Introduction

What are Ordinals on Bitcoin?

Ordinal theory on Bitcoin, credited to Casey Rodarmor, is a protocol for assigning serial numbers to satoshis, the smallest subdivision of a bitcoin, and tracking those satoshis as they are spent by transactions. It does not require a side-chain, separate token or change to bitcoin. The numbering scheme for satoshis allows tracking and transferring individual sats. These numbers are called ordinal numbers. Satoshis are numbered in the order in which they're mined, and transferred from transaction inputs to transaction outputs first-in-first-out. Both the numbering scheme and the transfer scheme rely on order, the numbering scheme on the order in which satoshis are mined, and the transfer scheme on the order of transaction inputs and outputs. Thus the name, ordinals (opens in a new tab). These serial numbers are large numbers, like this 804766073970493. Every satoshi, which is ¹⁄₁₀₀₀₀₀₀₀₀ of a bitcoin, has an ordinal number; a unique sequentially ordered number between 0 and 2,100,000,000,000,000 (2.1 quadrillion satoshis = 21 million bitcoin).

With this new protocol, it allows individual satoshis (SATs) with a unique identifier to be transacted with extra data attached. Attaching data such as images, videos, HTML, JSON code and more to an individual satoshi is now possible on the base Bitcoin blockchain. The data is stored in the witness field of a transaction and the individual satoshi used to ‘inscribe’ the data is used as a claim of ownership.

Why did Luxor got involved?

Luxor is a bitcoin mining technology company. In early February 2023 when ordinals started taking off, we realized early that this technology of Bitcoin could have potentially positive economic impacts on our mining partners.

Miners are focused on economics to improve revenue and reduce costs. Because each ordinal needs to be transacted to be inscribed, the lift in transaction fees flow positively to each miner on the network.

Luxor wanted to explore this technology in a ‘labs’ format to fully understand where the market could develop with the main goal of supporting miners through higher fee revenue.

How do ordinals impact miners?

Because ordinal inscriptions compete for blockspace to initiate a transaction to store its’ data, this inherently increases the fee market. The amount of data and speed in which a user requires impacts the total transaction fees. Prior to ordinals, the average transaction fees (sat/vybte) necessary for a transaction to be included by a miner in a mined block were near 1sat/vbyte. Today, fees average between 10-50x prior fees, largely driven by ordinal inscriptions.

At the time of writing (7/17/2023), a total of 17M ordinal inscriptions contributed >$50MM in transaction fees to miners. Updated data can be located here (opens in a new tab).

How are ordinals created, or ‘inscribed’?

Ordinals can be viewed as verifiably scarce and valuable digital collectibles. To enable robust inscriptions on the Bitcoin blockchain, the Segregated Witness (SegWit) update and Witness Signature Data are applied. SegWit separates the transaction data and signature data, thereby freeing up block space. Witness Signature Data, on the other hand, removes signature data from transactions, significantly reducing their size. These updates enhance the ability to create inscriptions with maximum limits allotted to each inscription. The said limit facilitates the creation of a unique record, which is output as a “digital artifact.” These digital artifacts are similar to non-fungible tokens (NFTs) in that they create verifiably unique digital collectibles.

What are ordinals used for?

Many of the pre-existing business cases from other chains have been quickly replicated such as ‘JPEG NFT Collections’. In addition, other data formats included GLTF (3D files), HTML, JSON, audio, GIF and more are being tested and trialed to develop new bitcoin-native use cases.

With ordinal theory, there are also inherent collectible satoshis. For example, users can claim the first satoshi mined for each block, or satoshis used in the first ever transaction between Satoshi and Hal Finney. This mirrors the collectible coin market in the real world.

The potential for token authorization or identity to be housed on-chain is also something that could be explored in the future.