Non-Fungible Tokens (NFTs) rose to popularity in 2021 alongside major NFT projects like CryptoPunks and Bored Ape Yacht Club. Opensea, a major online NFT marketplace, saw monthly transaction volumes peaking at $5B in January of 2022. The rise in popularity of NFTs coincided with the Bitcoin/crypto bull market in general. After their initial rise to popularity in 2021, NFTs had a very tough year in 2022 alongside the Bitcoin/crypto bear market cycle. Opensea saw monthly transaction volumes decline 94% from their January peak to just $303 million by October. 

The shocking drop in popularity of NFTs in 2022 led many to believe that NFTs were dead. I was among that camp. I have been skeptical about NFTs since their introduction because of the design flaws that most NFT projects have. Specifically, two major flaws I see in the design of most NFTs are:

1. The image file (usually a JPEG) of the NFT is not stored on the actual blockchain; rather the NFT just contains a link that points to an outside server where the image file is hosted. That server may go offline, become compromised, or restrict access, destroying the original image file that the token references. The image file should reside on the same blockchain as the NFT token. When the image is stored on the blockchain, the economic incentive to keep the image alive aligns with incentives of the NFT token holder. 

2. Nearly all NFTs are built on centralized, unreliable blockchains that are prone to censorship like Ethereum, Solana, and Polygon. These blockchains offer very little in terms of security assurances. Instead, the NFT token should echo the same Cypherpunk principles of Bitcoin; censorship resistance, privacy, and self sovereignty. The NFT should have an infinite life, with a history that can’t be altered. That is what makes the NFT actually valuable as a collectible. 

I have not seen any NFT projects created with the “right” design principles; until the Ordinals project was launched in January 2023.

How Ordinals and Inscriptions Work

Ordinals are a system for assigning a serial number to a specific Satoshi. The serial number that is assigned to the specific Satoshi is known as that Satoshis Ordinal number. 

Since it’s known that the supply cap of Bitcoin is 21 million, and there are 100 million Satoshis per Bitcoin; it follows that there will be a total of 2.1 quadrillion individual Satoshis that will ever exist. The Ordinal protocol assigns a serial number to each of the 2.1 quadrillion Satoshis, in numbered order, starting at 0 for the first Satoshi ever mined, and ending at 2.1 quadrillion for last Satoshi that will be mined when the block subsidy runs out. These serial numbers can be represented in several different ways, but for this article we will just focus on the simple integer number format (1, 2, 3, …).

Since Ordinals are just numbered Satoshis, they can be transferred and stored on a wallet just like normal Bitcoin; however they require the use of a special “ordinal aware” wallet such as the Ord wallet, which can properly create a transaction which isolates the Ordinal Satoshi. Importantly, Ordinals do not require any change to the current Bitcoin network protocol in order to function. Ordinals are a second layer protocol that operates “on top” of the Bitcoin network. The Ordinals protocol is open source, and runs alongside Bitcoin core software on any Bitcoin node. 

The assigned Ordinal number is used as the identifier that allows an individual Satoshi to be labeled and tracked as it is transferred throughout the network. Notably, the serial number allows the individual Satoshi to have a piece of content attached to it, such as an image or video file; a process known as inscription. When a Satoshi is inscribed with a piece of content such as an image file, it functions in a manner similar to NFTs native to other blockchains. 

Unlike NFTs created on other blockchains, inscriptions using Ordinals on Bitcoin do not actually create a separate token; they instead use the individual Satoshi as the identifiable “token” that the piece of content is associated with. With inscriptions, the content file is hosted on the native blockchain itself; as opposed to a third party hosting service like NFTs on other blockchains.

What Can be Done with Ordinals and Inscriptions?

Ordinals and inscriptions take ordinary Satoshis and turn them into collectible items. 

Ordinals can be used to track ownership of rare and exotic Satoshis. Rare and exotic Satoshis may include Satoshis used in a famous Bitcoin transaction, a Satoshi that was mined on a notable date, or Satoshis that correspond with a noteworthy event in the Bitcoin network, such as the first Satoshi that was mined after a supply halving. The value of these Satoshis as collectibles is subjective, and have different meanings to different people.  `

Inscribed content on the Bitcoin blockchain is thought to have the same properties that normal Bitcoin UTXOs have; censorship resistant, immutable, and can’t be destroyed. Since inscriptions are really just Satoshis with content attached to them, the inscribed content receives the same security assurances of standard Bitcoin UTXOs.

The most popular use for inscriptions is to create NFT-like assets with images attached, but inscribed content can also include videos, audio files, simple games, schematics, messages, or code. Inscriptions can include essentially any piece of content that a user wishes to upload to the Bitcoin blockchain to keep alive and accessible publicly forever. There is a limit though. Since the Bitcoin blocks can only contain a maximum of 4MB (megabytes) of data, that is roughly the limit on the size of content that can be uploaded via inscription.

Examples of some images inscribed on the Bitcoin blockchain are shown below:

The popularity of inscriptions on Bitcoin has exploded in the past few weeks. The chart below shows the cumulative inscriptions on Bitcoin since the introduction of the Ordinals Project. At the time of this writing, there are already over 70,000 inscriptions on the blockchain.

The chart below shows the number of new inscriptions that are added to the Bitcoin blockchain each day. This number seems to have settled at around 9,000 new inscriptions added per day, but these are still early days, so it’s hard to tell if this 9,000 is any kind of equilibrium level. 

Of course, all of this growth has not come without controversy. In the next two sections, I will do my best to steel-man both sides of the argument; are inscriptions good or bad for Bitcoin?

The Argument Against Inscriptions on Bitcoin

There are several arguments as to why Ordinals and/or inscriptions are bad for Bitcoin. The major arguments can be summarized into 3 main points.1) inscriptions cause “bloat” on the Bitcoin blockchain by making the blockchain data larger than it would otherwise be, 2) inscriptions will increase network transaction fees, and 3) inscriptions are a means for hosting illegal content on the Bitcoin blockchain blockchain.

Inscriptions Will Cause Blockchain Bloat

Every piece of content that gets inscribed on the blockchain is stored permanently on every Bitcoin node operator’s hard drive. With added demand for inscriptions, Bitcoin blocks may become full 4MB blocks. Inscriptions could cause the size of the blockchain data to be materially larger than would be otherwise without the inscriptions transactions. Critics of inscriptions refer to this as “blockchain bloat”. 

The problem with blockchain bloat caused by full blocks is that it will increase the computer storage requirement for each Bitcoin node which stores a copy of the blockchain. With a higher storage requirement, less people will have the financial means to purchase the hardware required to run a Bitcoin node, negatively impacting the decentralization of the Bitcoin network. Decentralization is one of the most important properties of Bitcoin, and one of the attributes that makes it innovative.

Inscriptions Will Increase Transaction Fees

Why should important financial transactions have to compete with frivolous image files for Bitcoin block space?  Inscriptions are like spamming the network, and could result in transaction fees becoming much higher for people who wish to transact on the network for normal financial transactions; the kind of transactions that Bitcoin was originally intended for. High transaction fees means that the use of Bitcoin will become limited to wealthy people that can afford to pay the high transaction fees, at the exclusion of people that are less financially privileged. The Bitcoin network needs to be useful for all people, rich or poor, if it is to one become the world’s reserve asset, and inscriptions will prevent this from happening. 

Illegal Content

Inscribers are free to upload any type of content that they want; including illegal content. Examples of illegal content are classified documents, proprietary data, schematics for a 3D printed gun, or illegal pornographic images. Uploading this data to the blockchain essentially would make every node operator that downloads the blockchain complicit in crime, as a host of illegal content. Governments would quickly take action to eliminate this content by, say, making it illegal to run a Bitcoin full node. This would have severe negative consequences for the decentralization and security of the network 

The Argument in Favor of Inscriptions on Bitcoin

It can be argued that Inscriptions are 1) good for Bitcoin security, 2) help drive Bitcoin adoption, 3) give bitcoin a fun use case outside of its original intended function.

Inscriptions Increase Bitcoin Security

With their large transaction size, inscriptions ensure that all Bitcoin blocks remain completely full of  fee paying transactions. User transaction fees are the “security budget” that is paid to the Bitcoin miners to secure the network. 

For background, Bitcoin miners get compensated in two ways; the block subsidy, and user transaction fees. The block subsidy is the new Bitcoin that is issued to the miner that finds the newest block, roughly every 10 minutes. The Bitcoin protocol is designed such that the compensation that the miners receive though the block subsidy is cut in half every 4 years until the block subsidy eventually reaches 0. At that time, the only compensation that miners will receive for securing the network will be from transaction fees.

It is still not known if there will be enough natural demand for fee paying standard financial transactions to secure the network when the block subsidy runs out. Inscription transactions are like a buyer of last resort for Bitcoin block space; and they are willing to pay a fee to be included in blocks. Since we know that the network will be reliant on transaction fees for security in the future, having this additional source of fee paying demand now, gives us a higher level of confidence that fee paying transaction demand will be there in the future when the block subsidy runs out. Full blocks of fee paying transactions are thus good for security of the Bitcoin network. 

Inscriptions Help Drive Bitcoin Adoption

The Ordinal protocol and inscriptions get more people interested in Bitcoin; even if it’s for the “wrong” reason.  For one, in order to mint ordinals, a person has to first set up a Bitcoin full node. This incentivizes more people to run Bitcoin nodes; further decentralizing and strengthening the network. Since Ordinals are just Satoshis, and transferring them requires bitcoin; the user becomes a bitcoin bag holder by default.  

Second, since the fees to create and transfer inscriptions creates additional compensation for Bitcoin miners, the incentives to mine Bitcoin increase. More Bitcoin miners will come on the network because of the financial incentive of these fees. This is good for the security of the network. 

Inscriptions Make Bitcoin Fun

Bitcoin is designed to do two things well; store and transfer value. It offers very little in terms of functionality outside of those two things; and it’s designed that way on purpose. As a result, applications that exist simply for fun, like NFTs, were built on competing blockchains like Ethereum, Solana, or Polkadot. With the introduction of Ordinals and inscriptions, these “fun” applications can now occur on the Bitcoin network as well.

My Take

There was a major negative knee jerk reaction amongst Bitcoin purists after Ordinals/inscriptions were introduced. In my opinion, arguments against Inscriptions are largely overblown and these criticisms can be easily addressed. I view inscriptions on Bitcoin as a net positive for Bitcoin. 

Inscriptions Don’t Cause Blockchain Bloat

Fears of “Blockchain” bloat are overstated by those who argue against Bitcoin inscriptions. In the worst case, Inscriptions will only slightly erode the level of decentralization of the Bitcoin network. The myth of blockchain bloat can be easily dispelled with simple logic and a little math.  

For the sake of argument, we can analyze the most negative possible hypothetical outcome; inscriptions cause full blocks (4MB), every block, for the rest of time. We can then compare this with the current average block size, about 1.2MB, and determine how much additional storage hardware a Bitcoin node operator would have to purchase each year if blocks were always full.

I calculated that about $14.50 of additional storage hardware would be required in the worst case if inscriptions cause all blocks going forward to come in as full 4MB blocks. The details of how I calculated this are below. It’s a bit mathy, so you may wish to skip ahead to the next full paragraph. 

If all blocks were full, 4MB blocks, then the storage requirement of the Bitcoin blockchain is 208GB(gigabytes) per year. 

(4MB per block) X (52,500 blocks per year) = 208,000MB per year = 208GB per year

For the year preceding the introduction of Ordinals inscriptions, the average block size was about 1.2MB. With blocks of this size, 63GB of storage is required to store the Bitcoin blockchain each year.

(1.2MB per block) X (52,500 blocks per year) = 63,000MB per year = 63GB per year

So in the worst case scenario, 145GB of additional storage hardware would be required if all blocks were full.

208GB – 63GB = 145GB 

A typical solid state drive that is used by a node operator costs about 10 cents ($0.10) per gigabyte. Using that information, we can find the additional annual cost for node operators in the hypothetical worst case scenario, if all blocks were full, forever. 

($0.10 per GB of storage) X (145GB additional storage required)  = $14.50 per year of additional to run a node.

We can see in the worst case scenario, $14.50 of additional computer storage hardware would be required each year. While I would not argue that this additional cost to run a node is good for the decentralization of Bitcoin, most people will be able to stomach this additional cost of running a node. Remember this is the worst possible outcome, of full 4MB blocks, every block, for the rest of time. In this worst case, it becomes only slightly more expensive to run a Bitcoin node; a trend in the wrong direction, but not detrimental to the decentralization of the network. 

In the more optimistic scenario, inscriptions will have no effect, or even increase the level of decentralization of Bitcoin, because any single node operator can opt out of storing the inscription data by choosing to “prune” away the data on their node. Without getting too much into the weeds, inscription data is stored on a Bitcoin node alongside the witness data. I will put aside the details of what witness data is for the purposes of this article but you can learn about it here. What is important to this argument is to know that witness data is stored on the blockchain in a separate data structure from the transaction data. Bitcoin nodes allow an individual node operator to prune away (delete) the witness data; the data which contains the inscriptions files. 

With pruning, each node operator can make the choice to store the inscription data if they prefer, or simply delete this data via pruning after it is initially downloaded to their node. 

Inscriptions and Bitcoin Fees

A second point made by critics of inscriptions is that they will cause transaction fees to rise, making Bitcoin transactions unaffordable for unprivileged  people that need to use it the most. 

So far, this has not played out in real life. As shown below, transaction fees have not risen significantly since the introduction of inscriptions. In fact, network fees have been significantly higher at other times in Bitcoin’s history. 

Average transaction fees are around $1.70 (average of the past week) per transaction at the time of this writing. Since Ordinals inscriptions were launched just 24 days ago, it is too early to tell if they will cause a material rise in Bitcoin transaction fees. The effect that Ordinals have on transaction fees is something important to monitor over the coming months. 

High transaction fees however is not necessarily a bad thing for Bitcoin because it pushes forward the adoption of second layered scaling solutions like the Lightning Network. Layers are ultimately how Bitcoin is going to need to scale in order  to accommodate the needs of billions of users around the world. Bitcoin layers can be imagined like the image below.

The Lightning network is an open source protocol that was originally introduced in 2016 and began to be deployed at scale in 2020. The Lightning network is designed with the same ethos as Bitcoin; open source, decentralized, and owned by nobody. The Lightning network allows bitcoin to be sent in a peer-to-peer fashion without a fee paying transaction on the underlying Bitcoin blockchain.

The Lightning network allows the Bitcoin network to have the capacity for millions of small transactions that occur off chain, with only final settlement on the Bitcoin blockchain. A common analogy for how the Lightning Network works is like a bar tab. A guy at a bar opens up a tab with his credit card. He orders his first beer, and throughout the night, he orders several more beers. He doesn’t have to swipe his credit card for each beer, the bartender just adds another entry to his bar tab. The guy only pays the final balance at the end of the night when he closes the tab. Practically speaking, this is the same way that the Lightning network works. Two people open channels (the bar tab) with each other, have many transactions between them, and only settle the final balance on the Bitcoin base layer. An actual (fee paying) transaction only occurs with the opening and closing of the channel on the blockchain. Theoretically, millions of Bitcoin transactions can occur between that opening and closing of the channel.

When fees rise high enough, it does not make economic sense to make a transaction on the Bitcoin base layer. Due to the economic incentives, small bitcoin transfers will occur on the Lightning network instead of the base blockchain. For example, a small $5 transaction is not practical on the layer 1 blockchain, which currently has fees of $1.70 per transaction. That transaction will likely occur on the Lightning network, for a transaction fee that is fractions of a penny. However a large transaction of say $10,000 does make sense on the base blockchain layer; as a $1.70 fee is not material compared to this large amount of money.

The Lightning network creates significant network effects for Bitcoin as a payment technology. If ordinals cause transaction fees to rise, more transactions will occur off chain, on the Lightning Network instead. Increased Lightning adoption only makes Bitcoin more useful as a currency, a good thing for Bitcoin overall. 

Inscriptions are Good for Bitcoin Security

As long as there are people willing to pay transaction fees to create and exchange inscriptions, there is a stable security budget for Bitcoin. If  Bitcoin is to remain a safe store of value asset, any transaction that increases the security of the network is a good thing. A secure network is a network that can be trusted. For this reason, Inscriptions are good for the security of Bitcoin.

Inscriptions are Good for Bitcoin Adoption

Something I observed in the 2021 NFT/crypto bull run: many new people entered the space out of genuine interest in NFTs, only to fall down the “crypto” (not Bitcoin) rabbit hole. This happened because the NFTs were almost exclusively built on Ethereum, Solana, or Polygon. NFT fans would become bagholders, and therefore promoters of these unethical, centralized, and insecure blockchains because of their interest in the NFT use case. Regardless of your opinion of whether or not inscriptions are a “valid” use case for the Bitcoin blockchain, the more people that join the network because they want to inscribe content; the more people that will fall down the Bitcoin rabbit hole. Inscribers become bagholders and promoters of Bitcoin out of their interest in the Inscription use case. They will come for the monkey pictures, but stay for the sound money. 

To reinforce an earlier argument, interest in inscriptions increases activity in key infrastructure of the Bitcoin network: 1) increased incentive to mine Bitcoin means more miners come online, 2) increased interest in running a Bitcoin node in order to inscribe means that more nodes come online, and 3) higher on chain transaction fees may speed up Lightning adoption. More nodes and miners leads to increased security and robustness of the network, and Lightning adoption makes Bitcoin more useful as a payment network.

The Value of Bitcoin Inscriptions

An Important distinction between the inscriptions on Bitcoin versus NFTs on other blockchains is the cost that it takes to inscribe. With inscriptions, there is a high fee involved with every piece of content that is inscribed. The data is stored on the immutable blockchain itself, a costly method of storage, not some third party server like NFTs on other Blockchains. 

Using Ethereum NFTs as an example where the content data is not stored on the blockchain; it is significantly less expensive to mint a large collection of NFTs on Ethereum compared to a large collection of inscriptions on Bitcoin. With Ethereum, a virtually limitless amount of NFT tokens can be created with the initial fee paying ERC-721 contract , because the content data is not stored on the blockchain, but rather some third party server. 

Since inscriptions on Bitcoin are very costly to create; they are inherently more valuable and scarce than NFTs on Ethereum or other blockchains. Think about it from the perspective of the inscriber. A rational inscriber would only spend the time and money to create and inscribe a piece of content if a) what they are inscribing is much more valuable to them than they high transaction fee to create the inscription or b) they are confident that the quality of the inscription is high enough that they can sell it to somebody else for a higher price. 

We’re All Inscribers

There is no denying that humans love to inscribe, and the value of their art is subjective. Inscribing on the Bitcoin blockchain is just the newest medium that artists have access to. Below are some other examples of inscriptions. An ancient cave drawing of a buffalo, a tree inscribed by Chuck Yeager in 1952, modern memorial graffiti art, and Inscription #76864: a pixelated monkey with a top hat. All of these inscriptions are different in time frame and drawing medium, but were all created out of the free will by people at the time. They found value in what they did so they took the time, money, and effort to create them.

Hosting of Illegal Content on Bitcoin is Unlikely

The Bitcoin blockchain is completely transparent, auditable, and publicly viewable. Because of these properties, the blockchain is actually used by investigators as a tool to locate, and prosecute criminals. The Bitcoin blockchain is the worst place to commit a crime because the criminal will leave a paper trail of evidence that leads right to  their prosecution. Using the Bitcoin blockchain to host illegal content just doesn’t make sense for this reason. 

In addition, since the inscription content is stored in the witness data, a significant amount of the data can be pruned away at the discretion of the individual node operator. In other words, if they don’t feel comfortable hosting what could be illegal content, they can choose not to. 

Closing Comments

As of the time of this writing, Ordinal inscriptions on Bitcoin were launched not even a month ago. Their effect on the function of the Bitcoin network as a whole has been relatively insignificant in terms of transaction fees, and average block size, or overall usability. The network is fine. So far, so good. Recognizing that these are very early days of inscriptions, there is no guarantee that things will remain this way. Some important items to monitor going forward to measure the impact of Ordinals/Inscriptions.

• Will the “blockchain bloat” concern play out, degrading decentralization of the network, or will the opposite occur; where increased interest in inscribing encourages more people to run Bitcoin nodes?
• Will average transaction fees actually make the network unusable for normal financial transactions?
• Will inscriptions help drive growth of the Lightning network?
• Will Ordinal Theory actually catch on?
• Will Inscriptions cause some type of soft fork to work around them? Or an update to core Bitcoin software?

These are all things that I will monitor and update going forward on my twitter account. I hope that this article was informative, or at least helped with understanding of how Ordinals and Inscriptions work. Thanks for reading.