Bitcoin NFT Regression: What is an "ordinal NFT"?

Author | Colin Harper

Compile | BTCSTUDY

Original link:

https://www.btcstudy.org/2023/02/22/ordinal-nfts-inscriptions-digital-artifacts-oh-my/

Surprise or surprise?

A new method of minting non-fungible tokens (NFTs) on the Bitcoin blockchain has recently emerged, which can put the substance of an NFT entirely onto the Bitcoin blockchain.

Only Casey Rodarmor, the creator of this standard, doesn't like to call these things NFTs. He believes that the term has been stigmatized, so he calls these things "electronic artwork". Whether you call it "electronic artwork" or "ordinal NFTs," they use "ordinal theory" to tag and track these "inscriptions," i.e. data/content embedded in the blockchain.

An "ordinal" is a number that describes a specific position within a sequence (e.g., "first", "second"). Here, "ordinal" refers to the UTXO (unspent transaction output) of a particular satoshi (the smallest unit of Bitcoin). This cong "contains" an inscription, that is, the content of the NFT, which can be text, images, HTML files, or even MP3s (music files); The ordinal number marks this cong with an inscription attached as a special transaction, so users can locate and track them. Surprisingly, such a system for sorting satoshis was proposed as early as 2012.

Since its launch in January, more than 1,000 electronic artworks have been immortalized on the Bitcoin blockchain. These inscriptions include screenshots of Twitter, emerging NFT collections, ads for Keet.io software, and even an 8-pixel video game (like a clone of the traditional shooter Doom, which you can play in the ordinal block explorer).

In addition to these trivial but fun pictures, video games, and more, ordinal NFTs can also be used as tamper-proof, censorship-resistant storage for sensitive information.

The traditional shooter game Doom is now forever on the Bitcoin blockchain

Unlike previous Bitcoin blockchain-based NFTs, ordinal NFTs do not use Bitcoin's OP_RETURN output (the opcode also allows users to store arbitrary data on-chain). Instead, it uses the transaction witness field of a Bitcoin block, as well as tapscript (a scripting feature that emerged since the Taproot upgrade in 2021).

Ordinal NFTs are native to Bitcoin, so it doesn't require a new blockchain or a new token. And it also stores the entire content of the NFT on the chain, unlike other NFT standards that just put a link on the chain.

This innovation has unlocked new use cases for the block space (at least, lowering the barrier to entry). Naturally, this has led some miners to hope that ordinal NFTs will further drive demand for block space and generate greater fee benefits, but not everyone is happy with the innovation — some in the Bitgod camp believe that it is at best trivial gadgets and at worst an attack on Bitcoin.

The return of Counterparty, Rare Pepes, and Bitcoin NFTs

Before we dive into ordinal NFTs, let's take a moment to learn about previous attempts to mint NFTs on Bitcoin.

Anyway, NFTs did originate from Bitcoin. Before the punks and monkeys with slumping eyes on Ethereum and Solana chains became celebrity toys, Bitcoin already had transaction cards and "Pepe the Frog." ）

NFTs first appeared in 2015 on Couterparty; This is a blockchain network that uses the OP_RETURN output of Bitcoin to make non-fungible assets. After OP_RETURN was introduced in March 2014, Robby Dermody, Adam Krellenstein, and Ouziel Slama launched Counterparty in November. In 2015, the platform's first set of NFTs appeared, a card-swapping game similar to "Magic-the-Gathering" called "Spells of Genesis."

The traffic jam, the real outbreak of Counterparty, came after the launch of 1774 NFTs of the Frog Pepe exchange card series. Collectors use Counterparty wallets to keep these NFTs, and Counterparty uses OP_RETURN outputs to anchor the indexes of these NFTs to the Bitcoin blockchain. OP_RETURN The size of the data that can be attached to the output is limited to 80 bytes, which is only enough for Counterparty to put the description, name, and number of NFTs in it (but for ordinal NFTs, the only limit on the volume of data is the size limit of Bitcoin blocks, which we will discuss later OP_RETURN). In this way, mounting data can also be considered limited only by the block size, but this limit will be lower than the practice of ordinal NFTs. ）

OP_RETURN trading volume peaked in late 2018, hit rock bottom in the spring of 2019, and then faded away in 2020 with the exit of OMNI (the platform where Tether originally issued USDT) and Counterparty. 2019 ~ 2020 is also the time when USDT migrated to Ethereum, and early NFT projects on Ethereum rose.

The above figure raises a resounding question for ordinal NFTs that are still in their infancy: Will ordinal NFTs follow in their footsteps? Or can it have a bigger impact?

What is an ordinal NFT (electronic artwork, inscription)?

Continuing from the book, let's take a look at a few basic modules of ordinal NFTs:

The witness data field of the transaction: This is where the data and content of the NFT are stored.

Inscription: It is the main body of the NFT - the actual content placed on the Bitcoin blockchain, and the NFT represents the ownership of this content. The inscription is engraved in the witness data field of the input to the transaction, and the NFT is given the first satoshi of the first output of the transaction. You'll also see people referring to inscriptions as "electronic artwork/ordinal NFTs" – the three words are already synonymous.

Envelope: The inscription is stored in an area called "envelope" by Rodarmor (within the witness data), which is made up of OP_IF and OP_FALSE opcodes. Just like OP_RETURN, these opcodes are used to send instructions to the Bitcoin blockchain. In the use of "envelope", OP_IF store the inscribed data, while the OP_FALSE ensures that the data is never actually executed and pushed onto the stack (so, while some theists are creating panic, in reality, the full node does not need to process and verify the inscription, only the UTXO set, in which the NFT is free).

Ordinal: A mathematical theory of numerical ordering, used here to identify a single satoshi as an "electronic artwork" (i.e., "ordinal NFT"). An ordinal defines the first satoshi of the first output of a transaction as an NFT; Once tagged, the Satoshi can change hands and trade like other NFTs.

Unlike Counterparty NFTs (which are only 80 bytes on the on-chain part), ordinal NFTs have no volume limit, only limited by the 4MB volume of the transaction witness data field. So, if your file is large enough, you could theoretically mint an ordinal NFT and fill the entire Bitcoin block with just its inscription.

The tapscript brought by the Taproot upgrade and the transaction witness data fields brought by the SegWit upgrade make it all combined.

After the SegWit upgrade in 2017, the signature of Bitcoin transactions can be moved from the "ScriptSig" field to the witness data field, and the data in this field will not be included in the block's transaction Merkle tree, and will be placed in a separate area (which is where the name "Segregated Witness" comes from).

SegWit essentially increases the block size limit because none of the data contained in the witness data field will take up the 1MB of space that Bitcoin originally arranged for the block. Therefore, the SegWit upgrade introduces a new method of measuring block volume, called "block weight", and the data placed in the witness data field will be "lighter" than the data placed in the original block space. Therefore, it is cheaper to store data in the witness data field of a SegWit transaction than to store OP_RETURN data in a block. This is known as the "witness data discount" and is the key to allowing ordinal NFTs to be generated.

Another key is the Taproot upgrade. Although witness data discounts were introduced, SegWit still limits the amount of data that a single transaction can place in a witness data field. The Taproot upgrade relaxes these requirements and removes the restriction entirely, so you can theoretically inscribe an NFT with up to 4 MB of content with the entire block space. (We Luxor really put it into practice, digging up a block with 3.9 MB of electronic artwork, which is also the largest block ever).

Largest block ever; The inscribed NFT has 3.94 MB and a total block size of 3.96 MB

"The transaction to attach the inscription is a spending transaction of the taproot output and will expose the corresponding tapscript and therefore the content and file type of the inscription", Casey Rodarmor, founder of ordinal NFTs, said in a mobile phone interview, "The inscription would be 'attached' to the first satoshi of the first output of such a transaction... Then the ordinal protocol allows you to transfer these satoshis using ordinary Bitcoin transactions. ”

As Bitcoin developer Peter Todd points out, ordinal NFTs were possible even before the SegWit activation upgrade in August 2017. But Taproot makes them cheaper and allows larger files to be uploaded at once. Some commentators say Rodarmor discovered the innovation by accident, as if by accident.

"I wouldn't call it an accident — I think people would be pleasantly surprised," Raodarmor says.

Bitcoin users need a special wallet and block explorer (Ord Wallet) to index and track ordinal NFTs, but can use arbitrary Bitcoin addresses to send and receive these NFTs. Because electronic artwork requires taproot to mint, Ord Wallet enables the taproot address by default.

It should also be reminded that the Satoshi with the inscription attached is still no different from other Satoshi from the chain, which means that it can be spent like other Satoshi, and there is no difference in the way it is spent. Now, a satoshi can only be inscribed once, but Rodarmor is working on an upgrade that allows users to re-engrave satoshis that have already been inscribed before (called "transcription").

What do ordinal NFTs mean for Bitcoin miners?

Although the founders of ordinal NFTs have tried to avoid controversy by calling them "electronic artworks," ordinal NFTs have become a hot topic among Bitcoinizers.

There are basically two camps. The proponents argue that Bitcoin's block space is a free market; As long as you can pay the fee, you can use the block space, no matter how large the transaction is or what it contains. The opposing party claims that NFTs are scams that take up block space, and that these junk transactions crowd out more meaningful economic transactions (such as ordinary transfers); Moreover, this "occupancy" increases the bandwidth requirements to download and run Bitcoin full nodes.

Ordinal NFTs have also entered the larger debate because of Bitcoin's security budget (whatever you call it). Proponents argue that this new application will drive demand for block space, which is good for Bitcoin's future, as Bitcoin's block reward eventually drops to zero. Naturally, the debate over block space and fees has also piqued the interest of miners, who once accounted for 30% of their total income, but now only 3% in good times.

There are only over 1,000 ordinal NFTs in circulation right now, so they don't yet reach a parabolic increase in transaction fee rates. That said, Bitcoin transaction fees and block sizes did increase significantly in the last two days of January, but part of the increase may be due to Bitcoin's hash rate falling by 3% from its all-time high, which means that the time to produce blocks has become longer, resulting in longer transaction block times and higher fees. But without the inscription boom of ordinal NFTs, we will most likely not see an increase in transaction fees and block size.

No astronomical numbers appeared, but ordinal NFTs did have an impact on block size and transaction fees. Source: Hashrate Index

There is a good chance that ordinal NFTs will not increase transaction fees. Of course, they can lead to higher fees, but not what you think. After all, because of the SegWit discount, a block full of electronic artwork could theoretically carry fewer fees than a block full of regular Bitcoin transactions.

But if enough users start minting ordinal NFTs, they will compete fiercely for block space with ordinary transactions, and users who broadcast ordinary transactions will need to increase the fee in order for their transactions to be packaged. In this way, miners may prioritize packing as many ordinary transactions as possible because they pay more fees for each of their own data, so the more ordinary transactions they pack, the higher the fee income.

So, even if ordinal NFTs generate upward pressure on fees, miners may prioritize packaging more ordinary transactions to generate higher fees.

Scarcity

What will really benefit miners may not be transaction fees, but the digging of electronic art — specifically, scarce satoshis.

In a blog post on ordinal number theory, Casey Rodarmot lists a chart of the rarity of different satoshis. This classification method mainly revolves around Bitcoin's proof-of-work self-regulating events, namely difficulty adjustment events and additional issuance halving events. For example, the first satoshi in the first block after halving the additional issuance speed will be classified as "Epic" satoshi; Assuming there is such a demand, such a satoshi can be sold at a better price from collectors.

The chart is as follows:

Rare Satoshi can bring an additional, explosive source of income for miners 

Once such a market for collectibles emerges, miners will be able to make a lot of money selling such satoshis to collectors. Of course, this scarcity is based entirely on the assumption that such a market will emerge. But with everything from monkeys, to stones, and even chickens finding their collectors in the of NFT trading, it's no surprise to imagine some Bitcoin people joining the bandwagon, chasing the first satoshi of the new halving cycle and the first satoshi of the new difficulty cycle.

Ordinal NFTs: is it anomalous?

Casey Rodarmor's innovation has only been around for about a month and has become the most controversial topic in Bitcoin circles this year.

The opposition is so strong that Bitcoin Core contributor Luke Dashjr has written a crude filter for node operators, although the utility and impact of the tool are questionable. In any case, OP_FALSE means that the inscription data does not need to be verified, and the pruning node does not hold the witness data of the transaction at all.

There are also those on the other side, with many people – including Bitgodists and ordinary cryptocurrency enthusiasts – excited about this new way of NFT minting. In addition to images and collectibles, ordinal NFTs can also be used to publish sensitive files and can benefit from permanent, censorship-resistant storage and copying. To borrow the words of Galaxy Digital's Brandon Bailey, Bitcoin users can curate an "immutable library" by inscribed ordinal NFTs.

For miners, this innovation can lead to an increase in transaction fees in the future, and open up additional revenue streams for miners (digging up rare satoshis) and even generate "miner extractable value (MEV)".

Ordinal NFTs aren't going away anyway. All that is questioned is how much impact they will have and whether the inscriptions will be able to create an NFT craze like Ethereum and other blockchains.

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