By Rajagopal Menon
Bitcoin, the unrivaled titan of cryptocurrencies, has recently witnessed a burst of energy with the introduction of the ordinals protocol. This groundbreaking development has ignited fervent debate within the Bitcoin community, injecting a fresh dimension into the digital currency. So, what exactly are ordinals? Why are they causing such a stir? And what implications could they hold for the future of Bitcoin?
To fully grasp the significance of ordinals, let’s start with a basic understanding of Bitcoin’s structure. As most Bitcoin enthusiasts are aware, each Bitcoin is composed of 100 million satoshis, or SATs. Ordinals, however, revolutionise this notion by enabling the individual transmission of SATs with the option to attach supplementary data. This data can take various forms, ranging from text and images to videos. This process of associating data with SATs is known as inscription. Impressively, over 100,000 inscriptions have already been created since the inception of ordinals earlier this week.
The name “ordinals” stems from the protocol’s unique approach to numbering sets based on the order of their mining. Among these 100,000-plus inscriptions, notable examples include ordinal punks and ordinal penguins. Given the Bitcoin and broader crypto communities’ proclivity for embracing and expanding on novel ideas, it is only reasonable to anticipate an influx of innovative and derivative concepts etched onto SATs. Crucially, these advancements have been made possible by the recent major upgrade to Bitcoin known as Taproot, which was implemented in late 2021.
But are these ordinals akin to NFTs (non-fungible tokens) on the Ethereum platform? The answer is both yes and no. While some distinctions can be drawn between ordinals and the familiar NFTs, the comparison holds merit. It is worth noting, however, that NFTs rely on smart contracts and often have their underlying assets hosted elsewhere, whereas ordinals are directly inscribed onto individual sets within blocks on the Bitcoin blockchain. In the press release accompanying their launch, as cited in Bitcoin magazine, it was emphasised that “ordinals are fully on-chain and do not require a side chain or separate token. Inscriptions inherit the simplicity, immutability, security, and durability of Bitcoin itself.” Furthermore, Casey Rodimore, the creator of ordinals, elucidated in an interview with Decrypt that “the ordinals protocol is just a system for numbering satoshis, giving individual sets a serial number, and then tracking them across transactions.”
Essentially, ordinals have unveiled a new use case for the Bitcoin network, extending its utility beyond the mere transfer of value. Inscribed sets now compete for block space alongside regular BTC transactions, leading to an increase in network fees. While this might not sound ideal, it is crucial to remember that these fees serve as vital incentives for miners to secure the network. As block rewards diminish over time, network fees will inevitably become the primary reason for committing hash power to Bitcoin. In this context, ordinals contribute additional functionality to Bitcoin.
According to Glassnode, ordinals have not only propelled the number of non-zero Bitcoin addresses to a record high of 44 million but have also ushered in a novel and unique chapter in Bitcoin’s history. This innovation generates network activity without necessitating the classical transfer of coin volume for monetary purposes. Consequently, the user base has expanded, exerting upward pressure on the fee market beyond the conventional investment and monetary transfer use cases.
However, not everyone in the Bitcoin community agrees with this innovation. Adam Back, CEO of Blockstream and about as OG as they come, sees ordinals as a “frivolous waste of block space” and objects to “the sheer waste and stupidity of an encoding” that does not do anything efficient. This disagreement sums up the divide in the Bitcoin community, with some fervent and non-toxic Maxis like Adam and others believing that Bitcoin’s relative simplicity and limitations to storing and transferring value should be preserved at all costs, while more progressive voices argue that Bitcoin needs to adapt in order to thrive and survive.
This fundamental argument is unlikely to be resolved anytime soon, but one thing is for sure: ordinals are generating a lot of attention and debate within the Bitcoin community. This is a welcome change from the FUD that has been clouding the industry, and we can expect to hear more about ordinals and their impact on Bitcoin in the months and years to come.
The author is vice-president, WazirX
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