original blockchain

Bitcoin ordinals offer a way to realize the concept of non-fungible tokens on the largest blockchain protocol, Bitcoin. We typically associate NFTs with smart-contract-enabled protocols like Ethereum as you need a mechanism for minting new tokens, be it fungible or non-fungible. Smart contracts and token standards like ERC-721 provide such a mechanism and make the minting process a relatively straightforward affair.

This is not the case with Bitcoin, which was conceived as a payment protocol and, as such, does not have native support for smart contracts. However, through a clever use of the humble satoshi and by taking advantage of key changes to the Bitcoin protocol, Bitcoin ordinals have been able to bring NFTs to the original blockchain network.

What are Bitcoin ordinals?

So let’s see how it all works.

Bitcoin ordinals take inspiration from Ordinal theory, which proposes a methodology for identifying individual satoshis - the smallest unit of Bitcoin (100,000,000 sats comprise one BTC) - via a serial number. This  opens the door for individual sats to be inscribed with unique identifiers and data, effectively turning them into NFTs.

To achieve this in practice, Bitcoin ordinals take advantage of features introduced by two key Bitcoin upgrades - SegWit and Taproot. Introduced in the summer of 2017, SegWit, short for Segregated Witness, is one of the most important upgrades in Bitcoin’s history. It allowed for witness information to be decoupled from transaction data and stored separately on the blockchain. This increased the amount of transaction data that could be stored in a Bitcoin block. It also made it possible for images, video and other data to be recorded and stored in the witness, which is what Bitcoin ordinals take advantage of today.

The more recent Taproot upgrade introduced a new type of Bitcoin address format, which Bitcoin ordinals now use to identify specific sats.

The difference between standard NFTs and ordinals

Bitcoin Ordinals differ from standard NFTs in several key aspects:

• On-chain storage - NFTs typically have their metadata stored off-chain, Bitcoin Ordinals store content directly on the blockchain, making them truly immutable.
• Rarity - whereas in traditional NFTs rarity is often determined by the attributes of the digital asset,  Bitcoin Ordinals  inherit the intrinsic rarity of their underlying satoshis.

The mining of Bitcoin ordinals

Mining Bitcoin ordinals involves associating digital content with specific satoshis. Initially, this could only be done by running a Bitcoin node, which was a technically complex process. 

However, as the concept gained popularity, user-friendly, no-code applications like Gamma and Ordinals Bot were developed to facilitate the mining process. These applications allow users to upload content and inscribe it onto the blockchain without requiring extensive technical knowledge.

Potential challenges

While this novel technology is very promising, it has has some drawbacks:

• Blockchain size - As the inscribed content is stored directly on-chain, this could lead to rapid growth in the size of the blockchain, which can cause scalability issues.
• Transaction costs - The increased use of the Bitcoin blockchain for inscribing and trading Ordinals may drive up network usage and transaction fees.

Conclusion

Launched in early 2023, Bitcoin ordinals represent a nascent trend and the jury is still out on their place in the Bitcoin ecosystem. On the one hand, their detractors point to their inefficient use of the Bitcoin network, arguing that they would slow down the network and drive transaction fees up. On the other hand, Bitcoin ordinals demonstrate the protocol can be expanded beyond its original purpose and could potentially inspire others to bring more utility to the world’s largest blockchain network. It remains to be seen what their fate will ultimately be, but, as it stands, Bitcoin ordinals are certainly worth paying attention to.