Bitcoin "Ordinals": From Magic Internet Money to Magic Internet JPEGs

A “Bitcoin Punk" NFT recently sold for 9.5 BTC, roughly $230'000. Bitcoin NFTs have exploded. What's the fuzz all about? How does it work? And will it change Bitcoin forever? A primer.

Feb 22, 2023

A “Bitcoin Punk” NFT recently sold for 9.5 BTC, roughly $214’000.

The “Ordinal Punk” NFT collection, minted on the Bitcoin-native “Ordinals Protocol”, sold out earlier this month and features 100 NFTs in the style of the famous Ethereum-based CryptoPunks collection.

As of now, more than 155’000 Bitcoin NFTs, named “ordinals”, have been minted (“inscribed” is the official term). Growth has exploded and it’s not slowing down.

But wait… I thought Bitcoin couldn’t do NFTs? And what's all that fuss all about, anyway? Today, we’re going to look at:

What are ordinals & how they work, technically
Why ordinals are regarded as “better” NFTs (at least for some)
Why ordinals divide the Bitcoin community
How to find, buy, create, and receive ordinals
The difference between “Ordinal Punks” and “Bitcoin Punks”
Impact of ordinals on miners
Impact of ordinals on NFTs as we know them
What this means for Bitcoin (the big picture)

One thing is clear: It's certainly one of the most exciting developments in crypto recently. Let’s dive in.

What are Bitcoin NFTs, aka ordinals?

“Ordinals” allow users to inscribe (“mint”) files to Bitcoin's blockchain for the first time ever, including images, text, small videos, etc. without a separate token, side chain, or change to Bitcoin’s underlying code.

This is big.

So, how does it work?

“Ordinals” stands for nothing else than a numbering scheme for satoshis, or “sats” (as you know, one Bitcoin contains 100’000’000 sats), that allows individually identifying (via a serial number), and tracking each individual satoshi throughout the Bitcoin coin supply. These numbers are called ordinals.

“Inscribing” means attaching content like an image, text, SVG, or HTML, to individual sats through an inscription transaction. The content is included in the transaction witness, which normally contains signatures and other data proving that a transaction is authorized.1 Notice: While Ordinal numbering scheme has no on-chain footprint, and satoshis are not actually serialized at a protocol level, content is still inscribed on-chain.

You can compare it to painting the exact same image on two $1 bills. They are both unique, as both bills are numbered.

This makes them almost like NFTs. Or even better, some argue. Why?

Ordinals: “Better” NFTs?

Compared to NFTs on other blockchains, ordinals don’t require “off-chain” data, meaning that the file (metadata) is stored on-chain, instead only including a reference pointer to the target file on a separate decentralized server (e.g. on the interplanetary file system, or “IPSF”) like a standard NFT.2

This is why the creator of ordinals, software engineer Casey Rodarmor, refers to them as “digital artefacts”. He writes:

Inscriptions are digital artifacts, and digital artifacts are NFTs, but not all NFTs are digital artifacts. Digital artifacts are NFTs held to a higher standard, closer to their ideal. For an NFT to be a digital artifact, it must be decentralized, immutable, on-chain, and unrestricted. The vast majority of NFTs are not digital artifacts.

This makes Bitcoin ordinals “better” NFTs, according to some, and questions the value of NFTs for which the file is usually not stored on-chain, like on Ethereum or Polygon (even though some projects with on-chain data exist, such as “Moonbirds”).3

And Rodarmor is pretty blunt about it:

“So I basically decided that I can make Ethereum NFTs, but I wouldn’t feel comfortable actually telling anybody to buy them due to security problems and centralization. I was like all right, I guess I have to figure out a way to do NFTs on Bitcoin if I want to make some JPEGs for people to buy.”

It's interesting that this concept makes Bitcoin NFTs theoretically more scarce than Ethereum NFTs. While Bitcoin is limited to 21m BTCs total supply with only 10k inscriptions per BTC (more on that below), Ethereum contracts can create unlimited amounts of NFTs.

Casey Rodarmor even proposed a classification to track rarity levels of ordinals:

common: Any sat that is not the first sat of its block
uncommon: The first sat of each block
rare: The first sat of each difficulty adjustment period
epic: The first sat of each halving epoch
legendary: The first sat of each cycle
mythic: The first sat of the genesis block

And the corresponding supply:

Total Supply

common: 2.1 quadrillion
uncommon: 6,929,999
rare: 3437
epic: 32
legendary: 5
mythic: 1

Current Supply

common: 1.9 quadrillion
uncommon: 745,855
rare: 369
epic: 3
legendary: 0
mythic: 1

Wait, I thought Bitcoin only stores numbers?

Although the official maximum size of a Bitcoin block used to be 1MB, following the 2017 SegWit update blocks can now be much larger (up to 4MB) if data is counted as “witness” data. Ordinals makes use of this by inscribing data in the witness section of a transaction.

According to Denis, the CTO of Blockworks, each inscription is tied to 10’000 stats (=0.0001 BTC) total by default. This is the minimum amount an inscription costs. Additionally, you need to pay for mining fees based on the size of your image.

For the following example, you need to understand what “vB” means. It’s an abbreviation for “virtual byte”. After the SegWit update, each byte in the non-witness part of a transaction counts as 1 virtual byte. Each byte in the witness part of a transaction counts as 1/4 of a virtual byte.

This is a feature of SegWit. By discounting witness data, it makes it cheaper to spend old outputs than to create new ones. This incentivizes shrinkage in the total number of unspent transaction outputs and helps scalability.

Example: At 20 sats/vB mining fee (this varies) you pay 4000 sats (0.00004 BTC) for every kilobyte. This means a 1kb image will cost 0.0001 BTC + .00004 BTC = 0.00014 BTC. For a 10kb image this would be 0.0014 BTC in total.

A divided Bitcoin community

The rise of ordinals sparked much controversy and philosophical discussions among the Bitcoin community and even among the Bitcoin maxis themselves.4 The two main arguments are:

Ordinals are pointless and “waste” blockspace for more important uses of the network, e.g. Bitcoin as a global reserve currency or settlement layer
Ordinals introduce potentially destabilizing incentives for mining consensus (cf. chapter “Impact on miners”).

At this point, the more moderate Bitcoiners are supportive of the trend, arguing that whatever helps the Bitcoin network to be alive and innovating, is a positive thing.

Meanwhile, the Bitcoin maxis are divided in two camps:

The “purists”, who argue that anything that crowds out blockspace for “normal” Bitcoin transactions is bad for the network and goes against Satoshis initial vision “peer-to-peer electronic cash”. Bitcoin should not become a “general purpose world computer”, like Ethereum.5
The other camp are the “neutralists”, arguing that whatever happens within the existing rules of validity of the network, can happen. The Bitcoin network is neutral. No one has the authority and morality to decide over “legitimate” or “illegitimate” uses of Bitcoin.

Tyler Odean, aka knifefight, lays out the more neutral perspective:

To some Bitcoiners this is sincerely offensive — like graffiting a sacred monument or filling up the seats on a lifeboat with stuffed animals because you find it funny. I can appreciate why people are defensive about Bitcoin because I share the belief that it is profoundly sacred. But I also think it is robust and I think it is harder than it might seem to sort "legitimate" use from "illegitimate" and impossible to assign that responsibility to anyone while preserving Bitcoin’s unique properties.

In his Tweet, Nic Carter shows the divides between the Bitcoin maxis: 6

nic carter 🌠 @nic__carter

Shows hypocrisy of fundamentalist camp: “Btc is for everyone!” “No don’t use it like that” “Free markets, not rulers” “pls follow my rules, the market is wrong” “Ossification now” “umm hang on might need to update something” “Btc has no culture, no leaders” “pools pls listen..”

What can we learn from this?

Debates about Bitcoin's purpose and philosophy are as old as the protocol itself (e.g. the block size wars a few years ago).
The Bitcoin community is far less united around the purpose of Bitcoin than it appears. It is remarkable that a relatively straightforward, novel use-case for Bitcoin is questioning the widely accepted fundamental premise that Bitcoin is the most robust, resistant to change, and original cryptocurrency, and sparking debates about what Bitcoin should be. This could be a sign of the importance of ordinals or/and a lack of alignment among Bitcoiners on the purpose and ideology of the network. The network is only as strong and stable as its community.
It’s not yet clear how the debate will unfold. I sense that if the adoption of ordinals continues at the current pace, more serious debates might yet unfold.

How to find, buy, create, and receive ordinals

We’re still early. Ordinals exploded less than a month ago and the tools to properly and easily store and trade them are still being built.

The UX is still a bit cumbersome compared to interacting with traditional NFTs, but it is improving rapidly. Let’s dive in.

Disclaimer: I’m not affiliated with any of the services mentioned below. New services are popping up on a daily basis and technical details are in flux. There are still many quirks that can cause you to lose your assets. Please use those tools and experiment at your own risk.

Step 1: Set up a wallet

Ordinals don’t work with Ethereum wallets like MetaMask. You must set up a Bitcoin wallet that allows enough customization to receive Ordinal inscriptions. For now, you have several options: Ordinals wallet or Sparrow wallet. XVerse wallet recently announced its support for ordinals as well, so did Hiro wallet.

For now, I recommend you to use the Ordinals wallet as it’s very easy to set up.

Ordinals Wallet

The Ordinals wallet is a browser-based wallet that was released last week. Just head over their webpage and start setting up your wallet. The set-up process works like you know it from any other crypto wallet. For now, you can view, store, receive and send ordinals.

Here’s a screenshot of the interface once you’ve set it up:

Sparrow wallet

Sparrow wallet is a desktop application that requires a handful of steps to make it compatible with Ordinals. Sparrow is a great wallet but you need to create a new address every time you get a new ordinal.

To start, go to Sparrow wallet.
Click on the download link associated with your computer’s operating system.

Once you’ve downloaded Sparrow, follow this detailed tutorial on Github to make an Ordinal-compatible wallet. Here’s a alternative video explanation of how to set it up.

Attention: This wallet apparently does not allow to send ordinals. If you send BTC from this new wallet, you may accidentally send both your BTC and your ordinal(s). I’m still investigating this.

Step 2: Create an ordinal

Now that you have your wallet set up, you have two options for creating an ordinal:

1) Run a node and inscribe an ordinal yourself.

At this point, if you don’t have a node already, this is a fairly technical procedure and not recommended for newbies.

2) Use a service to inscribe an ordinal without running your own node

Several services already offer direct minting of ordinals:

The Satoshibles NFT collection team has created Ordinals Bot, which will inscribe an ordinal on your behalf.
Gamma also has an Ordinal inscription service.

Here’s a helpful step-by-step guide from the XVerse team of how to inscribe an ordinal through Gamma and then send it to an XVerse wallet. Instead of using an XVerse wallet address, you could also use any other Ordinal wallet address.

The whole process won’t take you more than a minute.

Be aware: Minting costs are much higher than Ethereum, up to several hundred dollars, depending on the transaction size. As transaction over 100 kvBytes are considered non-standard, miners are often paid directly off-chain to include the “ordinal” transaction in a block.

Step 3: Find Ordinals to buy

The Ordinals market mainly exists on Discord right now, with OTC, peer-to-peer transactions, with an individual doing the escrow service. So a great deal of trust and caution is required to proceed.

To find Ordinal projects, join the Ordinals Discord channel
On the “link-your-project channel” you can see what projects are out there
In that channel, collection creators link their Discords where you can buy their ordinals.

Meanwhile, the first two ordinals marketplaces have popped up:

1. Ordinals Market

2. Scarce City

Step 5: Sending & Receiving ordinals

Sending ordinals is already possible. The safest way to send and receive ordinals right now is the Sparrow or the Ordinals wallet. Here’s an example of someone sending an ordinal from Ordinals wallet to another wallet.

Be aware:

If you accidentally transfer one of your sats that make up your ordinal, it is lost.
If you’re receiving ordinals, you need to create a new bitcoin receiver address with your wallet for every ordinal. So make sure you do that if you want to receive an ordinal.
You also need to be mindful of whether you send it to a SegWit or a Taproot Bitcoin address. Apparently, it’s quite challenging to get your ordinal back on Taproot once it’s on SegWit, unless you cooperate with a mining pool operator into letting you make a 0 fee UTXO.7

Buying advice: Don’t confuse “Bitcoin Punks” with “Ordinal Punks”

At the moment, two different punk collections exists:

“Ordinal Punks”: A collection of 100 NFTs, original looks based on the Ethereum CryptoPunks style. 8
“Bitcoin Punks”: A collection of 10’000 NFTs, a 1:1 replica of the Ethereum CryptoPunks.

“Bitcoin Punks” are much cheaper than the “Ordinal Punks”. Currently, Bitcoin Punks are traded on the two marketplaces mentioned above, while Ordinal Punks are traded over their Discord channel. Bid and asks are documented on this Google Sheets file, and sales are facilitated by a trusted community manager.

It’s still early.

Impact of ordinals on miners

The whole Bitcoin ordinals boom could have serious implications for miners, as it changes network usage, block space, and fees.

The first impact of ordinals is an increase in the Mempool. The Mempool is a list of all unconfirmed transactions waiting to be added to the blockchain.

At the same time, transaction sizes and mean block sizes increased significantly:

Generally, the more transactions compete for blockspace (= the larger the mempool), the higher the transaction costs. However, the Bitcoin average transaction fee has not increased significantly since January, even though they’re on an upwards trajectory.

NYDIG did an excellent analysis on that and explains this with the assumption that some transactions might be included by direct coordination with miners.

NYDIG argues:

This could have important implications for miners. First, miners could receive increased fee revenue associated with Ordinals transactions, ones not directly observable from the block chain. Second, the appearance of non-standard transactions bifurcates fee markets, creating one which is visible to users through the mempool and blockchain, and another which is opaque and conducted directly between users and miners. This type of market structure may have unintended consequences, such as fee volatility or make judging appropriate fees more complicated. The flipside is that it may create for a more robust fee market, one that Bitcoin will increasingly need as the block subsidy declines and transaction fees are required to secure the network.

In short: While the impact of ordinals may not be directly visible with higher average transaction fees, ordinals might provide miners with additional fee revenue in the future. We’ll have to wait and observe to make definitive conclusions.

Impact of ordinals on NFTs

At this stage, Bitcoin ordinals are still fairly primitive. They don’t support collections, aren’t programmable and can’t have traits, unlike other NFTs blockchains like Ethereum or Polygon. Due to their limited size of 4MB, which is imposed by the maximum transaction size, they can’t store large image files, videos or 3D animations.

So, are ordinals worthless then? Just fun to play around with?

I don’t think so.

Why do some people argue that ordinals are “better” NFTs? Because they are "inscribed" on the oldest, most respected, most decentralized, most secure blockchain in the world.

Just think about it: Has there ever been a more secure and affordable way of transporting a digital file through time and space than as an ordinal? I don’t think so. It’s not your computer's hard drive. It’s not Dropbox, or Google drive. It’s not a platform, such as Instagram. It’s not your cloud provider, such as Google Cloud or AWS. It’s certainly not a government.

And of course, with all those solutions above you’d lose the point of creating a NFT in the first place (ownership & scarcity).

Thus, if you optimize for permanence, security, and decentralization of your NFT, Bitcoin ordinals might be your first choice.

This is why I expect this to be especially interesting for artists creating 1:1 art pieces that need to outlast generations. As certain edge cases wander off to Bitcoin, this could induce an interesting power shift away from the Ethereum NFT monopoly.

A major advantage of Bitcoin over other chains is its simplicity and consistency. So are ordinals. They’re simply digital artifacts.

Here’s a good overview of the current pros and cons of the different chains:

Chainleft @ChainLeftist

8. False: We already have Ethereum NFTs, it’s stupid to care about inscriptions. True: Each chain has its own security & risk assumptions. Ordinals & Inscriptions have an elegant & simple design, which is definitely an advantage for them, but Ethereum has better tooling today.

A pivotal moment for Bitcoin

Bitcoin has experienced multiple narratives in its 14 years of history. From “peer-to-peer electronic cash” to “digital gold”, “private & anonymous darknet currency”, “store of value”, “global settlement layer”, “payments network”, or “uncorrelated digital asset”. None of them changed Bitcoin.

Rather, those narratives contributed to the fascination with this technological experiment.

The rise of ordinals is insofar significant as it's the first time Bitcoin could transition from a “currency-only” technology to something more. This narrative won't change Bitcoin either, but it might mark a pivotal moment in its history.

Bitcoin is technology and technology is what people see in and make out of it. If ordinals inspire people to do more, so be it.

Eventually, ordinals or not, Bitcoin is “either going to change everything, or nothing”.9

Onwards.

– Marc

Artwork: Inscription #488