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Executive Summary
- Ordinals are a way to attach information like pictures, text, or videos to a Satoshi, the atomic unit of Bitcoin. They enable the creation of Bitcoin NFTs originally.
- Ordinals have garnered significant market attention since the launch of the protocol in January 2023. At the time of writing, 63 million inscriptions have been minted on the Bitcoin network, generating ~6,370 bitcoin-worth (~US$430 million) of fees. Some notable developments of Bitcoin Ordinals are:
- Inscriptions were mostly image-based in the early days to create NFTs. Text-based inscriptions became dominant since the launch of BRC-20.
- BRC-20 is a token standard to enable fungible token transfers on the Bitcoin network via inscribing JSON data (text structure) to Satoshis through the Ordinals protocol. BRC-20 tokens reached a market cap of US$2.6 billion (at the time of writing), representing a significant development on Bitcoin, but also received criticisms around network congestion.
- Subsequent improvements have been introduced, including recursive inscriptions, Atomicals (separate from Ordinals), and the Jubilee upgrade.
- Ordinals have sparked debates amongst the community. Supporters believe the protocol has expanded the use cases of Bitcoin. Yet, it also made Bitcoin deviate from its original purpose as a peer-to-peer system of money transfer.
- Due to BRC-20’s existing shortcomings, Casey Rodarmor (the creator of Ordinals protocol), proposed Runes in September 2023. It aims to be a UTXO-based fungible token protocol.
- By being UTXO-based, Runes is more compatible with Bitcoin’s native model and expected to reduce ‘junk’ UTXO creation, reduce the on-chain footprint, and promote better user experience.
- Runes is scheduled to launch during the upcoming Bitcoin halving in April 2024. There are already protocols and NFT projects launched that leverage Runes’ potential. While Runes has created certain excitement in the community, its adoption currently remains uncertain.
1. Development of Bitcoin Ordinals
1.1 What Are Bitcoin Ordinals?
The Ordinals protocol, developed by Casey Rodarmor, aims to give each Satoshi (smallest unit of Bitcoin) a distinct numerical identity. It enables Satoshis to be tracked, transferred, and imbued with individual meanings through inscriptions.
Inscriptions are the metadata added onto Satoshis. They contain information attached to transactions. The Ordinals protocol assigns each Satoshi a sequential number, in the order they are mined. Satoshis can be inscribed with data — such as pictures, text, or videos — through a Bitcoin transaction. This allows one Satoshi to be different from another, hence becoming non-fungible and enabling the creation of Bitcoin NFTs. This process is on-chain and does not rely on sidechains, smart contracts, or tokens other than Bitcoin.
The Ordinals protocol was launched on the Bitcoin mainnet in January 2023 and has quickly gained popularity. In fact, at the time of writing, 63 million inscriptions have been minted on the Bitcoin network since launch, generating ~6,370 bitcoin-worth (~US$430 million) of fees.
In this report, we explore several key developments in the Ordinals protocol, as well as its significance and controversies.
1.2 Overview of Development
Ordinals represent one of the recent significant developments in the Bitcoin blockchain. It expanded the use cases of the Bitcoin network and explored new sources of demand for Bitcoin blockspace. Casey Rodarmor, the creator, described this protocol as kicking off “an era of fun and innovation on Bitcoin.”
Early Development and Projects on Ordinals Protocol
Ordinals theory provides a numbering system for Satoshis (sats), according to the order they were mined. Additionally, the orders of sats are associated with their rarity which can be identified as “common”, “uncommon”, “rare”, “epic”, “legendary”, or “mythic”.
- 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 (every 2,016 blocks)
- Epic: The first sat of each halving epoch (every 210,000 blocks)
- Legendary: The first sat of each “cycle”, when the difficulty adjustment period and halving coincide which happens every six halvings
- Mythic: The first sat of the genesis block
As a result, Bitcoin token holders can track and identify the rarity of their sats. A market has also been created where these uncommon or rare sats are traded.
Soon after, with inscriptions, a new numbering system began starting from 0, numbering each inscription in the order they were inscribed. The genesis inscription (#0) was a pixel art of a skull, created by Casey Rodarmor. This was inscribed on sat #1252201400444387. With this, there are two levels of numbering, and hence rarity – sats number and inscription numbers. Apart from the numbers, market attention slowly shifted to the content or images inscribed on sats. Since the protocol launched in January 2023, it has garnered much market attention with cumulative ~150,000 inscriptions in one month, according to Dune. Inscriptions were mostly image-based (or digital artefacts) in the early days for creation of NFTs.
Some of the earlier projects on the Ordinals protocol included Taproot Wizards, OnChain Monkeys, and Ordinal Punks, which is a collection of 100 punks that pays tribute to CryptoPunks, the NFT collection on the Ethereum blockchain.
As the Ordinals protocol continues to develop, it has gained support from more exchanges and marketplaces. For example, in March 2023, Yuga Labs, the company behind Ethereum-based NFT Bored Ape Yacht Club, auctioned its first NFT collection based on the Ordinals protocol, TwelveFold, generating 733 bitcoin-worth of revenue (US$16.5 million at the time of auction). Sotheby’s had its first auction featuring Bitcoin Ordinals in December 2023, representing a heightened awareness of Bitcoin NFTs.
These NFT projects saw a spike in prices after launch, and also sparked discussions on the potential of Bitcoin NFTs. On the contrary, they also raised concerns and debates on the usage of the Bitcoin network given potential network bloating.
While inscribing images were the mainstream in the earlier days, text-based inscriptions became dominant with the launch of BRC-20.
BRC-20
The launch of the Ordinals protocol laid the foundation for the development of BRC-20. It was created by Domo, an anonymous on-chain analyst, in March 2023, and was initially developed as an experimental standard to create fungible tokens on the Bitcoin blockchain.
BRC-20 is a token standard that inscribes JSON data (text structure) to Satoshis, which contains the token’s basic information (for example, token ticker and maximum supply). It enables functions including token deployment, minting, and transfer on the Bitcoin blockchain, and is designed as a ‘fungible’ token standard, which means tokens are interchangeable.
The image below shows an example of the JSON script for the deploy, mint, and transfer functions for the first BRC-20 token, ORDI. Deployments establish that the token exists, but they do not automatically provide the creator with any tokens. To hold the token, the mint function is needed. The script below would ‘mint’ an amount of 1,000 tokens. Transfers deduct from the sender’s balance and add to the receiver’s balance – a new inscription needs to be created on-chain – and the transfer inscription is sent to the receiver’s address.
While inspired by Ethereum’s ERC-20, BRC-20 differs, as it does not have smart contract capabilities. The Bitcoin protocol only recognises the transfer of Satoshis instead of the inscriptions.
Hence, BRC-20 needs a separate database to recognise and register the transactions, called indexers. They are centralised and off-chain to maintain the wallets and their balances of BRC-20 tokens. Indexers are crucial to the BRC-20 market, as they help to prevent problems like duplicated tokens or tokens minted over the set limit.
BRC-20 information is stored in JSON (a text format), which is turned into a serial number and inscribed onto Satoshis. This serial number is then inserted into the witness field (or signature field) of the Bitcoin transaction, verifying ownership and ensuring authenticity.Although it was experimental, the BRC-20 standard took off shortly after its launch with text-based Ordinals overtaking image-based as the dominant form. As of the date of writing, BRC-20 tokens have a total market cap of US$2.6 billion and account for over 70% share in Bitcoin transactions at the peak.
While BRC-20 has represented a significant development, it has also received criticisms.
- Increase in overall network transaction fees: BRC-20 fees reached their peak in December 2023, which also coincided with a spike in Bitcoin transaction fees. Bitcoin weekly median transaction fees were 199 sat/vb in the week of 11 December 2023, reaching a two-year peak since April 2021.
- Network congestion: Rodarmor, the creator of the Ordinals protocol, raised that the BRC-20 standard is not based on unspent transaction outputs (UTXOs), which led to the problem of ‘junk’ or unused UTXO proliferation.
Use of indexers: Centralisation of indexers remains a weakness: If major indexers acted maliciously or faced technical issues, it would be detrimental for the protocol. Moreover, some inscriptions were not identified by the indexers, and hence were named as ‘cursed’ and marked with negative numbers as a temporary solution.
Recursive Inscriptions
Recursive inscription — the ability of inscriptions to access on-chain data and use content of other inscriptions — was a development on the Ordinals protocol in June 2023. Prior to this, inscriptions were independent of one another, with a block size limit of 4 MB.
As the idea of recursion is introduced, inscriptions can call and use data from existing code packages to create new inscriptions. This saves block space, as duplicates are reduced. This daisy-chaining mechanism effectively allows inscriptions to surpass the 4 MB limit, opening up possibilities for Bitcoin blocks to carry higher-quality files and expand use cases. At the time of writing, there were ~460,000 recursive inscriptions.
OnChainMonkey was the first to launch a 3D NFT art collection with recursion, named OnChainMonkey Dimensions.
Atomicals Protocol (ARC-20)
Atomicals Protocol focuses on minting, transferring, and updating NFTs (referred to as digital objects by Atomicals) for UTXO blockchains, such as Bitcoin. Released in September 2023, it introduced the ARC-20 fungible token standard in which Satoshis represent ownership units of deployed tokens — every unit of the token is backed by 1 Satoshi forever. For example, if a project wants to mint 100 million tokens under direct minting, the team would have to put up 1 Bitcoin to substantiate the tokens (since 1 Bitcoin = 100 million Satoshis). This gives each token an inherent value, which by definition, can never go below the value of 1 Satoshi.
Atomicals is separate from the Ordinals protocol and aims to improve upon the BRC-20 standard. One of the key differentiations is that ARC-20 is based on Bitcoin’s UTXO, which aligns more closely with Bitcoin’s model and reduces creation of ‘junk’ transactions. There is also no need for an off-chain ledger, given it adopts a UTXO model.
At the time of writing, ~2.0 million atomicals have been minted. The top ARC-20 token, ATOM, has a market cap of US$128 million.
Recent Developments: Jubilee Upgrade
The Jubilee upgrade in January 2024 on the Ordinals protocol mainly aimed to address the issue of ‘cursed’ inscriptions, which were not recognised in the protocol and marked with negative numbers as a temporary solution.
This upgrade sparked a debate amongst the Bitcoin developer community. Domo, creator of BRC-20, initially suggested that BRC-20 should not follow the upgrades of the Ordinals protocol due to potential introduction of disruptions and complexities to BRC-20 users. On the other hand, UniSat, an Ordinals and BRC-20 wallet and marketplace, expressed that it would follow the upgrade. At that time, it implied a potential split in BRC-20 (Domo’s version freezed at version 0.9 and UniSat’s upgraded version). Shortly after, Domo announced an agreement with UniSat and other parties for BRC-20 to follow the Ordinals protocol’s Jubilee upgrade, marking an effort to ensure consistency for the token standard. In March 2024, Domo announced his nonprofit organisation, Layer 1 Foundation, will partner with UniSat and Best In Slot (Ordinals aggregator and explorer) to be the “lead maintainers” of BRC-20. This collaborative effort would potentially support the growth of Ordinals and beyond.
1.3 Significance and Controversies
The Ordinals protocol and the related BRC-20 token standard have sparked other debates within the Bitcoin and broader crypto community, as well. Let’s explore some of the significance and controversies:
Significance
- Expansion in use case: Ordinals enable the on-chain creation of NFTs and ‘fungible’ tokens, expanding Bitcoin’s use case beyond a digital currency. They created interest in the Bitcoin user and developer community, and may open up further applications, for example DeFi.
- Bitcoin native: Inscriptions are always on-chain, which makes them traceable. At the same time, inscriptions are immutable, which means the creator or owner could not modify them after creation. These make Ordinals and inscriptions unique compared to similar concepts launched on other blockchains.
- Simplicity: BRC-20 tokens utilise a streamlined tokenisation mechanism that eliminates the requirement for complex smart contracts. This simplicity enables straightforward token minting and transfer, making them accessible to a wider range of users without necessitating specialised technical knowledge.
- Increased miners’ revenue: Ordinals and BRC-20 transaction fees have significantly contributed to Bitcoin transaction fees during the BRC-20 hype period, becoming a new source of revenue for miners.
Controversies
- Deviation from Bitcoin’s original purpose: The Ordinals protocol has added complexities to the Bitcoin network beyond its purpose as a peer-to-peer system of money transfer when it was first created by Satoshi Nakamoto.
- Network congestion and high transaction costs: Ordinals introduced more activities of higher transaction sizes on the Bitcoin network. Some accuse inscriptions as “exploiting a vulnerability in Bitcoin Core to spam the blockchain.” The BRC-20 standard, which is not UTXO-based, is also criticised for creating ‘junk’ UTXOs, causing potential network congestion.
- Use of centralised indexers: BRC-20 uses off-chain, centralised indexers, which creates vulnerabilities to the system. Moreover, ‘cursed’ inscriptions were created because some inscriptions were not identified by the indexers.
2. Introduction of Runes
2.1 Overview
Runes protocol was proposed by Casey Rodarmor, the creator of the Ordinals protocol, in a blog post published in September 2023. It aims to be a UTXO-based fungible token protocol, which allows issuance and management of tokens on the Bitcoin network.
“Creating a good fungible token protocol for Bitcoin might bring significant transaction fee revenue, developer mindshare and users to Bitcoin,” Rodarmor wrote in the same blog post. Runes is aiming to launch at the time of Bitcoin halving (840,000 block), which is estimated to be sometime in April 2024.
Mechanism of Runes
The Runes protocol issues and tracks tokens using UTXO, which is also the native model of Bitcoin used in tracking transactions on the network. This is in contrast to BRC-20 which adopts the account model and is not compatible with Bitcoin’s standard, hence requiring the use of centralised indexers mentioned previously. From this point of view, Runes protocol is more native and decentralised.
In addition, balances of runes are directly held by UTXOs, and a UTXO can hold any amount of runes. With Runes, no “junk” UTXOs are created, the mechanism is more efficient and reduces on-chain footprint.
Transactions are marked in protocol messages using OP_RETURN followed by a data push of uppercase letter R. Issuance or transfer transactions are specified in the subsequent data push. Invalid protocol messages will result in the burning of runes.
- OP_RETURN is a script opcode in the Bitcoin network that marks a transaction output as invalid and is provably unspendable. Moreover, it allows storage of 80 bytes of data in transaction output.
- Data push is the way to add data to a transaction’s script, which specifies how to process the transaction.
The figure below illustrates how the Runes protocol would work for issuance and transfer transactions:
- Transfer is specified by the first data push in a protocol message, which would assign runes from the original source to one or more new UTXOs.
- Issuance is specified by the second data push. The token supply will be assigned to a UTXO.
2.2 Pros and Cons of Runes
Pros
- Interoperability with Bitcoin’s architecture: Runes’ UTXO-based model integrates well with the native Bitcoin architecture, which enhances security. In addition, UTXO enables Runes to be compatible with the Lightning Network, expanding its potential use cases.
- Better UTXO management: Runes’ UTXO-based model improves compatibility, hence reducing blockchain bloat and the on-chain footprint. Moreover, Runes was designed with responsible token management in mind, where invalid messages would result in burning of runes.
- Simpler user experience: Runes is designed to operate without the need for off-chain data or native tokens. This is different from other protocols; for example, RGB requires off-chain data, and BRC-20 requires use of ordinary theory for certain operations.
Cons
- Require BRC-20 users to re-adapt: Despite having the same developer as the Ordinal theory, Runes’ design approach is quite different from BRC-20. It is uncertain whether BRC-20’s current acceptance, from both users and developers point of view, would extend to Runes once it is launched.
- Lack of standard framework: There wasn’t a clear technical framework when Runes was first proposed. Since then, there has been a rise of protocols launched (not related to Casey Rodarmor), which include Pipe (a separate UTXO protocol inspired by Runes), as well as RSIC and Runestone (Bitcoin NFT ‘rune’ projects). Though these projects have attracted market attention, it also reflects potential divergence in the Runes ecosystem.
2.3 Runes vs ARC-20 vs BRC-20
Both Runes and ARC-20 are developed to address some limitations of BRC-20 due to its account-based model. The table below summarises the pros and cons of the three protocols:
2.4 Notable Runes-Related Protocols
Pipe: Inspired by Runes and BRC-20, Pipe is a UTXO-based token protocol launched on Bitcoin in September 2023. Created by BennyTheDev, the creator of Tap protocol (Bitcoin Ordinals protocol supporting OrdFi), Pipe enables users to deploy, mint, and transfer tokens on the Bitcoin network. It aims to improve upon Runes by providing fair minting (equal chance to acquire tokens). $PIPE was the first token launched on Pipe.
Rune Specific Inscription Circuit (RSIC Metaprotocol): RSIC Metaprotocol is a project combining Ordinals with yield farming, consisting of 21,000 Bitcoin NFTs featuring runic symbols, with 90% of the NFTs airdropped to selected active Ordinals wallet addresses in January 2024. After activation, NFT holders can earn “runes (token to be issued on Runes protocol once the protocol is live, note that it is not an official token launched by Casey Rodarmor). At the time of writing, RSIC has a floor price of 0.089 BTC.
Runestone: Runestone is an NFT project led by founder of ord.io platform (@LeonidasNFT). In March 2024, Runestones were airdropped to Bitcoin addresses holding three or more non-text inscriptions before block height 826,600 (one year anniversary of Ordinals). Prior to the airdrop, Runestone #63,140,674 was auctioned for ~8 BTC (US$544,000 based on price during auction). Similar to RSIC, Leonidas mentioned that Runestone would be “converted” into a token launched on the Runes protocol once it’s live. At the time of writing, there are 112,384 Runestones, with a floor price of 0.058 BTC and a total transaction volume of 24 BTC.
2.5 Outlook of Runes
Although Runes has yet to launch — it’s set for sometime in April 2024 – it has created great interest in the community based on the appeal of Casey Rodarmor and the Ordinals team’s work. Rodarmor mentioned that the first 10 Runes would be deployed with fair and open mints, and started a poll to collect name suggestions in February 2024. The token names will be 12 characters or more during initial launch, and gradually shorter ones will be unlocked where projects would have to pay fees to acquire these names.
As discussed above, various projects were already launched with linkage to the Runes protocol, showing the community’s excitement to build on the protocol. By aligning itself with Bitcoin’s UTXO model, Runes is expected to be an improvement over the existing BRC-20 standard, promoting better user experience and efficiency, with the potential to trigger a new wave of innovation in Bitcoin.
3. Conclusion
Ordinals represent a significant development in the Bitcoin ecosystem. They created additional utility on the Bitcoin network through enabling creation of NFTs and tokens. The BRC-20 token standard was a key driver for the Ordinals protocol, and since its launch, has laid the foundation for the development of more tools and infrastructure (e.g., wallets, competitor protocols). However, Ordinals and BRC-20 also received a fair amount of controversy. Part of the community believes Ordinals has caused Bitcoin to deviate from its intended purpose as a peer-to-peer transfer mechanism. They have also caused network congestion and given rise to the Runes protocol, which aims to resolve that.
Although Runes is yet to launch (April 2024) and adoption is uncertain, the community is excited about the protocol. This is evident from seeing protocols inspired by Runes launched, as well as NFT projects that promise users an airdrop of a future token to be launched on Runes. Runes is designed with a simpler design and better user experience in mind, and the community expects it to be an improvement over the existing BRC-20 standard.
With these developments from Ordinals, BRC-20, and subsequently Runes, we have seen continuous innovation in the Bitcoin ecosystem, and the potential to, as Casey Rodarmor puts it, “make Bitcoin fun again.”
Read the PDF version of the report: Bitcoin Ordinals Development and Introduction to Runes
Authors
Crypto.com Research and Insights team
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