Market Byte: Can Ordinals Unlock New Potential for Bitcoin?

Zhao B&W
Michael Zhao
Last Update 04/27/2023
Since its inception, Bitcoin has been hailed by some as a revolutionary technology with the potential to transform the way we conduct transactions using a new financial layer. Recently, a new innovation has emerged that could unlock new possibilities for the Bitcoin network to also function as a cultural layer. Ordinals1, which refer to NFT2-like assets on the Bitcoin network, had their start in December 2022 when Bitcoin developer Casey Rodarmor released the ORD software. Each bitcoin can be subdivided into 100 million smaller units called “satoshis,” and while normally these satoshis are fungible3, ORD assigns numerical values to individual satoshis, allowing for uniqueness. More specifically, ORD, which runs on top of a Bitcoin Core full node, allows users to add arbitrary data to a Bitcoin transaction (“inscription”) and tie the data to an individual satoshi4 (“ordinal”). Ordinals have generated a great deal of attention in the crypto ecosystem, surpassing one million inscriptions on April 8, 2023 (Figure 2), and sparking a conversation about the potential to unlock new possibilities for the Bitcoin network.

Figure 1: Simplified Bitcoin Inscriptions and Ordinals Example

Figure 1: Simplified Bitcoin Inscriptions and Ordinals Example

Source: Grayscale Research

This process effectively creates a Non-Fungible Token (“NFT”) on the Bitcoin network. While some are critical of ordinals, cautioning against bloating the blockchain or harming fungibility, we believe that ordinals represent one of the larger opportunities for Bitcoin adoption, especially as the Bitcoin network has historically been viewed as a rigid blockchain ecosystem. 

Figure 2: Ordinals Count

Figure 2: Ordinals Count

Source: Dune, @dgtl_assets, as of 4/21/2023

Brief History of Bitcoin Network NFTs
Despite their recent popularity, ordinals are not the first instance of NFTs on the Bitcoin blockchain. Renowned Bitcoin NFT projects, such as Rare Pepe Cards (Figure 3), employed a Layer 25 network known as Counterparty, which was established in 2014. However, Counterparty’s Layer 2 infrastructure was criticized for being complicated, which left room for other approaches to take hold. While the Counterparty network may seem less relevant today, it still represents one of the first instances in crypto’s history where users created and traded unique digital assets – and arguably could have spurred the mass excitement around NFTs, more broadly.

Figure 3: Rare Pepe Card on Counterparty Network

Figure 3: Rare Pepe Card on Counterparty Network

Source: Rare Pepes

Ordinals stand out among Bitcoin NFT endeavors due to their independence from Layer 2 solutions. Rather than relying on such solutions, ordinals capitalize on previous Bitcoin network enhancements, such as SegWit (conducted in 2017, and increased Bitcoin block size limit to 4MB) and Taproot (conducted in 2021, and added more complex scripting in the witness6 section of the transaction). Ultimately, ordinals enable data to be directly embedded within the witness segment of a Bitcoin transaction. Ordinals can be composed of almost any type of data, ranging from pictures to videos to applications (Figure 4).

Figure 4: Example of a Bitcoin Ordinal

Figure 4: Example of a Bitcoin Ordinal
Source: Doom Clone NFT
Against Convention

As the use of ordinals deviates from the conventional peer-to-peer electronic cash system, numerous criticisms have arisen from those who disapprove of them. Generally, these criticisms can be summarized as follows:

  • Straying from Bitcoin’s initially conceived purpose: Utilizing the Bitcoin network to store arbitrary data contradicts the primary objective outlined in Satoshi’s 2013 whitepaper, which is for Bitcoin to serve as a “peer-to-peer electronic cash system.
  • Blockchain bloat: Embedding additional data into the blockchain increases its size, making it more challenging to download and some argue that ordinals clutter the blockchain with extraneous information.
  • Compromises fungibility: If a substantial number of satoshis are inscribed, Bitcoin’s fungibility will diminish, potentially affecting its primary use case as electronic currency.

The concerns are valid: the original Bitcoin whitepaper does not account for unique digital assets, extra data contributing to blockchain bloat, nor inscriptions that could reduce fungibility. Still, ordinals are, in fact, a byproduct of utilizing the Bitcoin blockchain as it exists today and the subsequent crypto innovations that have come since, even if not initially envisioned by Bitcoin’s creator. And—while the inscription of satoshis does decrease fungibility—it is estimated that it would take around 238 years7 to mint ~.24% of total terminal BTC supply.  

Potential Opportunities

We believe that ordinals are positive for the Bitcoin network in two key ways: resulting in an increase of Bitcoin miner fees, and potentially contributing to a cultural transformation within the Bitcoin community.  

Supporting Network Security

One of the largest open issues related to Bitcoin’s economic model is the security budget, which is the concern that once all new tokens have been mined, miner rewards derived from transaction activity may eventually prove insufficient to motivate miners to maintain an adequate hash rate for securing the network. The advent of ordinals has led to an increase in total fees paid to miners (Figure 5), which could potentially establish a sustainable baseline level of transaction fees to incentivize miners, thereby ensuring continued network security throughout the lifetime of the Bitcoin network.

Figure 5: Bitcoin Total Fees 

Figure 5: Bitcoin Total Fees

Source: Glassnode, as of 4/21/2023. For illustrative purposes only.

Renewed Developer Excitement

Bitcoin-the largest digital asset by market cap and mainstream awareness-has been criticized by some crypto insiders and developers as a relatively stagnant community and blockchain. Based on the velocity of NFT adoption witnessed on other chains, such as Ethereum, we believe that ordinals have the potential to attract new users who may not have previously considered using Bitcoin. We believe the emergence of ordinals is likely to promote a development-oriented community and culture in support of the Bitcoin network. 

Comparisons to Ethereum’s ERC7218

Since its inception in 2017, the ERC721 standard has been adopted by some of the most well-known NFT collections on Ethereum. While other blockchains use their own standards, it is a natural reference point to compare Bitcoin Ordinals to Ethereum’s ERC721, considering Ethereum NFTs account for nearly 90% of the total NFT market share. Ordinals exhibit several notable distinctions in comparison. 

Features Ordinals ERC721s
Immutability The data inscription for ordinals is immutable.  ERC721s can be either mutable or immutable, depending on the smart contract code.

For an average individual, discerning the immutability of an ERC721 may be challenging without a grasp of smart contract scripting languages, like Solidity.

On-Chain Ordinals’ data must be directly inscribed on-chain, as it cannot reference off-chain content. Ethereum's NFT content can be inscribed either on-chain or off-chain.

Numerous Ethereum NFTs link to external platforms, like IPFS9, which may carry additional risks.

Simplicity Ordinals are less complicated, as they are merely data attachments to transactions assigned to a satoshi, and therefore have a uniform format.  ERC721s are highly programmable and more intricate, given that they are smart contracts. One NFT contract might not necessarily be the same as another NFT contract on the Ethereum network.

Ultimately, ordinals present a straightforward manifestation of non-fungible digital assets due to their immutable nature, absence of programmability, and mandatory on-chain inscription requirements, as opposed to ERC721s. Although Ethereum NFTs boast greater programmability and currently dominate the NFT market in terms of volume and popularity, ordinals could be an appealing alternative for those seeking a straightforward, scarcer digital asset on the most established blockchain available.


Although ordinals are a recent development, they have already amassed over one million inscriptions within a mere four months, even during a bear market. This unexpected surge in popularity may indicate a shift in the broader perception of Bitcoin, despite its reputation as an ossified blockchain. While legitimate concerns exist, we believe that ordinals have the potential to positively impact the Bitcoin network in the longer-term, attracting a new wave of enthusiastic users and developers to embrace the Bitcoin community.

1. “Ordinals” refers to a numbering scheme for satoshis that allows tracking and transferring individual satoshis.

2. A non-fungible token is a unique digital identifier that is recorded on a blockchain, and is used to certify ownership and authenticity. 

3. Fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts are indistinguishable from any other part.

4. The smallest unit of bitcoin; there are 100 million satoshis in one bitcoin.

5. Layer 2 blockchain solutions are protocols designed to function atop a Layer 1 blockchain (such as Bitcoin or Ethereum) with the aim of enhancing scalability, privacy, and other attributes of the foundational blockchain.

6. The witness segment within a Bitcoin transaction is responsible for housing transaction signatures. This information can be converted into accessible content for any Bitcoin node utilizing the ORD software.

7. 500 million inscriptions assuming around 10,000 satoshis per inscription, which equates to approximately 50,000 BTC inscribed or 0.24% of the total terminal supply of 21 million.

8. Ethereum Request for Comments (ERC) 721 is a data standard for creating non fungible tokens, meaning each token is unique and cannot be divided or directly exchanged for another ERC-721 token. The ERC-721 standard allows creators to issue unique crypto assets like NFTs via smart contracts.

9. The InterPlanetary File System is a protocol, hypermedia and file sharing peer-to-peer network for storing and sharing data in a distributed file system. 

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