灰度: Can Ordinals Unlock New Potential for Bitcoin

Introduction

Since its inception, Bitcoin has been hailed by some as a revolutionary technology with the potential to transform the way we conduct transactions using a new financial layer. Recently, a new innovation has emerged that could unlock new possibilities for the Bitcoin network to also function as a cultural layer. Ordinals, which refer to NFT-like assets on the Bitcoin network, had their start in December 2022 when Bitcoin developer Casey Rodarmor released the ORD software. Each bitcoin can be subdivided into 100 million smaller units called "satoshis," and while normally these satoshis are fungible, ORD assigns numerical value to individual satoshis, allowing for uniqueness. More specifically, ORD allows users to add arbitrary data to a Bitcoin transaction ("inscription") and tie the data to an individual satoshi ("ordinal"). Ordinals have generated a great deal of attention in the crypto ecosystem, surpassing one million inscriptions on April 8, 2023 (Figure 2), and sparking a conversation about the potential to unlock new possibilities for the Bitcoin network.

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.

Figure 2: Ordinals Count

Source: Dune, @dgtl_assets, as of 4/21/2023

Brief History of Bitcoin Network NFTs

Despite their recent popularity, ordinals are not the first instance of NFTs on the Bitcoin blockchain. Renowned Bitcoin NFT projects, such as Rare Pepe Cards (Figure 3), employed a Layer 2 network known as Counterparty, which was established in 2014. However, Counterparty's Layer 2 infrastructure was criticized for being complicated, which left room for other approaches to take hold. While the Counterparty network may seem less relevant today, it still represents one of the first instances in crypto's history where users created and traded unique digital assets—and arguably could have spurred the mass excitement around NFTs, more broadly.

Figure 3: Rare Pepe Card on Counterparty Network

Source: Rare Pepes

Ordinals stand out among Bitcoin NFT endeavors due to their independence from Layer 2 solutions. Rather than relying on such solutions, ordinals capitalize on previous Bitcoin network enhancements, such as SegWit (conducted in 2017 and increased Bitcoin block size limit to 4MB) and Taproot (conducted in 2021 and added more complex scripting in the witness section of the transaction). Ultimately, ordinals enable data to be directly embedded within the witness segment of a Bitcoin transaction. Ordinals can be composed of almost any type of data, ranging from pictures to videos to applications (Figure 4).

Figure 4: Example of a Bitcoin Ordinal

Source: Doom Clone NFT

Against Convention

As the use of ordinals deviates from the conventional peer-to-peer electronic cash system, numerous criticisms have arisen from those who disapprove of them. Generally, these criticisms can be summarized as follows:

• Straying from Bitcoin's initially conceived purpose: Utilizing the Bitcoin network to store arbitrary data contradicts the primary objective outlined in Satoshi's 2009 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 an electronic currency.

The concerns are valid: the original Bitcoin whitepaper does not account for unique digital assets, extra data contributing to blockchain bloat, nor inscriptions that could reduce fungibility. Still, ordinals are, in fact, a byproduct of utilizing the Bitcoin blockchain as it exists today and the subsequent crypto innovations that have come since, even if not initially envisioned by Bitcoin's creator. And—while the inscription of satoshis does decrease fungibility—it is estimated that it would take around 238 years to mint ~0.24% of the total terminal BTC supply.

Potential Opportunities

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.

Supporting Network Security