Ordinals have been a hot topic in the Bitcoin community recently. They first started flooding the Bitcoin network earlier this month, and as the hype continued to build, it peaked with hundreds of ordinals inscribed.
But what are they exactly? Ordinal Inscriptions are digital assets similar to non-fungible tokens (NFTs). They can be inscribed into the smallest denomination of Bitcoin, Satoshi.
However, unlike NFTs on other networks, Ordinals embed the image data for NFTs directly into the blockchain, which as a result, takes up a considerable amount of space.
The Bitcoin blockchain allows satoshis to be inscribed with data, including images and videos, effectively bringing NFTs to the network. Inscribing writes the data of the content stored into the witness of the Bitcoin transaction, which was introduced in the SegWit upgrade in 2017.
Segregated Witness (SegWit) is a change to Bitcoin's transaction format where the witness information is removed from the input field of the block. The purpose of SegWit is to allow for more transactions to be stored within a block. It was also intended to solve a blockchain size limitation problem that reduced Bitcoin transaction speed.
Besides SegWit, the Taproot upgrade in November 2021 brought more privacy and smart contract capabilities to Bitcoin and enabled Ordinal users to add more data to each block.
Taproot's primary focus is to improve the privacy and efficiency of its network. And in order to do this, Taproot uses “Schnorr Signatures.”
Schnorr Signatures are a more secure and less data-intensive way to authorize transactions. Additionally, Taproot uses a technique called “MAST” that allows it to commit fewer transaction data to the blockchain and obscure a part of private transaction information.
While these tools have already been used to inscribe mostly JPEGs on Bitcoin, these inscriptions have caused a minor frenzy around inscriptions and Bitcoin-native “NFTs.”
NFT Frenzy on Bitcoin
Calling Ordinals “the most interesting thing to happen to Bitcoin since El Salvador made it legal tender,” research firm Delphi Digital said that ordinal inscriptions first began on Dec. 17, 2022, but it didn't catch up until Jan. 21, 2023. “Since then, we have seen the market go parabolic,” it said.
According to Dune Analytics, more than 160,000 Ordinals have been inscribed to date. The effect of this Ordinal craze could be seen last week on-chain, with inscription fee rates, block size, and taproot utilization all exploding.
The average block size reached a high of 2.525 MB on Feb. 12, 2023, but has since gone down 2 MB, according to data from Ycharts.com. Average on-chain fees meanwhile surged to $2.465 per transfer before falling under $1.5.
Mempool also began to fill for the first time in months, although with the ordinals' frenzy cooled down, Mempool levels have now stabilized.
The Mempool is a place where Bitcoin transactions go to wait to be verified by full nodes. Once a node has verified a transaction, it goes into the Mempool until it is picked up by a miner and inserted into a block.
If the Mempool starts filling up, nodes prioritize transactions by setting up a minimal transaction fee threshold. Only transactions with a high enough fee are allowed into the Mempool, so this mechanism effectively eliminates transaction spam.
Fundamental Changes to Bitcoin
While many in the Bitcoin community opposed the project, with some going as far as advocating for the censorship of transactions by miners, Delphi Digital noted that this “fundamentally” changed Bitcoin's fungibility and can provide “wild ramifications for sat providence and the entire chain.”
With fees climbing and blocks getting bigger, Delphi Digital said, it is “increasing Bitcoin's security budget and miner profitability.”
While some people may view Ordinals as abusing the network, the protocol developer Casey Rodarmor disagrees with such claims and reminds Bitcoiners of the network's security issue.
“One thing that people don't understand is that in order for Bitcoin to be secure, blocks must be full. That is part of the coin security model,” said Rodarmor in an interview. “If blocks are not full, then nobody has any reason to pay more than the minimum fee rate to have their transactions included in a block. So, as a result, blocks must be full.”
These thoughts are shared by research firm FSInsight in its report, where it argued that an Ordinals-driven resurgence in development and the expansion in the total value transacted and secured over the Bitcoin blockchain should lift its price up.
Bitcoin price has been experiencing an uptrend this year and surged to hit $25,000 after going under $16,000 in Nov. 2022. The largest cryptocurrency by market cap of $465 bln is up 45% YTD but down over 65% from its all-time high (ATH) of $69,000 in Nov. 2021.
As Bitcoin becomes more widely adopted as “money,” Ordinals could become a major source of demand for block space, said FSInsight in its report. This would present a major opportunity for these tokens to fuel Bitcoin's next bull run, it added.
“Despite the loud critics from the more dogmatic side of the bitcoin ecosystem,” Sean Farrell, head of the crypto strategy at FSInsight, said, “the benefits to the network have become immediately apparent.”
A Boon for Bitcoin Network
A reasonable criticism of bitcoin's security model is that most of the security budget paid to miners to secure the network comes from the block subsidy rather than from fees.
The research firm FSInsight noted in its report that blockchain needs to find a way to create a sustainable demand for block space, or else non-economic miners will be the only ones left committed to securing the network.
It then goes on to point out how the excitement around NFTs on Bitcoin has led to new experimentation on the network, causing average block sizes to increase overnight. This, in turn, leads to higher fees per block.
Although there are concerns that the inscription of non-fungible data on the blockchain could cause bloat, FSInsight says they seem generally unfounded and that Bitcoin-based NFTs have been a boon to miners, generating more than a million in fees since their inception.
According to Dune analytics, there has also been a significant increase in Taproot adoption, with 4.83% of transactions utilizing the upgrade — up from less than 2% last month.
As the Ordinal craze intensified, several projects in the crypto space, such as Web3-focused Bitcoin wallet Xverse, Bitcoin NFT marketplace Gamma, Oridalsbot, and Hiro Wallet, have announced support for Ordinal to provide users with a seamless way to create inscriptions.
“What the team came up with Ordinals is genius,” Alex Miller, CEO of Hiro and the developer for layer-2 smart contract platform Stacks said in an interview. “It's super core to the Bitcoin ethos in that they basically took several different things and pieced them together in a way the original creators did not foresee or expect.”
Importing Ordinal to Litecoin
After populating the Bitcoin network late last week, a coder successfully imported the Ordinals NFT protocol to Litecoin. Launched in 2011 by computer scientist Charlie Lee, Litecoin is a peer-to-peer cryptocurrency designed to be faster and cheaper than Bitcoin.
Litecoin also contains soft forks of both SegWit and Taproot technology required to make Ordinals work. In crypto, a fork happens when changes are made to the blockchain's protocol, splitting it into two different versions, each running on its own separate network with a shared transaction history.
Late last week, developer Anthony Guerrera forked the Bitcoin Ordinals project to bring it to Litecoin after a Twitter user @indigo_Nakamoto raised the bounty for porting the repository to 22 LTC (about $2k).
The announcement of Ordinal's Litecoin launch was followed by the first Litecoin inscription: the whitepaper for MimbleWimble, an upgrade that improves transaction speed and privacy on the network.
Introduced in May 2022, MimbleWimble Extension Blocks (MWEB) upgrade allows Litecoin users to opt-in to confidential transactions and other blockchain improvements that help reduce excess and unnecessary transaction data.
With MimbleWimble, Ordinals can handle more data than Bitcoin at a lower transaction cost. And compared to Bitcoin, the cost to inscribe a litoshi, the LTC equivalent to a satoshi, is significantly less — “about two cents.” Moreover, Litecoin has a larger block size.
While it was a “simple” task, Guerrera did find issues when he began working on the project. The issue has been regarding the project's dependency on rust-bitcoin, which did not support the MimbleWimble upgrade on Litecoin.
The developer then forked rust-bitcoin to make one that can work with Litecoin MWEB, allowing Ordinals to decode the block data and safely ignore the extension block MWEB. And with that came Litecoin's first set of NFTs.
“I wanted to dedicate the first inscription to that and make it aware that Litecoin now has this privacy sidechain attached to it,” Guerrera said. “I'm a fan of the technology, and I like that privacy can become a thing on these public ledgers.”
Much like Bitcoin and the broad cryptocurrency market, LTC has also been enjoying the greens. The 16th largest cryptocurrency by market cap at $6.89 billion, LTC has been trading at $94.78 as of writing, according to CoinGecko. The coin is up 35% YTD but down 77% from its peak hit two years ago.
This development on the Litecoin network comes ahead of the halving in August 2023, which will see Litecoin miner rewards reduced to 6.25 LTC.
A halving cycle is a significant event that often results in substantial gains for the cryptocurrency experiencing it. This also adds tremendous momentum to a coin's growth trajectory. By reducing the coins being generated and entering into circulation, the halving tends to lead to a rise in demand and subsequently result in appreciation in its value.
Amidst all this, Litecoin's hash rate touched a new all-time high by exceeding 886 TH/s as new miners entered the network in preparation for the big event.