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What Is The Bitcoin Ordinals Protocol? How Do They Work?

By February 27, 2023February 28th, 20234 minute read

A new project in the crypto sector has developed a method for tracking individual Satoshis on the Bitcoin blockchain, effectively enabling Bitcoin NFTs. This project has given Bitcoin a new use case.

This project, directed by a former developer for Bitcoin Core named Casey Rodarmor, is simply a protocol for allocating numbers to specific Satoshis so that they can be monitored and transferred precisely. The lowest unit of Bitcoin that is suitable for use in transactions is the Satoshi, which represents one hundred millionths of a single Bitcoin. The Ordinal protocol makes it possible for Non-Fungible Tokens (NFTs) to operate directly on Bitcoin’s blockchain by allowing users to assign whatever content to a Satoshi they please.

In this blog, let’s learn about Bitcoin Ordinals and how they work.

What are Bitcoin Ordinals?

Bitcoin Ordinals use an open-source protocol that gives each individual Satoshi (Sats) a distinct identity. The smallest units of Bitcoin are called Satoshis, named after the creator(s) of Bitcoin, Satoshi Nakamoto. The protocol adds data to these Sats and allows Ord software users to follow them using an Ordinal numbering scheme.

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At a high level, this essentially gives each Satoshi a numerical value based on a number of factors. These factors include the time when Satoshi was mined into circulation as well as the precise block height where Satoshi first appeared.

Users can track each Satoshi using software called Ord. Additionally, the system embeds content within them to produce digital artifacts specific to Bitcoin.

These specifically identified Satoshis can be traded and transferred by users exactly like any other standard Bitcoin unit. Yet, the digital item itself is exclusively stored on-chain and not anywhere else on the internet, unlike Colored Coins or the majority of Ethereum NFTs.

This functionality would not be feasible on Bitcoin without the implementation of SegWit and Taproot, two soft fork updates that helped raise Bitcoin’s block capacity,

Advantages of Bitcoin Ordinals

  • Representing art, culture, and money. Casey explains that old forms of money were intertwined with art and culture. In the olden days, money was in the form of carved beads and art. Ordinal inscriptions are its modern representation.
  • Filling market demand. Casey brings up the immense popularity of NFTs. He believes that Ordinals provide the right product-market fit.
  • Onboarding users to the Bitcoin network. Casey opines that Ordinals can attract more users to use Bitcoin.

How do they work?

The Ordinal protocol is divided into two parts:

Ordinal theory: It is the process of allocating Satoshi numbers for tracking, transferring, and assigning value.

Inscription: The method of using the Ord software to link content to a Satoshi based on the unique number that the software gives. The Ord software links to content to real Satoshis, but it does this by using a system of numbers exclusive to the Ord software.

Ordinal theory

Ordinals provide a way to give each of the 2.1 quadrillion Satoshis that will ever be produced a unique identification value.

Each Satoshi has a unique numerical value that serves as its serial number. This serial number is generated by the system based on how that Satoshi relates to other periodic events that take place on the Bitcoin blockchain, such as:

  • Blocks: Approximately every ten minutes, batches of transactions are committed to the Bitcoin blockchain. Blocks are the most popular event that Ordinals use to determine their numerical value.
  • Difficulty adjustment periods: The Bitcoin protocol modifies its mining difficulty goal based on the computational power required to sustain the network every 2,016 blocks (about every two weeks). This is known as the hashrate.
  • Halvings epochs: The system reduces the quantity of new Bitcoin entering circulation by half after every 210,000 blocks (about every four years). Since the beginning of Bitcoin, three halvings have occurred.
  • Cycles: Every six halvings, simultaneous difficulty adjustment and halving take place, which is known as a conjunction. Since halvings only happen every four years, conjunctions happen every 24 years. Conjunctions are the least frequent event that Ordinals track, and the time between conjunctions is known as a cycle.

Ordinals develop a method for tracking the comparative rarity of Satoshis using these events.

Ordinals create a mechanism to turn inherently fungible Satoshis into non-fungible items by giving each one a unique identity. They are entirely unique due to this identifier, just like NFTs.

Ordinal inscription

“Inscription” is the act of committing a piece of content to a Satoshi. Ord is used for this operation, and the Ordinals explorer can be used to read the inscriptions.

The system identifies the content by its MIME type (whether it is a JPEG, MP3 file, HTML code, etc.) and a byte string (the content itself). There is no necessity that inscriptions represent a Non-Fungible Token (NFT). Also, users can develop new assets, such as security tokens based on Bitcoin.

Ordinal inscriptions are totally stored on-chain in a taproot transaction’s script. Many of the most common NFT collections on the Ethereum blockchain differ from this process. Typically, NFT media content is stored off-chain on the Ethereum blockchain, with only a record of the NFT remaining on the network.

Only a handful of NFT collections store both the media and the NFT directly on-chain, with CryptoPunks being the most well-known of these.

The blockchain stores content alongside a particular Satoshi due to this inscription process. As a result, each Satoshi becomes a different digital asset that users may trace, transfer, keep, purchase, and sell.

Final thoughts

The full impact of Ordinals is still rising, but one thing is sure: both Ethereum and Bitcoin blockchain fans are enthusiastic about the new possibilities that these digital artifacts provide.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With knowledge of SEO and Content Writing, she knows how to win her content game!

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