Bitcoin Ordinals and BRC20: similarity of smart contracts on Bitcoin

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After deployed last yearTaproot updates Bitcoin was able to jump over old barriers. More complex tokens are issued on the first blockchain, including NFTs. Do they have a future?

Not very knowledgeable userscryptocurrencies are often called Bitcoin obsolete or a “first-generation blockchain” that does not support the advanced capabilities of younger competitors: smart contracts, decentralized applications, non-fungible tokens and complex programmable assets. In some ways they are right, but skeptics underestimate the grandfather.

The software product has one essentialdifference from hardware solutions. It can be updated and even completely redesigned, often almost imperceptibly for users, without affecting old developments and functions. This also applies to crypto-assets, which exist only in the form of databases and program code.

Development of smart contracts on Bitcoinhas been underway since 2016, but periodic market drops, called “crypto winters,” slowed them down, and the developers moved on to more pressing tasks. However, towards the end of 2021, the Taproot update was finally activated, containing MAST (Mercolated Abstract Syntax Trees) technology.

Taproot has opened up the opportunity for developerscreate more complex applications on the world’s most reliable blockchain, and not just simple scripts with a set of conditions for receiving a transaction. The first practical solution - Bitcoin Ordinals - appeared on the wave of hype around NFTs, and therefore was aimed at issuing non-fungible tokens. But other uses were soon found for it.

Bitcoin Ordinals (for the tokens themselves alsothe term Ordinal Inscriptions is used) was introduced in January 2023 by American programmer Casey Rodarmor, who previously worked at Google. After the advent of Bitcoin, Rodarmore became a cryptoanarchist and is now a member of the independent Bitcoin developer community BitDevs, as well as a participant in the development of Bitcoin Core and the Lightning Network. In 2022, he became disillusioned with smart contracts on Ethereum and launched the Ordinals project to expand the boundaries of what “legacy Bitcoin” could do. Now Casey works exclusively on his project and is gradually hiring employees.

Foundation Ordinals

Conceptually, Bitcoin Ordinals is similar to the earlythe “colored coins” project is the first attempt to create derivative assets on the Bitcoin blockchain. However, since 2010, a lot of water has passed under the bridge, and Bitcoin has received new opportunities that Rodarmore used. He was able to detail transactions down to individual satoshis, which was too expensive before the advent of SegWit and the Lightning Network.

As a derivative metadata markerassets (NFTs) use so-called “numbered satoshis” (ordinals). Transactions with such satoshi are used to create regular and unique tokens, and in the future, other application solutions.

As the developer declares, in the systemOrdinals, each Satoshi mined by miners or already existing receives its own unique number, updated with each transaction in which it participates. This allows you to make each Satoshi unique, uniquely identifiable within the blockchain. More precisely, within the framework of the Ordinals protocol. To create a binding, Taproot code is used, generated by a special script (script-path spend script). In fact, everything is somewhat simpler and funnier, more on that below.

Issuing unique tokens (NFTs) is obviousapplication for “unique satoshi”. However, while on Ethereum and similar platforms the hash of a token is unique within the entire blockchain, things are not so simple with Bitcoin Ordinals. This protocol is not included in the general Bitcoin protocol and is not available through the "official wallet" of Bitcoin Core. If an alternative way of numbering Satoshi appears, it may use completely different bindings, and discrepancies will mislead users.

Information about Satoshi and Sami labelingThe tokens created in the transaction are stored in a separate output OP_REURN, which with the introduction of Taproot was expanded to 400 KB. Currently, only a few content types (MIME types) can be linked to a token: image, HTML, TXT and SVG, with a total size of up to 300 KB. In the future, if 300 KB is not enough, the token could contain a link to external storage for massive content, such as IPFS. However, even now nothing prevents you from specifying it inside HTML.

Bitcoin users not participating in the NFT boom have every right to be dissatisfied with the additional swelling of the blockchain and rising fees. Ethereum users have already experienced this more than once.

Global economic retreat

The amount of satoshi may seeminfinite, but from a mathematical point of view there are not so many of them. The maximum possible number of Satoshi is only 2 100 000 000 000 000, or 2.1 quadrillion (billion).

For comparison, global GDP and totalCapitalization of stock markets already exceeds $100 trillion by each figure. In total, they give about 10% of the maximum amount of Satoshi, without taking into account the fact that about 20% of bitcoins are already considered irretrievably lost.

If crypto becomes a global currency, it willIt won’t be an expensive Bitcoin at all, but an unnoticeable Satoshi for now. If the price of 1 BTC rises to a million dollars, 1 satoshi will be worth 1 cent. And with a Bitcoin price of $30,000, 1 satoshi costs about 3 kopecks.

BRC20 - fungible tokens on Bitcoin

Soon after the Ordinals appeared and foundedit contains NFTs, and the usual fungible tokens also came to the Bitcoin blockchain. The standard for creating tokens on Bitcoin was named BRC20 without further ado. Here the borrowing went in the reverse order - from Ethereum to Bitcoin. The standard was proposed in March 2023 without the participation of Casey Rodarmore. Similar to ERC20, it describes the issuance and transactions of “regular” fungible tokens.

The main difference between the BRC and ERC standards isthat ERC20 is based on smart contracts, and BRC20 is all on the same Ordinals protocol and Bitcoin scripting language. Unlike Ordinals NFTs, not a single token is tied to one Satoshi number, but a whole series of tokens.

Transactions for buying and selling tokensof the BRC standard occur with the indication of the series identifier, but processing by the smart contract does not occur. Therefore, the original issuer of the series cannot freeze or reject transactions with “its” tokens at the blockchain level.

Until the protocol became popular, BitcoinOrdinals may look more economical than Ethereum tokens, but transactions on the underlying Bitcoin blockchain are themselves more expensive and less scalable. Therefore, without the Lightning Network, the mass use of tokens on the Bitcoin blockchain will be unprofitable, as everyone has seen in recent months.

The BRC20 standard is not compatible with currentversions of DeFi protocols such as DEX and lending platforms. If the standard begins to be widely used, “wrapped” versions or separate platforms for trading and borrowing BRC20 may emerge.

Due to technical difficulties and stilllack of popularity, the token market on the Bitcoin blockchain is not yet associated with large centralized exchanges and DEXs. Trading takes place on a few specialized platforms, such as Ordswap, or directly through wallet applications if they provide such an opportunity. This prevents the mass distribution of BRC20 tokens.

Rare sats

In June, another one began to unwinda “potentially profitable” topic for those who want to catch a new hype at the very beginning, without thinking about where it came from. These are the so-called “rare satoshis”, or Rare sats. Laid the theoretical basis
the creator of the Ordinals protocol, Casey Rodarmore, but he himself probably did not foresee the possible consequences. The basics of the Satoshi numbering scheme were outlined by him last year in an unnumbered BIP.

Based on the theory he created, Casey Rodarmore went wild and proposed six “levels of uniqueness” for individual satoshis:

Regular: approximately all 2.1 quadrillion satoshis, except for the “selected” ones.
Unusual: “first satoshi” in each block - now there are more than 800 000 blocks, and their number is growing by an average of 144 per day.
Rare: “first satoshi” in each block after difficulty recalculation. Now there are 3438 of them and another one is added approximately every 2 weeks, on average 26 pieces per year.
Epic: “first satoshi” after the next halving of the block reward (halving). Now there are 3 of them, the theoretical maximum is 32.
Legendary:“first satoshi” in the “cycle”, when the halving coincides with the difficulty recalculation. Now these do not exist; in theory, five such satoshis are expected to appear after every sixth halving.
Mythical: Finally, the supposedly “first Satoshi in history,” that is, the first in the “zero” genesis block, created by Satoshi Nakamoto himself on January 3, 2009.

Despite the fact that rocking this topicstarted three months ago, it still remains virtually unnoticed in the industry media, among developers and large investors. This means that the community as a whole knows how to read and does not fall for cheap tricks.

It is difficult to assess the motives of Casey Rodarmore himself,when he compiled this “ladder of rarity”. Perhaps he became so carried away by his theory that he began to equate it with reality. But the very fact that the Satoshi classification did not go into the real BIP proves that it was only theorizing. But attempts to make money on the so-called “rare satoshi” are at best profanity, at worst fraud.

Rodarmore probably didn't even imaginepractical application of your Satoshi classification, and even more so making money from it. However, Casey falls into a trap at the very beginning of the description of his theory. He states that satoshis are numbered, attention (!!!) in the order in which they were mined.

Every sat is serially numbered, starting at 0, in the order in which it is mined.

Anyone familiar with the basics of the protocolBitcoin, not to mention the protocol developers, will immediately say that this is impossible, in other words, complete nonsense. Satoshis are not mined in any order. All satoshis in a block are mined simultaneously and “in one piece”; they do not have any unique characteristics. You can view a transaction under any microscope; it does not contain individual satoshis. “Big Satoshi,” which is not Craig Wright, did not initially intend to assign unique numbers to individual Satoshis. In the entire history of the Bitcoin blockchain, for almost 15 years, they are not stored anywhere.

Let's take the so-called “mythically rare”the first satoshi in history. In reality, at 21:45 on January 3, 2009, one transaction input was created in the genesis block, containing 50 BTC, or 5 billion satoshi, created simultaneously, absolutely no different from each other.

If we go further, then no satoshi in the blockdoes not exist at all until a transaction with a denomination of 1 satoshi is sent from the input of a bitcoin-generating transaction (or a transaction containing many outputs of 1 satoshi each). The Bitcoin network client (wallet) will simply indicate in the transaction its amount equal to 1 satoshi. The protocol will not know that this 1 satoshi has a “unique number”. To do this, you need a wallet that supports the Casey Rodarmore algorithm, which assigns some numbers to initially non-existent objects. But if you send 1000 transactions of 1 satoshi each, and only then open them in a wallet that supports Bitcoin Ordinals, then the problem is that the wallet will not be able to identify these satoshis by a unique number if they were previously sent from the banal Bitcoin Core. Since a supposedly unique Satoshi number is created only at the time of sending a transaction and only in a wallet that supports Bitcoin Ordinals.

Bitcoin Core does not have to be interested in anynonsense recorded in OP_RETUPN. And if there is nothing there, then on the contrary, the Ordinals wallet will not know about the existence of a “unique” satoshi in this transaction.

If you still want to buy a uniquedigital item from the genesis block itself - don’t be afraid, there’s enough for everyone. More precisely, approximately every second inhabitant of the Earth, and about a billion more will remain in reserve for latecomers. Are you really ready to pay at least a couple of dollars for such “uniqueness”? Unfortunately, even if you pay a billion, you will not receive your goods until the real Satoshi returns and sends it to you personally. And if he refuses to use Casey’s wallet... well, you understand.

The so-called all-all-all numberingof mined satoshi is based in retrospect solely on the algorithm of Casey Rodarmore himself, and therefore has no logical validity, much less legal force. Therefore, any sellers of tokens with “rare Satoshi”, such as this project, are real scammers.

Great renumbering

Interestingly, in the last article in hisblog Casey carefully moved away from the issue of Satoshi numbering, until the notorious SEC or, even worse, the prosecutor’s office immediately took up the matter. He started the “great renumbering”, where we are talking about the numbering of “subscriptions” of tokens (inscriptions), and numbered satoshis are never mentioned. Moreover, the wording is clearly created in the image and likeness of the above phrase about the numbering of Satoshi.

Inscription numbers are numbers assigned to inscriptions in the order in which they are created, starting at zero for the genesis inscription.

Subscription numbers are assigned in the order in which they were created, starting with zero for the original subscription.

Subscription numbering starts from the first NFT,created by Rodarmore himself on December 14, 2022. We will not discuss the artistic value of the picture. At least there are no more assassination attempts planned on Satoshi's life.

The same article announces the possibilitiescreating several subscriptions in one transaction and linking them to one satoshi. Only scripts and no fraud. Additionally, new data fields will be added to subscriptions.

Ordinals on the market

Contrary to Casey Rodarmore's expectations, it wasn't NFTs that found the most traction in the market. Most popular collections did not want to be “duplicated” on another blockchain.

Yuga Labs, owner of many popularcollections of NFTs, sold tokens based on Ordinals for $16.5 million. But these new NFTs could not repeat the hype of crypto cats, punks, monkeys and other funny pictures sewn into tokens on Ethereum several years ago. After a couple of months, the excitement around the new toy began to subside along with the cost of recently purchased tokens; its peak occurred at the end of February 2023.

The NFT market is going through hard times right now.and duplication on yet another blockchain threatens to lower the price of the “original” tokens on Ethereum. The NFT market on Bitcoin remains weak and has yet to produce any “high value” items, given that several million unique tokens have been issued. By the end of May, the 10 million token mark was broken, including both NFT and BRC20.

As interest in Ordinals NFTs began to wane,fungible tokens on Bitcoin took over the baton and also managed to catch the wave for a while. The most popular of them was the meme token Pepe Coin (PEPE) and its similar brother MEME. Strictly speaking, PEPE is not a unique project, but a repetition of the already dead project of 2016 on the Counterparty add-on.

On launch day May 5, 2023, capitalizationPEPE soared above a billion dollars, and cryptocurrency veterans had to remember the days of “crypto kitties,” when the cost of commissions on the blockchain jumped tens of times, and transactions could be confirmed for hours. Some transactions cost senders more than $10,000, to the delight of miners. Only now it was not Ethereum, but Bitcoin that became the victim of the hype, which once again confirmed the need for the widespread implementation of the Lightning Network. However, within a month the price of PEPE fell by half, and by the beginning of September it dropped to almost four times its maximum.

Time has shown that in the current implementationBitcoin Ordinals failed to gain enough popularity to remain in the market after the initial bubble burst. Thus, in mid-August, a DappRadar study was released that, compared to May, trading volumes of Ordinal Inscriptions (including NFTs and BRC-20) fell by 97% compared to May, that is, more than 30 times.

This doesn't mean the Ordinals project is dead.It has both unique technical aspects and expansion capabilities. However, to do this, developers will have to offer something more unique than trying to copy the functionality of blockchains with smart contracts.

Pros and cons of Bitcoin Ordinals

We summarize the main advantages and disadvantages of Ordinal Inscriptions in comparison with conventional tokens on blockchains with smart contracts.

Low fees for transactions with tokens.Direct commissions for transactions with tokensBitcoin Ordinals are significantly lower. However, the commission is higher at the level of the blockchain itself. To realize the benefit, you must use the Lightning Network.

Reliability of the underlying blockchain.Bitcoin is rightfully considered the most reliable in the worldblockchain. While its main rivals often experience code bugs and even block confirmation failures, Bitcoin is rock-solid. The only remaining drawback is the low throughput without using the Lightning Network.

Security and independence.Since tokens are not managed by a singlesmart contract, they cannot be blocked or confiscated at the blockchain level. The likelihood of hacking and theft is much lower, since there is no centralized access point to all tokens of the same series. You can only steal tokens from the user himself or an intermediary.

The shortcomings of the project should be discussed in more detail.

Insufficient functionality.Despite the assurances of Bitcoin apologistsOrdinals, this is still an incomplete add-on over the basic protocol, in other words, a “crutch”. It is difficult for a project to go beyond issuing simple tokens. It is still based on the good old scripting language, P2SH (pay to script hash) and the OP_RETURN function, albeit expanded with taproot capabilities. Mass adoption entirely depends on the popularity and liquidity of the still stalled Lightning Network.

Technical difficulty.Transactions with Ordinals-based tokens requiregood technical knowledge, for example, so as not to pay tens of thousands of dollars for a transaction. Applications with a convenient graphical interface and verified wallets do not yet exist, and without this it is impossible to attract mass users.

Lack of community recognition.Ordinals remains a craft projectenthusiasts, not recognized by the wider community and Bitcoin Core developers. Unless it becomes a single, generally accepted standard, the project is likely doomed. It may be pushed aside by a more active and functional competitor, or it will slowly fade away, remaining unclaimed due to technical complexity.

Virtual value concept.Finally, we got to the main thing.All cryptocurrencies are called virtual and unsecured. But this applies to “numbered satoshis” to an even greater extent. The numbering scheme itself is one big suggestion, to say the least. As described above in the section on "rare satoshis", the BTC minimum dividing unit is not intended to be unique. Uniqueness arises only at the moment of confirmation of the first transaction with a “numbered” satoshi. This is a fairly reliable marker for linking a token, but in general the concept is too conventional and not convincing for a large investor.

The Future of Bitcoin Ordinals and BRC20

The Satoshi numbering system is suitable for the mostdifferent applications, but Casey Rodarmore used it specifically to create NFTs, which were the hottest topic in 2022, when he led the development, even before the publication of the protocol. However, now is the time to think about more practical and popular functions.

After the publication of the BRC20 standard on the blockchainBitcoin, no longer related to Casey Rodarmore, began to issue a variety of tokens, not just classic NFTs with pictures embedded in them. And yet, Ordinals NFTs have more interesting prospects than “regular” tokens, of which there are too many on other blockchains.

Pseudo-uniqueness of a token based onNumbered Satoshi are more primitive, but more reliable than their analogues on smart contracts. These tokens could eventually be used to issue more complex financial assets, including analogues of shares and shares, or even personal certificates and important public documents. It is more profitable to use the BRC20 protocol to issue shares, and unique tokens to link registered documents to the blockchain. This provides very broad opportunities in the real economy, even without full-fledged smart contracts. And the reliability of the most secure blockchain will give them additional weight in the market.

On the other hand, for the prospects of Ordinals NFTs and BRC20 tokensthere are two main problems:

This is an opportunity for the Ordinals projectcompetition in the face of another Satoshi identification system and a more advanced standard based on it. The Ordinals protocol is not recognized by the Bitcoin Core team and has not been introduced into the main protocol. Therefore, its use is only possible with the help of third-party wallets. These are mainly web wallets and mobile applications from unknown sources. There is also an “official” website for the protocol developer and a wallet that you can independently assemble from source code on Github.

Secondly, the growth of commissions in the blockchain maymake BRC20 tokens prohibitively expensive and their demand remains questionable. The throughput of the underlying Bitcoin blockchain, without the Lightning Network, is virtually unscalable. Any increase in transaction volumes leads to a rapid increase in commissions. For a transaction with a nominal value of 1 satoshi, you will have to pay thousands or tens of thousands of satoshi. Unless applied, only the start and end point based on the Lightning Network are committed to the underlying blockchain. The rise in Bitcoin exchange rate, which investors are looking forward to, can also have a negative effect. Along with it, the cost of commissions in fiat currency will increase significantly.

According to the author, the only real wayfor the survival of Bitcoin Ordinals - a broad marketing campaign explaining the capabilities of the protocol to developers and potential investors. You should also clarify the concept of Satoshi numbering as much as possible and avoid dubious initiatives like Rare sats until regulators become interested in them. The most important step on this path is the inclusion of the Ordinals standard in the Bitcoin Core code. Only after this should we count on the appearance of DeFi applications supporting Ordinals and the listing on major exchanges of not only single hype tokens. The salvation or, on the contrary, the killer of Bitcoin Ordinals can be the Taproot Assets project, created directly by the developers of Taproot and Lightning Network. However, it has not yet left the alpha testing stage.

Even with the existing problems, Ordinals -a big step forward for the development of the Bitcoin blockchain capabilities. It may be followed by more advanced products that will strengthen Bitcoin’s position in the market.