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Ask CryptoVantage: WTF are Ordinals?
In the hypergrowth world of blockchain technology, Bitcoin remains an outlier. It is not because it was the first, not because it is perceivably the most valuable, or even because it is one of the only blockchains to still utilize a proof-of-work consensus mechanism. Instead, Bitcoin remains an outlier because there are very few changes to the Bitcoin network.
This is by design. Bitcoin, as a means of exchange, a unit of accounting, and a long-term store of value, relies on its fundamentals staying the same. A way to demonstrate this is knowing that if someone bought bitcoin in 2013, slipped into a coma for 10 years and then woke up in 2023, the architecture of Bitcoin would not have changed.
Other blockchains embrace the hypergrowth disruptive nature of the technology. Ethereum famously borrows Facebook’s ethos of “move fast and break things.” Use cases for blockchain technology and tokenization have exploded in recent years as a result. The rise of DeFi, NFTs, and gameFi are but some examples.
These use cases are often railed against by the Bitcoin maxi community, labeling anything outside Bitcoin’s value transfer as an altcoin with no value. This is what makes the introduction of ordinals so interesting.
What Exactly are Ordinals?
The ordinal protocol allows for sending individual satoshis (also known as sats) with the option for additional data attached, including text, photos, and videos. This is known as inscription because the additional data is inscribed directly onto the satoshi it is attached to. This is different from the creation of NFTs on other blockchains, which are created as independent tokens.
The creation of Ordinals was made possible by the 2021 Taproot upgrade. It improved security on the Bitcoin Network through the use of Schnorr signatures. These signatures allowed different Bitcoin inputs to be scrambled and appear the same while also reducing the amount of data required to make them. This made the introduction of ordinals possible, as any transaction moving an ordinal will appear the same as every other transaction.
The first Ordinals were launched in January 2023 by Casey Rodarmor and quickly surpassed 100,000 inscriptions by the middle of February.
Benefits of Ordinals
The obvious benefit to Ordinals is that they are attracting a new wave of users to Bitcoin. On the blockchain though, Ordinals help fill blocks. This is important because while the block reward for their service mainly incentivizes miners, they also receive a small fee for each transaction.
As the mining rewards go down over time, transaction fees will begin to make up more of their incentive to keep mining blocks. Therefore, ensuring that each block is filled will become increasingly important as rewards decrease. Ordinals are a way to help add utility and demand to the Bitcoin Network.
Drawbacks of Inscribing Ordinals
People in the Bitcoin community have raised a few main drawbacks to Ordinals. The first issue is contrary to adding value to the blocks to incentivize miners. Adding more utility to each satoshi will increase the number of transactions trying to make it into each block. This will create a bottleneck, slow down the time it takes to send transactions, and increase the cost of doing so. It is similar to the high gas fees witnessed on Ethereum prior to The Merge to proof-of-stake.
The second main issue raised over Ordinals is about attaching a form of non-fungible value to sats on the Bitcoin blockchain. If Bitcoin’s primary goal is to be peer-to-peer electronic cash, then it is critical for it to maintain the properties of money.
Properties that make good money are durability, portability, recognizability, stability, and fungibility. Money needs to act as a medium of exchange. For it to do this successfully, its fungibility needs to remain intact. One satoshi needs to equal the exact same as every other 99,999,999 satoshis within each of the 21 million bitcoins that will be mined.
Adding additional information to a sat potentially may impact a single sat’s value and undermine the whole system as a result. It could make it more difficult for people to move satoshis with attached ordinals or incentivize them to hodl them for long periods.
In addition to incentivizing users to hodl sats with ordinals attached, ordinals could attract the unwanted attention of over-zealous regulators. If users are hodling sats because of ordinals in anticipation of their price going up over time, regulators may be able to prove that they can be classified as a security and not a commodity through the Howey Test.
Summary: A New Conversation
In the slow-paced Bitcoin ecosystem, ordinals have provided a breath of fresh air. Controversial and polarizing, to say the least, they have stimulated dialogue and asked bitcoiners some difficult questions on the future of the protocol. Bitcoin Maximalists want the network to remain pure, with each sat’s only value coming from being a means of peer-to-peer electronic cash.
It is also important to acknowledge that the valuations of most NFT projects on other blockchains came crashing down over the last year. This begs the question if they are adding much value at all. Does inscribing ordinals onto a blockchain make a difference, or will their valuations continue to lag until they add more utility.
One sat still equals one sat for accounting purposes. Each has the same value in relation to its fractional makeup of 1 BTC. Each sat is one one hundred millionth of 1 BTC. And so far, nothing changes that.
After all, Bitcoin is for everyone. It does not care about your race, religion, sex, or even if you are involved in other blockchain projects. Bitcoin continues to run on hundreds of thousands of computers, and the more users utilizing Bitcoin, the closer it is to reaching mass adoption.
Yet, something feels different about the introduction of Ordinals. Innovation from ordinals may attract many new users, but some are asking at what cost?
