Reposted Original Title: Instant Understanding of Inscriptions: The Ultimate Guide to Bitcoin Ordinals and Inscriptions

Last year, we witnessed an unexpected trend on the Bitcoin network — a trend that infuriated many Bitcoin purists, surprised them, but also ignited the broader crypto community’s hope and enthusiasm for the industry’s oldest and most secure blockchain.

The discussed trend involves inscriptions, a novel method of engraving data in the form of code, images, audio, and text files onto the Bitcoin blockchain. Each inscription is associated with what is called an ordinal, representing a single, unique Satoshi (sat) — the smallest unit of Bitcoin. The term ordinal comes from the “ordinal theory” proposed by its inventor, Casey Rodarmor, which is a method of tracking and marking individual sats off-chain based on their issuance and transfer order.

Although the Bitcoin community often uses the terms “ordinals” and “inscriptions” interchangeably, it is essential to dispel confusion and note that they refer to two entirely different yet intertwined concepts. In this article, we will explore the technical foundations, fundamental properties, and potential mid-to-long-term impacts of these phenomena on Bitcoin and the wider crypto industry.

Bitcoin Ordinals: A Purely Social Phenomenon

The theory of ordinals was invented, or as its creator Casey Rodamor prefers to say, “discovered,” in January 2023. It focuses on the smallest denomination of Bitcoin, the satoshi (sat), by attributing to them a coin-like value and allowing them to be tracked, traded, and transferred. Bitcoin’s Unspent Transaction Outputs (UTXOs) are set to be unique or non-fungible digital collectibles.

It is crucial to recognize that the theory of ordinals is entirely a social or “off-chain” phenomenon. For anyone who chooses not to subscribe to this methodology, ordinals are indistinguishable from regular satoshis (sats). Indeed, Bitcoin users who do not run the “ord” client cannot see which individual sats have been mined and in what order they were mined, thus they cannot technically identify them as “ordinals,” let alone discern their subjective value.

In a sense, the theory of ordinals offers a different perspective on viewing Bitcoin, or more specifically, the way individual satoshis (sats) are observed. For the vast majority of Bitcoin users, a satoshi is just a satoshi, and all sats hold equal value. However, for ordinal collectors, some sats are considered more unique than others and thus more desirable.

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This is very similar to how numismatists collect coins. While a coin might have a face value of 1 dollar (and can be spent as such), its origin, unique design, minting year, and provenance can affect its rarity and perceived value. Hence, it is not uncommon in numismatics for the trading price of a coin to be thousands of times higher than its nominal value.

Similarly, ordinal collectors might value certain sats over others based on their mining sequence and the order they are transferred from transaction inputs to transaction outputs. For example, the first sat mined after a Bitcoin halving, or the first sat mined after other significant events in Bitcoin such as a hard or soft fork update, may hold special coin-like value to ordinal collectors. Some ordinal collectors might subjectively deem certain sats more exotic than others, such as the first sat they purchased or received, or the first sat mined at the exact time of their birth, marriage, or child’s birth.

Regardless, the reasons for making these or any other sats peculiar are entirely subjective, as they are essentially no different or special than any other sat, except for their position on the blockchain.

Ordinal Symbols and Rarity

Ordinal theory enumerates or constructs ordinals based on different representations:

• Integer notation: Ordinal terms, assigned based on the mining order of sats (satoshis). For example: 2099994106992659;

• Decimal notation: The first digit represents the block height at which the sat was mined, and the second digit represents the offset of the satoshi within the block. For example: 3891094.16797;

• Percentile: The position of the sat (satoshi) in the Bitcoin supply, represented as a percentage. For example: 99.99971949060254%;

• Name: Using characters A to Z for ordinal encoding. For example: satoshi.

In addition to the above representations, each ordinal also has a degree symbol that describes its rarity based on ordinal theory. It

uses four arguments to describe the position of a sat (satoshi) within the blockchain:

• A° – The index of the sat (satoshi) within the block;

• B’ – The index of blocks during the difficulty adjustment period;

• C” – The block index of the halving epoch;

• D’” – The number of cycles.

This method of categorizing sats (satoshis) within ordinal theory provides them with six levels of rarity: Common, Uncommon, Rare, Epic, Legendary, and Mythic. An example of a Mythic sat (satoshi) is the first satoshi of the genesis block, which is the first Bitcoin block mined by Satoshi Nakamoto in 2009. Since all sats mined by Satoshi Nakamoto have never been moved, it suggests that Satoshi Nakamoto either passed away, lost access to the private keys, or never had any plans to sell the bitcoins they mined. Thus, this mythic sat is likely to continue existing and remains unobtainable by ordinal collectors.

An example of an Epic-level ordinal is the first sat (satoshi) of each halving period, which occurs approximately every four years. So far, only three Epic-level ordinals have been mined, and the fourth will come due on April 22. To make things more concrete, the representation of the first Epic-level ordinal, or the first sat mined after the first Bitcoin halving in 2012, is as follows:

Ordinal theory has provided collectors with vast experimental and speculative space. For instance, apart from the rare and legendary satoshis (sats), the Nervos Foundation assumes a willingness to purchase a sat named “nervos” at a price far exceeding its nominal value— if that sat would not have been mined in 2012.

Beyond simply ordering and categorizing sats based on arbitrary rarity, the method used by ordinal theory to track and tag individual sats also allows Bitcoin users to record any data (including text, images, audio, video, and even application files) on a sat, thereby enabling them to be traded as NFTs, thus spawning a new trend of collecting digital artifacts based on Bitcoin.

Contrary to being purely a social phenomenon, inscriptions represent a blend of on-chain objectivity and social consensus. That is, while inscriptions can exist independently (as they are indeed inscribed on the chain and viewable by all full Bitcoin nodes), their association with specific, individual SATs (ordinals) enables them to be traded in the form of NFTs, based on off-chain cataloging methods (ordinal theory), with their recognition depending on social consensus.

What are Bitcoin Inscriptions and how do they work?

Bitcoin inscriptions are a method of embedding arbitrary data (such as images, text, audio, or even software files) within a single satoshi or ordinal. The current form of inscriptions is made possible through two Bitcoin upgrades, SegWit (Segregated Witness) and Taproot.

SegWit was introduced to Bitcoin in 2017 through a software upgrade with the aim of improving its scalability. Specifically, SegWit supports smaller transactions, allowing miners to package more transactions within a fixed block space, and also supports larger blocks (from 1MB to 4MB), enabling more transactions per block. This is achieved by separating the signature or witness data from all other transaction data and moving it to the end of the block as a separate structure. The concept of replacing bytes (data size) with virtual bytes (weight) and recalculating weight is introduced, where witness data counts as 1/4 of the weight units. This means the data in the transaction witness part is “lighter” than regular transaction data by four times, hence mining transaction fees are significantly lower.

The second upgrade, Taproot, was introduced to Bitcoin via a soft fork in 2021 to enhance Bitcoin’s smart contract capabilities, particularly for time-locked contracts used in second-layer network payment channels like the Lightning Network, outlined in the witness data. It removes the size limit on witness data, allowing for more complex scripts to be written in the transaction’s witness part.

While the OP_RETURN opcode could write up to 80 bytes of data even before SegWit and Taproot, the 75% discount on weight units introduced by these updates, along with the removal of the size limit on witness data, inadvertently opened the door for inscriptions as we know them today. The phrase “inadvertently” is used because enabling anything akin to inscriptions was never the goal of the SegWit and Taproot updates. In fact, Bitcoin purists overwhelmingly supported these updates, viewing them as a great and safe way to improve Bitcoin without introducing potential vulnerabilities. Now, they strongly criticize the inscription trend and view it as a negative externality.、

Create an inscription

To create an inscription, first, any data (such as JPEG) is wrapped into a Taproot script and injected into the witness section of a Bitcoin transaction. Since the data is recorded between opcodes as data pushes, and Taproot limits a single data push to 520 bytes, recording larger data files might require multiple data pushes until the desired size is reached.

Next, the inscribed satoshis (sats) are broadcasted to the network through two transactions: a commitment transaction and a reveal transaction. This two-step process is necessary because using a Taproot script (think sending JPEG inscriptions with SATs) requires having an existing Taproot output in the wallet. The commitment transaction is composed of the hash value of the Taproot script (its reference) and creates a Taproot output, whose spending conditions are defined by the script. On the other hand, the reveal transaction spends the input of the commitment transaction by revealing the entire script and creating an output with the sats to be inscribed.

These transactions are then sent to the mempool, where all pending transactions await miner confirmation. Once a transaction is mined, the inscription becomes a permanent part of the Bitcoin blockchain, and anyone can track and view it through custom tools like Ordinals Explorer. Needless to say, ordinal or inscription collectors and traders use tools to summarize all processes, making them easier to understand for a non-technical audience.

Unlike sending regular Bitcoin transactions (or Ethereum NFTs), creating, minting, and tracking inscriptions requires running a proprietary “ord” client on a fully synchronized full node. The “ord” client works in conjunction with Bitcoin Core, allowing users to record individual sats and track them in the UTXO set. Without this client, ordinary Bitcoin wallets cannot differentiate between inscribed and regular sats, leading us to the next point.

Bitcoin Inscriptions and Ethereum NFTs

The core difference between Bitcoin inscriptions and non-Bitcoin NFTs lies precisely in their liquidity or “semi-fungibility” mentioned earlier. From the perspective of the core protocol, the inscribed sats (satoshis) or ordinals are no different from regular sats, meaning they can be used as part of regular Bitcoin transactions or for the payment of transaction fees, even if arbitrary data may retain an attached state. Whether inscribed ordinals are considered non-fungible tokens entirely depends on their owner.

On the other hand, the same does not apply to Ethereum NFTs. Ethereum NFTs are second-class citizens or assets on the Ethereum network, completely different from the native currency ETH of the chain. Like all other non-native Ethereum tokens (most of which utilize the ERC-20 token standard), Ethereum NFTs are established by different smart contracts, typically utilizing the non-fungible token standards ERC-721 or ERC-1155.

Unlike first-class assets such as sats on Bitcoin and ETH on Ethereum, Ethereum NFTs are non-interchangeable, hence called “non-fungible tokens”. NFTs are established through different smart contracts or have a unique TokenID when established through the same contract (part of the same collection), making them easily distinguishable. Moreover, their respective protocols also treat them differently from native assets.

Another major difference between inscriptions and non-Bitcoin NFTs is their entirely on-chain nature. That is, non-Bitcoin NFTs typically only contain a reference pointer to the target file, or in this case, the image itself is hosted elsewhere: cloud servers, IPFS, or file storage blockchains. This means that anyone with access to the server hosting the image can delete or change the file, rendering the NFT useless. On the other hand, inscriptions engrave the actual raw file data directly onto the Bitcoin blockchain, making it immutable.

The last few differences include file size limitations and management or holding requirements. That is, some of the most popular Ethereum NFT platforms, like OpenSea and Mintable, allow uploading file sizes up to 100MB and 200MB respectively, but this only refers to the actual file size, not the size of the on-chain NFT, which only contains pointers. On the other hand, inscriptions are much smaller and can only be as large as the 4 MB block size limit of Bitcoin. Furthermore, NFTs can be viewed, minted, and traded using regular wallets, whereas inscriptions require running the “ord” client on top of a fully synchronized full node.

Inscription’s Impact on Bitcoin

Since ordinal theory and inscriptions were introduced over a year ago, over 60 million inscriptions of all shapes and sizes have been minted on the Bitcoin blockchain. Some of the more popular series, like Taproot Wizards and Bitcoin Punks, have seen floor prices reach over 0.2 BTC, and at some point, Inscription’s total transaction volume exceeded that of NFTs on chains like Solana and Ethereum.

As a result of this accelerating trend, new discussions have emerged about the long-term impact of inscriptions on Bitcoin, including its impact on state size and overall blockchain size, security budgets, transaction fee markets, and miner operations.

Regarding the first issue, on-chain data shows that since the rise of ordinal numbers and inscriptions in March last year, the average block size has roughly doubled, jumping from around 1MB to 2MB. This means that if this trend continues, or even accelerates to an average block size equal to the maximum block size of 4 MB, Bitcoin’s blockchain size will grow two to four times faster in the future. This could significantly slow down the time it takes for a Bitcoin node to fully synchronize with the blockchain and increase the hardware requirements to execute a full node, potentially impacting the decentralization of the network.

The silver lining to this negative outcome is the impact inscriptions have on miners’ income and thus Bitcoin’s security budget. Glassnode data shows that Inscription contributed 15% to 30% of miners’ total transaction fee revenue last year. Interestingly, Inscription transactions account for approximately half of all Bitcoin transactions, paying a significant proportion of the fees while consuming a small portion of the slot block space (measured in bytes) due to SegWit’s witness weight discount.

The huge demand for inscriptions has had a significant impact on miners’ incomes. If this trend continues, the economics of miners will improve significantly, both during the fast-approaching fourth halving and on a longer-term time scale, which will have a positive impact on Bitcoin’s security budget. For the uninitiated, a larger security budget means greater Bitcoin security in absolute terms.

Incidentally, in addition to its impact on the size of transaction fees, Inscription also has an interesting impact on the structure of the transaction fee market. That is, since inscription transactions have a lower time preference than regular strictly financial transactions, inscribers can afford to do it later (after 10-15 blocks) rather than later when the average fee is higher. Fees settled early (in the next 1 to 3 blocks). Differences in economic behavior between inscribers and typical Bitcoin users result in a consistent floor on block space requirements or a consistent price floor on transaction fees, giving miners a level of revenue predictability that did not exist before.

Likewise, inscriptions have led to a significant increase in what miners call over-the-counter transactions. These types of transactions are sent directly to miners rather than broadcast to the entire network. However, since inscribers pay these fees upfront (in order to mint the entire set in a single block at a larger block height), the network may find itself unable to accurately calculate the true need for block space and therefore adjust accordingly transaction fee.

The Influence of Ordinals on Bitcoin Culture

Since the end of the Block Size War in 2017, the rise of Ordinal Theory and inscriptions has been one of the most controversial issues within the Bitcoin community. Naturally, this issue has divided the community into two camps: the Bitcoin “purists” or “maximalists” camp, which strongly opposes using Bitcoin for anything other than peer-to-peer payments, including inscriptions, and the more “internationalized” camp, which wholeheartedly embraces inscriptions as an exciting new development and a positive narrative shift for what was originally considered a “boring” protocol.

The arguments in support of inscriptions include their positive impact on block space demand, miner fees, and the Bitcoin security budget, enabling a broader user base (of completely different scales) to utilize Bitcoin and its value potential, as well as their potential to develop Bitcoin not only as a financial layer but also as a cultural layer, where even the most valuable digital collectibles could be settled.

On the other hand, critics argue that inscriptions are unnecessary and dangerous state bloat that could distract from Bitcoin’s true purpose (peer-to-peer electronic cash) and harm the network’s decentralization by increasing the scale of the chain and the hardware requirements to run a full node. Moreover, Bitcoin purists believe that inscriptions are introducing new values such as high time preference and focusing on speculation and profit rather than ideals, thereby threatening the core spirit of the project.

The manner in which Ordinal Theory and inscriptions have entered the Bitcoin ecosystem could also make introducing new protocol updates more controversial and burdensome than before. That is to say, those who proposed and supported updates like SegWit (Segregated Witness) and Taproot (an upgrade that improves Bitcoin’s script) did not anticipate that they might lead to the rise of things like inscriptions, thereby sounding the alarm on the dangers of introducing any updates to Bitcoin — no matter how safe they might seem initially — in the future.

The Impact of Inscriptions on Non-Bitcoin NFTs

In addition to significantly altering the on-chain structure of Bitcoin, the rise of inscriptions has also had a profound impact on the broader NFT landscape, leading to numerous innovations and changes in user behavior.

Perhaps the most noteworthy are the innovations occurring on the Nervos CKB blockchain, such as the Omiga and Spore protocols. Omiga is a native inscription protocol on CKB that, with the support of CKB’s flexibility and superior programmability, allows for the fair minting of Turing-complete inscriptions that are fully verifiable on-chain (without reliance on centralized indexers). Its utility goes beyond simple meme tokens.

On the other hand, the Spore protocol represents a new standard for NFTs on CKB, establishing an intrinsic link between the content of a token and its value. That is, Spore NFTs are stored in Cells—the basic accounting units on the CKB blockchain (similar to Bitcoin’s UTXO)—allowing users to store arbitrary data by locking a certain amount of CKB tokens within them. When users wish to redeem the intrinsic value of their NFT, they can “melt” it to obtain the underlying CKB that supports it. Moreover, unlike Bitcoin inscriptions, the content held by Spore NFTs can be generative and dynamic, in addition to being fully on-chain.

Disclaimer:

1. This article is reproduced from blocktempo, originally titled “The Ultimate Guide to Bitcoin Ordinal Numbers and Inscriptions,” with copyright belonging to the original author, Block Unicorn. If there are any objections to the reproduction, please contact the Gate Learn team.
2. The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article by the Gate Learn team are not to be copied, disseminated, or plagiarized without mentioning Gate.io.