Ordinals, or Bitcoin NFTs, stormed the market last month.

While the first Ordinal was created on December 14, 2022, Ordinals only became popular in February 2023. ~350,000 Ordinals have been created so far. Images were the most trending type initially, but Text became more popular later. Image and Text collectively represent 99.4% of minted Ordinals right now, where Image accounts for 62.8% and Text adds up to 36.6%.

Yuga Labs also recently completed its TwelveFold auction, netting 735 BTC (~$16.5 million). TwelveFold is a limited edition, experimental collection of 300 generative art pieces on the Bitcoin blockchain. The highest bidder paid 7.12 BTC (~$161,000).

So what are Ordinals exactly? And is it too late to ape in now?

What are Ordinals?

In December 2022, Casey Rodarmor, a bitcoin developer, released an open-source software called ORD that runs on top of a Bitcoin Core full node. ORD allows users to mint Bitcoin NFTs in two steps: 1) engrave arbitrary information such as a string of text or an image onto the Bitcoin blockchain (“inscription”), and 2) attribute that inscription to an individual satoshi ("ordinal/ordinal theory"). Satoshi is the smallest unit of Bitcoin. 1 BTC = 100,000,000 satoshis. The end product, an inscribed satoshi, is a Bitcoin NFT or an Ordinal.

Inscriptions

During an inscription, arbitrary information is engraved into the taproot script of a bitcoin transaction's witness data. Unlike minting Ethereum NFTs, where every new NFT created is a separate ERC-721 token, inscriptions do not create new tokens. Instead, they bind arbitrary information to existing tokens (satoshis).

Inscriptions are made possible because of two Bitcoin updates, Segregated Witness (SegWit) and Taproot. SegWit took place in July 2017 and increased the size of witness data. Taproot was finalized in November 2021, making inserting arbitrary witness data in a bitcoin transaction easier.

An inscription consists of a content type, also known as a MIME type, and the content itself, which is a byte string. The inscribed content is fully on-chain and stored in taproot scripts.

For example, an inscription of the text "Hello, world!" looks like the following:

1 OP_FALSE
2 OP_IF
3      OP_PUSH “ord”
4      OP_1
5      OP_PUSH "text/plain;charset=utf-8"
6      OP_0
7      OP_PUSH "Hello, world!"
8 OP_ENDIF

Source: Ordinals Docs

First, the string

ord

is pushed, to signal that what follows is an inscription based on ORD.

OP_1

Indicates that the next push contains the content type, which is an utf-8 text string. Other types include image (jpeg, gif), video (mp4), application (pdf), etc.

OP_0

Indicates that subsequent data pushes contain the content itself, which is "Hello, world!" in this case. Multiple data pushes can be used for large inscriptions, as one of taproot's few restrictions is that individual data pushes may not exceed 520 bytes. The theoretical maximum size of an inscription is 400,000 bytes, because it is possible to make an inscription transaction that takes up an entire bitcoin block (4MB, but in practice, Bitcoin Core limits this size to 400,000 bytes).

The inscription content is contained within the input of a bitcoin transaction, and the inscription is tied to the first satoshi of its first output. This satoshi can then be tracked according to the ordinal theory, allowing it to be transferred, bought, sold, lost to fees, and recovered.

One of the controversies raised by inscriptions is that using the taproot script to store arbitrary data was not the intention of the Taproot update. The Taproot update probably would not have been activated if the bitcoin community had known about this unintended consequence. However, there's nothing that can be done now to limit this particular use of the taproot script. So Ordinals (Bitcoin NFTs) are here to stay.

Ordinals (Ordinal Theory)

Ordinal theory ascribes arbitrary features (inscriptions) to satoshis and allows tracking and transferring individual satoshis. But it is not a complicated mechanism. Rather, it is a simple numbering scheme for satoshis.

Satoshis are numbered by the ordinal theory according to two rules.

First, ordinal numbers are assigned to satoshis in the order in which they are mined. For example, the first satoshi in the first bitcoin block (the genesis block) has ordinal number 0, and the second has ordinal number 1.

Because of Bitcoin's UTXO model, satoshis exist as unspent outputs, but transactions destroy outputs and create new ones. Ordinal theory tracks satoshis from the inputs of a transaction to its outputs based on the principle of first-in-first-out, which is rule #2.

For example, the following transaction has three inputs and two outputs, all labeled with their respective values:

[2] [1] [3] → [4] [2]

Source: Ordinals Docs

Now let's label the same transaction with the ordinal numbers of the satoshis that each input contains, and question marks for each output. Ordinal numbers are unimaginably large, so let's use letters a-f to represent them in this example:

[a b] [c] [d e f] → [? ? ? ?] [? ?]

Based on the rule of first-in-first-out, the question marks are easy to figure out:

[a b] [c] [d e f] → [a b c d] [e f]

What about fees, you might ask? Good question! Let's imagine the same transaction, this time with a fee of two satoshis. Transactions with fees send more satoshis in the inputs than are received by the outputs:

[2] [1] [3] → [4]

As a result, the satoshis "e" and "f" now are lost in the outputs because they go to the miner who mined the block as transaction fees:

[a b] [c] [d e f] → [a b c d]

According to ordinal theory, fees paid by transactions are treated as extra inputs to the coinbase transaction, and are ordered how their corresponding transactions are ordered in the block. The coinbase transaction of the block, assuming it only contains one transaction, looks like this:

[SUBSIDY] [e f] → [SUBSIDY e f]

Here SUBSIDY means block rewards, i.e., the bitcoins (satoshis) given to the miner of that block. The numbering of the SUBSIDY follows rule #1, which states that ordinal numbers are assigned to satoshis in the order in which they are mined.

While inscriptions (images, videos, etc.) are fully on-chain, ordinals are not. The connection between an inscription and an individual satoshi (ordinal) is established by the ordinal theory, an off-chain numbering scheme. In other words, social consensus, or general acceptance of the ordinal theory, is required for ordinals to exist. Inscriptions cannot be tracked or traded without the ordinal theory, as inscriptions do not point to individual satoshis automatically.

For more detailed explanation on the history of Bitcoin NFTs and the technical details of Ordinals, I highly recommend Illegitimate bitcoin transactions by pourteaux or this whitepaper by Galaxy Research.

Ordinals Outlook

The Built-in 1000x

Ordinals will be at least as big as Ethereum NFTs.

Bitcoin market cap is 2.3x that of Ethereum. Its influence and outreach is much more than 2.3x that of Ethereum. Ethereum NFTs have proven their product-market-fit and became a billion-dollar industry. Even if Ordinals only achieve 50% of what Ethereum NFTs have accomplished, it will be just as big. Although smart contract functionality is limited on Bitcoin, meaning fancy plays such as NFT staking or gaming are not possible for Ordinals, the immutability and security of Ordinals guaranteed by Bitcoin cater to their own audience.

There are controversies around Ordinals among hardcore bitcoiners, mostly centered around Ordinals being deviated from the primary purpose of the bitcoin blockchain - a peer-to-peer electronic cash system. However, as discussed briefly in the Inscriptions section, Ordinals are here to stay. While there could be future updates to the bitcoin blockchain that adjust certain parameters (e.g., increasing the cost to mint ordinals), it is extremely unlikely that inscriptions will be banned.

Sources vary when they estimate the market cap of Ethereum NFTs at the moment. Galaxy Research arrives at $16.9 billion (with a base case of $11.7 billion). NFTGo's estimate is $22.75 billion. DegenKnows's calculation turns out to be a massive $47.24 billion.

Ordinals are collectively worth tens of millions at most at the moment. To catch up, that's a built-in 1000x.

Infrastructure vs. Individual collections

ERC-721 was proposed in January 2018 and finalized in June 2018. Ordinals right now are like August 2018 for Ethereum NFTs.

The prime opportunities at the moment are the infrastructure players, namely, marketplaces and wallets, the OpenSea and MetaMask of Ordinals.

A couple of weeks ago, traders had to rely on a Google Doc to buy and sell Ordinal punks, which shows you how early we are and the lack of necessary infrastructure for Ordinals.

Over a dozen of Ordinals marketplaces have emerged. Ordinals Market seems to be leading the race at the moment, but it is based on existing Ethereum infrastructure, while others opt for bitcoin native solutions. Other big players include Ordswap and Ordinals Wallet. OpenOrdex is an upcoming project worth keeping an eye on because it is fully open-source and 100% trustless and has gained traction among the community. If Magic Eden wants redemption, Ordinals are a good choice.

A few Ordinals marketplace projects have launched tokens already, such as Ordinal BTC ($oBTC) and ordinex ($ORD). I would stay away from such projects that release a token before having a functional product.

On the wallet side, Sparrow, Electrum and Xverse are the most popular among Ordinal traders because they offer UTXO selection.

Frankly speaking, MetaMask is a terrible wallet for Ethereum NFTs. So the opportunity is bigger there. After conquering Bitcoin Ordinals, the one wallet could move on to take over Ethereum NFTs.

On the other hand, I am rather bearish on the already-released collections. Except for one (Yuga's TwelveFold), maybe two collections, all the other ones will be replaced by newer collections when the technology is more mature, and the community grows bigger. In August 2018, while CryptoPunks is already a year old, BAYC and Azuki are still years away, although the timeline is shortened as people already know where to go.

The market is like a baby who always prefers shiny new toys. Ethereum blue-chip collection emerges every 1-2 months, think Penguins (July 2021), Doodles (October 2021), Clone X (Nov 2021), Azuki (Jan 2022), etc. The opportunity is ample. Don't get fixated on an OG collection that might be picked up later. They won't. Mooncats dates back to CryptoPunk days, launching on Ethereum in Aug 2017. Does anyone care about it now?

Read more: https://tokeninsight.com/en/research/analysts-pick/what-are-btc-ordinals-are-they-ape-able