Market Byte: Can Ordinals Unlock New Potential for Bitcoin?
Michael Zhao
Figure 1: Simplified Bitcoin Inscriptions and Ordinals Example
Source: Grayscale Research
This process effectively creates a Non-Fungible Token (“NFT”) on the Bitcoin network. While some are critical of ordinals, cautioning against bloating the blockchain or harming fungibility, we believe that ordinals represent one of the larger opportunities for Bitcoin adoption, especially as the Bitcoin network has historically been viewed as a rigid blockchain ecosystem.
Brief History of Bitcoin Network NFTs
Figure 4: Example of a Bitcoin Ordinal
Source: Doom Clone NFT
Against Convention
Straying from Bitcoin’s initially conceived purpose: Utilizing the Bitcoin network to store arbitrary data contradicts the primary objective outlined in Satoshi’s 2013 whitepaper, which is for Bitcoin to serve as a “peer-to-peer electronic cash system.“
Blockchain bloat: Embedding additional data into the blockchain increases its size, making it more challenging to download and some argue that ordinals clutter the blockchain with extraneous information.
Compromises fungibility: If a substantial number of satoshis are inscribed, Bitcoin’s fungibility will diminish, potentially affecting its primary use case as electronic currency.
We believe that ordinals are positive for the Bitcoin network in two key ways: resulting in an increase of Bitcoin miner fees, and potentially contributing to a cultural transformation within the Bitcoin community.
Figure 5: Bitcoin Total Fees
Source: Glassnode, as of 4/21/2023. For illustrative purposes only.
[1] “Ordinals” refers to a numbering scheme for satoshis that allows tracking and transferring individual satoshis.
[2] A non-fungible token is a unique digital identifier that is recorded on a blockchain, and is used to certify ownership and authenticity.
[3] Fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts are indistinguishable from any other part.
[4] The smallest unit of bitcoin; there are 100 million satoshis in one bitcoin.
[5] Layer 2 blockchain solutions are protocols designed to function atop a Layer 1 blockchain (such as Bitcoin or Ethereum) with the aim of enhancing scalability, privacy, and other attributes of the foundational blockchain.
[6] The witness segment within a Bitcoin transaction is responsible for housing transaction signatures. This information can be converted into accessible content for any Bitcoin node utilizing the ORD software.
[7] 500 million inscriptions assuming around 10,000 satoshis per inscription, which equates to approximately 50,000 BTC inscribed or 0.24% of the total terminal supply of 21 million.
[8] Ethereum Request for Comments (ERC) 721 is a data standard for creating non fungible tokens, meaning each token is unique and cannot be divided or directly exchanged for another ERC-721 token. The ERC-721 standard allows creators to issue unique crypto assets like NFTs via smart contracts.
[9] The InterPlanetary File System is a protocol, hypermedia and file sharing peer-to-peer network for storing and sharing data in a distributed file system.
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