Introduction: Understanding the Development of Digital Assets

Blockchain technology redefined and diversified how digital assets were presented, valued, and traded. Digital assets began to gain traction with the creation of the first NFT, Quantum, in 2014. “Quantum” was created by Kevin McCoy and launched on the Namecoin blockchain.

However, the blooming days of digital assets began following the launch of Ethereum with its smart contract functionalities. Ethereum blockchain supports the minting, issuance, and transfer of Non-Fungible Tokens (NFTs), thus, enabling the creation of several famous NFTs like CryptoPunks, Crypto Kitties, Bored Ape Yacht Club (BAYC), Meebits, DeGods, etc.

Subsequently, on December 14, 2022, a new variety of digital assets was introduced on the Bitcoin blockchain. It is called Ordinal Inscription and was created by Casey Rodarmore. The asset inscribed an art of a black and white skull on the Bitcoin Ordinal and assigned it a number zero (0).

The Bitcoin blockchain has numbered lots of Inscriptions since the launch of Ordinal Protocol on January 21, 2023, as shown in the image from the Bitcoin Ordinal timeline below:

Source: 720/format:webp/1*tRo7MJpTpjI0iE4Gq23J0A.jpeg">Ordinalsbot

Further, Ordinal Inscriptions and Non-Fungible Tokens (NFTs) present unique ways of representing digital assets on the blockchain. However, certain factors make them different from each other. This article delves into the intricate realm of Ordinal Inscriptions and NFTs, exploring their origins, functionalities, and distinctive characteristics within the blockchain ecosystem.

The Rise of Digital Assets in the Blockchain Industry

A digital asset is anything of value that can be created and stored digitally. Assets ranging from music albums, images, properties, and art, to videos, can be represented digitally as long as they have the potential to create value. Before now, however, digital assets were presented in media files representing physical items like when videos and pictures of physical paintings are taken. Currently, digital assets refer to investable assets that are backed by blockchain technology, thus, solidifying their validity, value, and ownership.

Digital asset owners can create and publish assets on their preferred blockchain platform, attach prices based on the item’s value, and earn revenues generated from sales. Assets such as real estate, videos, arts, music, and images are hosted on the blockchain to create value directly for its owner, hence eliminating third parties. This is opposed to what is obtainable in physical auction houses.

Essentially, digital assets on the blockchain can be represented either as Non-fungible tokens (NFTs) or as Ordinal Inscriptions. Depending on what the creator wants to achieve, NFTs and Ordinal Inscriptions offer two unique ways of hosting digital assets on the blockchain.

Understanding Ordinal Inscriptions and NFTs

Ordinal Inscriptions and NFTs present two different formats of representing digital assets on the blockchain. Let’s explore them in more detail.

What are Ordinal Inscriptions?

Ordinal Inscription, also called Ordinals or Bitcoin Ordinals, are digital assets created on the Bitcoin blockchain. They are created using small bits of Bitcoin called Satoshi. Every Bitcoin satoshi is numbered serially according to how they are mined. These numbers are called Bitcoin Ordinals since they help the Bitcoin network identify where every Satoshi is located and who owns it at the time.

Subsequently, creators have figured out a unique way in which additional information is added to the Bitcoin Ordinals. This process is called Inscription—it describes the process of adding write-ups, videos, or images on the Bitcoin blockchain, thus giving each ordinal a unique identification, hence the name Ordinal Inscription.

Ordinal Inscriptions are identified as digital artifacts. They are created to live on the Bitcoin blockchain where they are also traded as digital assets.

How Does Ordinal Inscription Work?

The functionality of Ordinal Inscriptions revolves around Segregated Witness (SegWit) and Taproot upgrade on the Bitcoin blockchain. Technically, the Bitcoin Ordinal protocol uses the SegWit and Taproot upgrade to identify specific bits of Satoshis and embed some data individually on them. It does so by accommodating more complex data on Bitcoin while also improving Bitcoin transaction validation procedures.

Taproot upgrade is a major development on the Bitcoin blockchain implemented in November 2021. The upgrade aimed to improve transaction processing speed and cost on the Bitcoin network and batches multiple transaction signatures together so they will be validated at once. Also, it merges both single and multiple signature transactions into a unified verification process, thus scaling the number of transactions processed on the Bitcoin network.

Moreover, the Segregated Witness field in the Bitcoin Ordinal protocol guides against transaction data malleability. This means that it guides against the possibility of changing transaction data while also storing more transactions in a block to speed up the transaction process.

While Taproot upgrade and SegWit are in place, the digital asset must be compatible with the Witness Script. Thus the file is compressed and converted into a hexadecimal format, enabling the inscription creator to initiate a Bitcoin transaction and include the Witness Script, the digital asset, and other unique data that are associated with the Inscription. When the transaction is processed, the Inscription is included in the Bitcoin block and confirmed by miners. Once this is done, the Inscription becomes a part of the Bitcoin network.

The functionality of Taproot upgrade and SegWit opens the door to innovation on the Bitcoin network. It gave room for more data storage, thus enabling Inscriptions on Bitcoin Ordinals. It also improved privacy and malleability by way of combining multiple signature transactions, hence keeping Inscriptions private, encrypted, and immutable.

In addition, Ordinal Inscriptions do not have separate tokens. The Bitcoin Satoshis are the tokens, and the ordinal inscriptions are the digital assets. Thus, making it tradable through Bitcoin transactions. Some of the digital assets that can be inscribed on Bitcoin Ordinals include music, artwork, videos, and photos.

Key Component Behind Ordinal Inscriptions

There are key components that facilitate the creation of ordinal inscriptions, they include:

Taproot Upgrade

Taproot upgrade introduces a new address format in the Bitcoin blockchain. This helps for easy identification of specific Satoshis with Bitcoin transactions, thus paving the way for data inscription on them. It also enhances the privacy and security of the assets on the Bitcoin blockchain.

Segregated Witness

Segregated Witness permits the inclusion of the asset information directly into the Bitcoin blockchain by storing the encrypted data on the Bitcoin Witness Script. It also allows the on-chain validation of these data.

Advantages of Ordinal Inscriptions

Compatibility

Ordinal Inscriptions are built to adapt to existing Bitcoin infrastructure. They can be traded using Bitcoin wallets (for example UniSat) and can be stored using Bitcoin storage systems.

Immutability

The Taproot upgrade and Segregated Witness that enable inscriptions stand as tamperproof, disabling the possibility of altering the asset’s uniqueness while ensuring transparency.

No Third Party

Banking on Bitcoin decentralization, Inscriptions are free from third-party interference. They are created, stored, and traded on the Bitcoin network.

Disadvantages of Ordinal Inscriptions

Network Congestion

The inclusion of larger files in the Bitcoin Witness Script could result in excessive network congestion. Also, transactions may require longer confirmation times.

Increase in Transaction Fees

Excessive network congestion and delays in processing transactions could lead to an increase in transaction fees, thus, discouraging potential traders.

No Regulation

Digital assets are seen as investment options and, hence valuable. However the lack of regulatory guidelines for the blockchain industry and by extension, the digital asset class leaves holders at risk of volatility, devaluation, and loss of funds.

Ordinal Inscriptions’ Use Cases

These are some notable use cases of the Ordinal Inscriptions.

Used to Improve Immutability

Ordinal Inscriptions are used to tighten the immutability of NFTs and keep their value pricy. An example is Trevor Jone’s ‘Bitcoin Angel.’ The open edition of this ‘Bitcoin Angel’ was released as NFTs on February 25, 2021, and sold to the public. Later, Trevor Jones announced he would launch a Bitcoin Angel cast sculpture NFT with an oak box inscribed on the Bitcoin blockchain as Ordinal Inscription. This is a limited edition and he chooses to inscribe his art to boost its value and tighten its immutability.

Source: Trevorjonesart

Store of Value

Ordinal Inscriptions are equally used as a Safe for keeping valuables. For example, a music album can be inscribed and sold to “specialized individuals,” thus increasing its rarity and market value.

What Are NFTs?

Source: Forbes

Non-fungible tokens (NFTs) are unique digital assets that represent ownership or proof of authenticity of a specific item or piece of content on the blockchain. Unlike cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), which are fungible and interchangeable, each NFT is distinct and cannot be replicated or exchanged on a one-to-one basis. Additionally, NFTs can represent a music album, medal, photo, artwork, real estate, collectibles, and other real-life items. While these items may reside outside the blockchain, the tokens used to identify them are minted, stored, and traded on the blockchain.

NFTs are mostly minted on the Ethereum blockchain and can be listed on NFT marketplaces (Opensea, Rarible, etc) where they are displayed and traded. It also uses smart contracts to manage the token ownership and transfer. Also, NFTs have separate token standards different from the asset itself, hence the use of Ethereum’s ERC-721 and ERC-1155 token standards to mint them.

How Does NFTs Work?

NFTs work by creating tokens that represent an asset on the blockchain while keeping the main asset off-chain. The token is created through a process called minting. This involves encrypting every information of an asset and recording them on the blockchain. After that, the NFT and its ownership data are verified and validated. Meanwhile, the main asset is stored elsewhere outside the blockchain network.

The procedure for minting NFTs embeds smart contracts with the tokens. Thus assigning ownership to the NFTs, and managing its movement and transfer on the blockchain.

Moreover, NFTs are valued based on demand and thus can be sold and bought according to their value on NFT marketplaces. There is no need for third-party management in NFT marketplaces; creators mint their NFTs, and list and trade them at their preferred prices.

Owning an NFT comes with some benefits. The original ownership does not end when it’s sold. This is because every time an NFT is sold, the original creator gets a royalty from the sales, thus allowing content creators to maximize the full benefits of their asset over time.

Key Components of NFTs

There are key components that make the functionality of NFTs effective, they include:

1. An Asset: This is the main item that the token represents. It can be an image, video, painting, real estate, collectibles, certificates, or any item of value that can be traded.
2. A Token: This is the representation of the asset on the blockchain. It is minted and embedded with a smart contract, thus making it tradable, and transferable while managing its ownership.

Advantages of NFTs

Efficiency

NFTs make the supply chain of assets more efficient. Asset owners can mint, manage, and sell their assets by themselves thus eliminating the activities of middlemen.

Easy Ownership Transfer

NFTs make it easy to transfer asset ownership. The Ethereum blockchain enables scalability thus making asset management and ownership transfer less cumbersome using smart contracts.

Easy to Create

Minting NFTs has become more accessible thanks to user-friendly platforms and the power of smart contracts. This allows creators to focus on what matters most: owning a valuable digital asset they can convert into an NFT.

Marketability

With the introduction of NFT marketplaces, it is easy to market NFTs by listing them on these platforms. It also increases their visibility and trade on the blockchain.

Disadvantages of NFTs

Lack of Liquidity

NFTs have their own market and do not rely on the liquidity of any other cryptocurrency. Thus, their prices are strictly based on value. The lack of liquidity makes the trading of NFTs challenging.

Potential Fraud

Because NFTs and the assets they represent are stored on and off-chain respectively, it creates chances of ownership misrepresentation. It also enables the possibility of creating fake NFTs without real assets.

No Regulation

NFTs are minted and sold on the blockchain without any regulatory backup. There is little to no standard for the creation of NFTs, as anyone can create, buy, and sell. This exposes both the asset owners and investors to potential fraud.

NFT Use Cases

Essentially, NFTs are minted to monetize the associated assets. Some of the major use cases include:

Metaverse

Virtual real estate acts as the foundation for the metaverse. These digital plots can be purchased and developed, allowing users to construct anything from houses to elaborate experiences.

Play-to-Earn Games

Blockchain games which often feature play-to-earn games reward players with in-game assets (NFTs), especially for completing tasks. These assets which may include avatars, virtual lands, and costumes, can be taken out of the gaming space and sold.

Source: Mirageportal

Album Tokenization

NFTs also help with the tokenization of music albums. The music can generate income directly for the owner when it’s streamed on the internet.

What are the Differences Between Ordinal Inscription and NFTs

Ordinal Inscription and NFTs are both digital assets but differ in the following ways:

Conclusion

While phrases like “Bitcoin NFTs” and “NFT Ordinals” may be commonly used interchangeably in discussions surrounding digital assets, it’s imperative to recognize the distinct nature of Ordinal Inscriptions and NFTs within the blockchain ecosystem. Ordinal Inscriptions, rooted in the Bitcoin blockchain, leverage its security and decentralized features, offering a unique avenue for digital asset representation. On the other hand, NFTs predominantly find their home on the Ethereum network, capitalizing on its decentralized infrastructure. This article elucidated the disparities between these two asset classes, ranging from their underlying blockchain infrastructure to their minting processes. As the blockchain landscape evolves, understanding these differences becomes increasingly crucial for participants navigating the diverse world of digital assets.