Bitcoin Ordinals Explained: What Are They and How Do They Work?

Bitcoin Ordinals Explained: What Are They and How Do They Work?

10 min read

Since Bitcoin’s debut in 2009, it has primarily been recognised as a digital currency, revolutionising the financial world. However, in January 2023, a use case emerged with the advent of Bitcoin Ordinals, extending Bitcoin’s utility to include data storage and digital expression.

Bitcoin Ordinals are essentially fragments of Bitcoin, each inscribed with unique data such as artwork or text. These digital artefacts are reminiscent of non-fungible tokens (NFTs) residing on the blockchain. Their value lies not in the Satoshi they represent (the smallest Bitcoin unit) but in the uniqueness of their inscriptions. Imagine a Satoshi being more than just a sliver of currency; it becomes a canvas for creativity, each with its distinct worth and story.

The introduction of the Ordinals protocol marks a significant innovation. It enables Bitcoin nodes to inscribe data on individual Satoshis, creating Ordinals that can be seen as a form of NFTs directly on the Bitcoin blockchain. This development has sparked a mix of excitement and debate within the crypto community. While some see it as a catalyst for new growth and innovation in the Bitcoin ecosystem, others question its compatibility with the original vision of Bitcoin’s creator, Satoshi Nakamoto.

Differing from previous Bitcoin-based NFTs, which stored data off-chain, Ordinals incorporate their data on-chain, offering a more cohesive and integrated digital experience. This advancement rejuvenates interest in the Bitcoin network and opens new doors for creators and collectors in the crypto space.

We’ll cover how they function, their distinctions from traditional NFTs, and practical insights into using and trading these unique digital assets.


Bitcoin Ordinals Explained: How Do They Work?


So, how do Bitcoin Ordinals work?

In January 2023, the Bitcoin universe expanded with the introduction of the Ordinals Protocol by Casey Rodarmor. This innovation reshaped how we perceive the smallest unit of Bitcoin – the Satoshi. The Ordinals Protocol simplifies the process of linking data, such as text or images, to these Satoshis, transforming them into unique digital assets known as “Ordinals” or “digital artefacts.”

The essence of the Ordinals Protocol lies in its ability to number each Satoshi, giving it a distinct serial number. This numbering is based on the order in which the Satoshis are mined and transferred, creating a chronological sequence. By attaching additional data to these Satoshis, a process termed “inscription,” each Satoshi gains its unique identity, differentiating one from another.

A Satoshi, named after Bitcoin’s mysterious creator, Satoshi Nakamoto, represents one hundred millionth of a Bitcoin (BTC). The ordinal numbering is pivotal, as it tracks the Satoshis and serves as a stable identifier for any data attached to them. This numbering system underpins the concept of Ordinals, giving each Satoshi its unique place in the Bitcoin blockchain.

While Ordinals share similarities with traditional NFTs, there are crucial distinctions. Traditional NFTs typically rely on smart contracts on blockchains like Ethereum or Solana, with the assets often hosted externally. In contrast, Ordinals are inscribed directly onto individual Satoshis on the Bitcoin blockchain, ensuring that they fully reside within the blockchain’s secure and immutable environment. This direct inscription benefits from the simplicity and robustness of the Bitcoin network, devoid of the need for sidechains or separate tokens.


Ordinal Theory and Inscriptions

The concept of Ordinal Theory and Inscriptions is intrinsically linked to the Bitcoin Taproot upgrade, launched in November 2021. This upgrade facilitated the creation of ordinal inscriptions without necessitating a sidechain or a separate token, integrating these digital assets seamlessly into the Bitcoin ecosystem.

Ordinal Theory categorizes Satoshis based on their rarity, ranging from ‘Common’ to the singular ‘Mythic’ Satoshi of the Genesis block. This system adds a layer of fascination for collectors and enthusiasts, as it defines the rarity of each Satoshi, similar to collectible items in the physical world.


Fungible Ordinals: What are BRC-20 Tokens?

bitcoin brc20

In addition to non-fungible Ordinals, the Ordinals ecosystem also introduced the BRC-20 token standard, similar to Ethereum’s ERC-20. This standard allows for the creation of fungible tokens and digital assets on the Bitcoin blockchain, using JSON code inscribed onto Satoshis. While similar in concept to ERC-20 tokens, BRC-20 tokens are somewhat limited in their expressiveness due to the intentionally restricted programmability of the Bitcoin blockchain. Nonetheless, they offer a novel way for users to create and manage blockchain-based assets using their Ordinals wallet.

In summary, Bitcoin Ordinals represent a significant stride in the Bitcoin network’s evolution, merging the foundational elements of Bitcoin with the innovative realm of digital collectibles. This integration adds a new layer to Bitcoin’s functionality and opens up a world of possibilities for users to explore and create within the Bitcoin blockchain.


Bitcoin Ordinals vs Traditional NFTs

ordinals vs nft


The distinction between Bitcoin NFTs and traditional NFTs lies in their novelty, technical design, and principles underlying their valuation.



The most notable difference is in how the assets are stored. Bitcoin Ordinals uniquely identify each Satoshi (or sat) and store content or art directly on the blockchain. In contrast, the prevalent Ethereum ERC-721 standard, used for creating most NFTs, typically includes metadata or pointers to the artwork, which is usually hosted off-chain. While some Ethereum NFTs are exploring on-chain storage, they remain more the exception than the norm.


Rarity and Valuation

The concept of rarity and valuation also significantly diverges between Bitcoin Ordinals and traditional Ethereum-based NFTs. In the Ethereum ecosystem, the rarity and, consequently, the price of an NFT often depend on the attributes of the artwork. Limited edition series, like those from the Ethereum Name Service (ENS), derive their value from their scarcity. However, in the world of Bitcoin Ordinals, the rarity and value are linked to the historical significance of the Bitcoin block in which they are inscribed. Early ordinals, such as the first 1,000 or 10,000, might hold special value for collectors, and the very first Bitcoin ordinal could potentially fetch a high price in the future.

The uniqueness of a Bitcoin Ordinal is determined by the timing of its inscription. For instance, the first Satoshi of every new block is considered rarer than the others in the same block. Similarly, the first Satoshi of each difficulty adjustment period, which occurs approximately every two weeks, is seen as even more rare. With the next Bitcoin halving scheduled for 2024, the first Satoshi of each halving epoch will introduce a new level of rarity.


No Smart Contracts

One of the defining features of traditional NFTs is their reliance on smart contracts for a multitude of functionalities, from creator royalties to digital memberships. Smart contracts are programs that execute specific actions on the blockchain. Bitcoin Ordinals, in contrast, do not employ smart contracts. They can store data but are not designed to execute actions or behaviors through smart contracts. This limits their functionality compared to NFTs but also simplifies their structure.

Another interesting aspect is the rarity linked to adjustment periods, occurring once every six halvings or roughly every 24 years. This system of rarity, as envisioned by the founders of Bitcoin Ordinals, is not controlled by the creators or artists of the tokens but is inherently random and tied to significant events in the Bitcoin blockchain.

This unique approach to rarity and valuation is partly why Bitcoin Ordinals have quickly captured the crypto community’s attention. Observing how the activity around Bitcoin Ordinals evolves, especially as we approach the Bitcoin halving in 2024, will be fascinating.

Further Reading: Could Ethereum-Style Smart Contracts Be Coming to Bitcoin?


Potential Impact of Bitcoin Ordinals: A Balanced View

Bitcoin Ordinals have emerged as a captivating development within the Bitcoin ecosystem. They carry implications that extend far beyond their novel application, potentially reshaping the landscape of digital assets.


Positive Implications: Security, Value, and Innovation

On the bright side, the introduction of Bitcoin Ordinals is seen as a boon for digital assets’ security, decentralisation, and liquidity. By integrating unique data directly onto the Bitcoin blockchain, Ordinals enhance the overall value and functionality of Bitcoin. They bring a new layer of inherent value to the BTC network, as each Satoshi gains a unique identity and potential worth.

This innovation has already attracted a significant portion of the Bitcoin community. Notable examples like ordinal punks exemplify the shift of NFT assets to the Ordinals protocol, reflecting confidence in the technology’s future. The rapid creation of new Bitcoin Ordinals by numerous users suggests a growing belief in the potential and longevity of this approach.


Concerns and Challenges: Functionality, Security, and Network Efficiency

However, not everyone in the Bitcoin community shares this optimism. Concerns range from the limited functionality and constraints on file size to ethical issues. There’s a fear that Bitcoin Ordinals could introduce new cybersecurity risks, such as the possibility of inscribing malware within the nodes.

A critical concern is the potential impact on the Bitcoin network itself. The surge in Bitcoin Ordinals might lead to increased congestion, potentially elevating transaction fees and elongating processing times. This poses a risk of cluttering the Bitcoin network, especially if Bitcoin Ordinals do not realise their anticipated potential, leading to an unnecessary burden on the system.


The Future: Uncertain but Promising

The long-term future of Bitcoin Ordinals remains uncertain, with convincing arguments on both sides of the spectrum. Their impact could either be highly beneficial or detrimental to the Bitcoin ecosystem. On one hand, Bitcoin Ordinals could usher in a new era of digital collectibles and expanded utility for the Bitcoin network. On the other, they might strain the network’s resources without delivering proportional benefits.

As the Bitcoin community continues to navigate these uncharted waters, the ultimate impact of Bitcoin Ordinals will unfold over time. Their potential to enrich or disrupt the ecosystem hangs in the balance, making them a focal point of interest and debate in the crypto space.


Wrapping Up

Bitcoin Ordinals have rapidly carved out a niche in the digital asset landscape, signaling a new era for collectors and creators on the world’s most established blockchain. In just the first four days of its inception, the protocol saw over 100,000 inscriptions, hinting at its immense potential within the web3 ecosystem.

The future of Bitcoin Ordinal inscriptions is vibrant and promising. They offer exceptional value to creators and collectors and secure this value within the Bitcoin blockchain. The challenge and opportunity lie in leveraging their potential while conscientiously minimising their environmental footprint, ensuring that Bitcoin Ordinals remain a valuable and sustainable addition to the digital art ecosystem.


Frequently Asked Questions About Bitcoin Ordinals

What are the risks associated with Bitcoin Ordinals?

One significant concern with the rising popularity of Bitcoin Ordinals is the potential impact on the Bitcoin network. As more data is inscribed onto individual Satoshis, it could increase network congestion. This might result in higher transaction fees and longer processing times, affecting the overall efficiency of the Bitcoin blockchain.


What are different wallets to store Bitcoin NFTs?

To store Bitcoin NFTs (Ordinals), you need a wallet that supports these unique digital assets. Some of the popular wallets include Hiro Wallet, Xverse Wallet, and Magic Eden. Each of these wallets offers different features and user-friendliness levels, so choosing one that aligns with your needs and technical expertise is important.


Do Bitcoin NFTs have separate marketplaces?

Yes, Bitcoin NFTs (Ordinals) have marketplaces like Magic Eden that cater specifically to their trade. These platforms allow users to buy, sell, or trade Bitcoin Ordinals, providing a dedicated space for these unique digital assets. As the Bitcoin Ordinal ecosystem grows, we can expect to see more specialised marketplaces emerging, offering a variety of digital artifacts inscribed on the Bitcoin blockchain.


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