17.04.2024
Ordinals seek to print uniqueness in every satoshi, creating a sense of ownership and significance engraved by the inscription.
Less than 100 years ago, in 1933, US President Franklin D. Roosevelt enabled Executive Order 6102, ordering the seizure of all forms of gold (coins, bullions, and certificates) from the population, claiming that accumulation of gold in private property was against the public interest of economic recovery during the Great Depression. This move was prompted by the US government's requirement that at least a 40% gold reserve be held to back the emission of new currency. Basically, to increase the circulating money supply and stimulate the economy, the Federal Reserve should have control and a monopoly on gold.
In the same year, 445,500 gold coins were minted, yet following the order, the coins never went into circulation and were finally melted, except for 20 coins stolen before their final fate that found a way to change hands over the years. This is the 1933 St Gaudens $20 “Double Eagles” story, an intricate series of events involving a thief, a king, a war, the US Secret Service, and a long legal battle to finally become the most valuable coins in history.
Source: Coin World
The birth of inscriptions on digital gold.
Within the bitcoin blockchain, a satoshi is equal to 0.00000001 BTC (one hundred millionth of a bitcoin). The Ordinal Protocol creates a method for tracking individual satoshis and identifying it by assigning a number to each one. The protocol therefore makes identifying individual satoshis and following them throughout transactions possible. Now, an inscription of data can be made on a unique satoshi that can be found regardless of how many transactions it went through using its ordinal identifier. This data inscription (images, text, video, and even small programs) can be traded, simply by sending the satoshi as a normal bitcoin transaction and it is owned by holding it in a wallet. Note that in this article we use the words ordinal and inscription interchangeably, but to be clear: An ordinal tracks where an inscription is in the bitcoin blockchain.
The Ordinals Protocol can be implemented thanks to the upgrades of SegWit and Taproot, respectively. The SegWit upgrade introduced the split data structure for bitcoin transactions, which significantly improved transaction data efficiency. The post-SegWit Bitcoin transaction data structure consists of two parts: transaction data, which contains details of the sender, receiver, inputs, and output, and witness data, which includes cryptographic signatures and scripts. It replaced the 1 MB max block size per transaction and increased the size to 4 million weight units per block (without going into detail, this means that the new theoretical maximum block size is 4 MB, but non-witness data takes on more weight units, lowering the MB limit based on the particular composition of transactions forming a block).
The Taproot soft fork was activated in late 2021, and the upgrade removed several SegWit-era constraints on the maximum per-transaction witness data footprint. Considering these two upgrades that made it possible to inscribe satoshis, the Ordinals protocol, launched in 2023, made it possible to track them across the blockchain seamlessly and defined them in the form we know today. Since then, the number of transactions involving ordinals has risen rapidly.
Source: Glassnode
Unlike non-fungible tokens (NFTs) typically found on ethereum, Solana and other Layer 1s, ordinals are directly embedded in the blockchain, eliminating the need for separate storage methods. This integration enhances the permanence and security of the inscription: For example, if you inscribe an image on a satoshi, every individual pixel of this image is stored in the witness data of the satoshi’s transaction, which is mirrored by tens of thousands of bitcoin nodes. This means that deleting this image from bitcoin is impossible: It will stay in the blockchain forever. On the other hand, NFT images (and other media) are usually saved on a server, often run by Amazon & co., and linked to by the NFT. This means that while the link itself is a permanent inscription in ethereum, there is the risk of the media itself being swapped or deleted against the will of the NFT owner.
This permanence of bitcoin ordinal inscriptions does result in higher creation costs and transaction fees. Furthermore, it severely limits the size of media that can be made into an inscription: Most ordinals are below 100 KB, while a photo taken by a new iPhone can easily weigh more than 2 MB. Try squeezing a 2 MB high resolution image into one bitcoin block, with your one transaction taking half the space of all the thousands of transactions occurring in the 10 minute block time! You’d have to offer the miners a fortune in transaction costs to prioritize your transaction over thousands of lighter ones that may be offering tens of dollars worth of bitcoin or more each. As a reference: The author of this article created an ordinal of a photo cropped and shrunk to sub-100 KB in December 2023 and had to pay more than 400 dollars worth of bitcoin for a chance for the inscription to be picked up by miners within 24 hours. Once you feel like storing a high-resolution video on a blockchain, you might as well go back to traditional NFTs.
Building concerns around ordinals.
The introduction of inscriptions has resulted in a surge in block space demand, leading to mempool congestion and increased transaction fees. Given the limited block size, bitcoin miners must prioritize transactions based on fees, giving precedence to those willing to pay a higher price.
Source: Glassnode
Bitcoin's blockchain efficiently handles high-value transfers with minimal data and cost, while inscriptions, on the other hand, tend to consume significant data and transfer low-value information. This increase in competition for block space pushes up the fees both for inscription, as well as for the monetary transactions bitcoin was originally intended for, impacting the entire network - in the eyes of many - negatively.
Source: Dune, Bitcoin Magazine
As a result, there has been a push by a faction of the bitcoin community to reverse the “bug” of inscriptions that was introduced by the SegWit and Taproot forks, by introducing another soft fork limiting the usage and size of the witness section. Given this debate of disabling (the current form) of inscriptions there is one speculative aspect to be taken into account at this particular time: Should the naysayers be successful in their mission, it would likely give a boost to all the ordinals that were minted pre-”prohibition”. These survivor ordinals will be around forever, and unlike the remaining Double Eagles, they cannot be molten down.
Our take on these concerns is that they are misplaced, as aiming to make transactions directly on the bitcoin network cheaper is besides the point: An on-chain bitcoin transaction will never be cheaper than its proof of stake’s counterpart. Bitcoin, at its core, is a slow, expensive, very decentralized, very secure store of value. As explained in our recent Bitcoin: A Paradox of Finitude and Infinity article, mining will likely continue smoothly well into the time when the block reward goes down to zero, and the reason for this is the transaction fees that will be paid to miners forever. Developments like ordinal inscriptions increase the demand for on-chain transactions even in a world where most of the monetary bitcoin transactions move to the lightning network and similar Layer 2 solutions (where they may well beat their proof of stake counterparts in terms of costs and speed), giving miners a more attractive pay for the unchanged security groundwork they do below all the fancy innovations that take place on top.
Drivers of ordinal value.
The 1933 St. Gaudens $20 "Double Eagles", made illegal in a time of economic uncertainty, valued for their rarity, and highlighted by the battles over their ownership, are some of the most valuable and fascinating pieces in coin collecting history.
One of the famous Double Eagle coins was purchased by King Farouk of Egypt. After a decades-long saga involving government attempts to reclaim it, an undercover operation, and a long and costly legal battle, the coin that remained in the King’s hand was eventually legitimized by the US government and sold at an auction in 2002 for a record-breaking price of 7.59 million dollars. Many other of these coins didn't have the same fate, as the US authorities repossessed them, and there may be a few still floating around the black markets of this world. In any case, King Farouk’s specimen was resold yet again in 2021 for the proud sum of 18.9 million dollars.
Like physical coins with a numismatic value, ordinals find their value in what makes them unique. Being unique is the feature that transforms the value attached to a satoshi into something much higher than one hundred millionth of a bitcoin. Of course, as with everything crypto: It paid to be early. The eighth ordinal ever created sold for 10.4 BTC in December 2023.
And this is what it looks like:
Source: Ordiscan
Today, if we look at the popular ordinal marketplace ordinals.market, we see that most “trending” collections still look like lower-quality ethereum NFT rip-offs.
Source: ordinals.market
What this means is that there is an opportunity to get truly creative with ordinals: Yet another cartoon animal likely won’t do the trick, but imagine an artist inscribing her journaling into bitcoin each day. Imagine an activist in a repressive state engraving his statements, or controversial images exposing those in power, into the bitcoin blockchain indelibly. Or how about a set of parents storing their daughter’s drawings over the years as inscriptions? Those may be worth exchanging millions of satoshis for just one, special one.