Chapter 1: Introduction to ordinals

Ordinals Explained

Ordinals are a novel concept in the cryptocurrency space that facilitate the unique identification of individual satoshis, which are the smallest units of Bitcoin and QTUM. This unique identification is achieved by assigning a sequential number, called an ordinal number, to each satoshi in the order of their creation through mining. This transforms each satoshi from a fungible to a non-fungible or at least distinguishable unit.

The introduction of ordinals effectively enables each satoshi to carry distinct characteristics, similar to how serial numbers differentiate individual banknotes. However, unlike banknotes, which are physical and thus naturally distinct, satoshis are digital and were designed to be indistinguishable from one another. Ordinals disrupt this fungibility by attaching a unique ordinal number to each satoshi.

Technically, this approach does not alter the fundamental properties of Bitcoin and Qtum, or require protocol changes. Instead, it utilizes existing transaction metadata fields to embed ordinal information. This process relies on the blockchain's inherent immutability and the chronological ordering of blocks to establish a verifiable sequence of satoshi creation.

Comparison with NFTs

Non-Fungible Tokens (NFTs) have gained widespread attention for their ability to represent unique digital assets on blockchain networks. An NFT is a special type of token that is distinct from others due to its unique attributes and metadata. This uniqueness allows for the ownership and transfer of digital art, collectibles, and other one-of-a-kind digital items.

Ordinals differ from NFTs in several key aspects. Firstly, NFTs typically exist on separate layers or smart contract platforms built on top of a blockchain, whereas ordinals are intrinsic to the blockchain itself, marking the native currency units. Secondly, while NFTs are distinct tokens within a broader ecosystem (e.g., ERC-721 or ERC-1155 tokens on Ethereum), ordinals turn the smallest units of the cryptocurrency (e.g., satoshis on Bitcoin) into uniquely identifiable units. This intrinsic identification does not rely on external smart contracts or tokens.

This is achieved by using the taproot upgrade, which introduced new ways to embed data in transactions through Tapscript. The transaction outputs (vouts) containing the inscribed satoshis use Taproot to enable the inclusion of arbitrary data, like text and images, without compromising privacy or scalability.

Main Use Case: Inscriptions

The primary utility of ordinals is the ability to attach metadata, or "inscriptions", to individual satoshis. These inscriptions can include text, images, and even small pieces of code, effectively embedding this data directly into a blockchain transaction. Inscribed satoshis can carry this metadata as they are transacted across the network, maintaining their unique characteristics.

Inscriptions open up a new realm of possibilities for expressing ownership, creating digital collectibles, and even preserving information in perpetuity on the blockchain. By inscribing data onto individual satoshis, users can mark their ownership, create artwork, or encode messages, making each inscribed satoshi uniquely valuable in a way that is verifiable and immutable.

From a technical standpoint, this is accomplished by including extra data within the witness part of a transaction. This data is not directly interpreted by the Bitcoin protocol but is instead used to provide context or content that is recognized by users and external applications aware of ordinals.

Technically, these inscriptions are a type of 'soft' metadata—they don't affect the consensus rules but provide a layer of human-meaningful information on top of the 'hard' data that the Bitcoin network processes. This is akin to comments in code: not executed, but informative.