Representing real-world assets on the Bitcoin blockchain is nothing new.

Over a decade ago, projects like the Colored Coin protocol and Counterparty exchange proved Bitcoin could track items, not just units of currency, in a decentralized way.

However, consensus issues prevented either project from gaining widespread adoption in the market. Ethereum quickly took over as the go-to platform for minting and deploying unique digital artifacts. This preference led to the rise of non-fungible tokens, or NFTs as they’re more commonly known today.

But, things appear to have come full circle as one Bitcoin developer looks to reinvent tokenized assets on the Bitcoin blockchain. Even the Ethereum community seems to be encouraging this new venture. The move suggests a potential unity between what many see as two of the cryptocurrency industry’s longest-standing rivals.

What are Bitcoin Ordinals?

Bitcoin Ordinals use an open-source protocol that assigns unique identities to individual satoshis (sats). Named after Bitcoin’s creator(s), Satoshi Nakamoto, satoshis are the smallest units of bitcoin. Using the Ord software, the protocol adds data to these sats and allows software users to track them based on a system called ordinal numbers.

At a high level, this involves assigning a numerical value to each satoshi based on several factors. These factors include the time when that satoshi entered into circulation through mining as well as the specific block height where the satoshi appears.

Users can use software called Ord to track each satoshi. The system also inscribes them with content to create bitcoin-native digital artifacts.

Users can trade and transfer these uniquely-identified satoshis just like any normal bitcoin unit. But unlike Colored Coins or most Ethereum NFTs, the digital item itself is stored entirely on-chain — not elsewhere on the internet.

This functionality wouldn’t be possible on Bitcoin without implementing SegWit and Taproot — two soft fork upgrades that helped to increase Bitcoin’s block capacity.

Who created Bitcoin Ordinals?

Bitcoin developer Casey Rodarmor launched the Ordinal protocol on January 21, 2023. Rodarmor set out to create a system for numbering satoshis that would give each a unique serial number. This unique identifier would then allow users to track each satoshi across the blockchain. He wanted to be able to accomplish this in a way that was entirely Bitcoin native, without using sidechains or separate tokens.

Rodarmor earned a degree in Computer Science from University of California, Berkeley. Most recently he worked as a software engineer for Agora, an open-source app that improves upon the Bitcoin Lightning Network.

Rodarmor’s idea isn’t the first time a numbering system has been proposed to assign unique identifiers to individual satoshis. In fact, a BitcoinTalk user by the name of jl2012 published an almost identical proposal for Ordinals in October 2012. At the time, another Bitcoin developer discredited the post as an “old idea.”

Rodarmor has since acknowledged jl2012’s work in the last section of a mailing list post announcing Ordinals.

How do Ordinals work?

The Ordinal protocol consists of two main parts:

• Ordinal theory: The method of numbering satoshis for tracking, transfer, and value assigning purposes.
• Inscription: The process of using the Ord software to associate content with a satoshi based on the number the software assigns. The Ord software associates content with real satoshis, but does so according to a numbering scheme unique to the Ord software.

Ordinal theory

Ordinals offer a method for assigning a unique identifier value to each of the 2.1 quadrillion satoshis that will ever be created.

The numerical value assigned to each satoshi acts as a serial number. The system creates this serial number based on how that satoshi relates to different periodic events that happen on the Bitcoin blockchain, including:

• Blocks: Batches of transactions that are committed to the Bitcoin blockchain roughly every 10 minutes. Blocks are the most common event Ordinals use to derive their numerical value.
• Difficulty adjustment periods: After every 2,016 blocks (approximately every two weeks), the Bitcoin protocol adjusts its mining difficulty target based on the amount of computational power being used to maintain the network. We call this the hashrate.
• Halvings epochs: After every 210,000 blocks (approximately every four years), the system halves the amount of new bitcoin entering circulation. There have been three halvings since the launch of Bitcoin.
• Cycles: After every six halvings, a difficulty adjustment and halving take place simultaneously, resulting in an event known as a conjunction. Because halvings only take place every four years, conjunctions only take place every 24 years. Conjunctions are the least common event that Ordinals track, and the time frame between conjunctions is called a cycle.

Ordinals use these events to create a process for tracking the comparative rarity of satoshis. The Ordinal Theory Handbook breaks down how satoshis relate to each of these events using the following rarity levels:

Rarity level	Condition	Amount (in total BTC supply)
Common	Any sat that is not the first sat of its block	2,099,999,990,756,525
Uncommon	The first sat of each block	6,929,999
Rare	The first sat of each difficulty adjustment period	3,437
Epic	The first sat of each halving epoch	32
Legendary	The first sat of each cycle	5
Mythic	The very first sat of the genesis block	1

By assigning a unique identifier to each satoshi, Ordinals open a way of making inherently fungible satoshis into non-fungible objects. This identifier makes them completely unique, just like NFTs.

Ordinal inscription

We refer to the committing of a piece of content to a satoshi as “inscription.” This process is accomplished using Ord, and you can see inscriptions with the ordinals explorer.

The system identifies the content by its MIME type (whether it’s a JPEG, an MP3 file, HTML code, etc) and a byte string (the content itself). Inscriptions don’t necessarily have to represent a non-fungible token. Users can also create Bitcoin-based security tokens and other assets.

Ordinal inscriptions are entirely on-chain and stored within the script of a taproot transaction. This process is different from many of the most prevalent NFT collections on the Ethereum blockchain. Usually, the Ethereum blockchain stores NFT media content off-chain, while keeping only a record of the NFT on the blockchain.

Only a select few NFT collections, the most prominent of which are CryptoPunks, store both the media and the NFT directly on-chain.

Through this inscription process, the blockchain stores content alongside a specific satoshi. The process turns the satoshi into a unique digital artifact that users can track, transfer, hold, buy, and sell.

How Bitcoin Ordinals (may) impact Ethereum NFTs

The Ordinals protocol has resurrected the vast potential of tokenizing assets on Bitcoin’s highly secure, decentralized blockchain. Not only that, it also serves as a means of permanently storing digital content directly on-chain — something rarely seen in the NFT space.

This innovation has already spurred the interest of existing Ethereum-based NFT creators, including Tom W, a co-founder of Cool Cats. On the official Ordinals Discord server, they commented, “Hey all, Im Tom, one of the co-founders of Cool Cats NFT. Here to experiment with some cool shit. https://twitter.com/coolcats.”

With renewed capabilities for launching existing popular collections on the Bitcoin blockchain, Ordinals may help to combat the long-standing problem of lost NFTs. These prevent external file storage issues and could open up potential new revenue streams for NFT creators.

Interestingly, Ordinals are actually gaining traction. For example, Bitcoin Rocks from the Ethereum-based original collection have already sold for 0.2 BTC, while a blue check-verified Twitter user with the handle “businessman.eth” posted, “WOW!!! 0.42 BTC sale for an @OrdinalPunks #Bitcoin Ordinals are starting to gain steam.”

While the true impact of Ordinals is still emerging, one thing is clear: maximalists from both Bitcoin and Ethereum camps are excited about the new opportunities these digital artifacts present.

Follow blog.kraken.com and our Twitter account @KrakenFX for all the latest developments shaping the crypto industry.

Want to see an Ordinal for yourself?

Click here to see one of the latest Ordinals to be inscribed, brought to you by Kraken.

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These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets and you should seek independent advice on your taxation position.