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Exploring new nodes in the Bitcoin ecosystem: opportunities and prospects of Ordinals protocol and BRC20 Token

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As new protocols and token standards for the Bitcoin network, the Ordinals protocol and BRC20 have significant technical advantages and are expected to become a new starting point for blockchain asset management.

Original title: "New Node in Bitcoin Ecological Development: Opportunities Brought by Ordinals Protocol and BRC20"

Original author: memeswap.bit; cryptoming

Original source: DeBox Research Institute

As new protocols and token standards for the Bitcoin network, Ordinals Protocol and BRC20 have opened a new chapter for Bitcoin digital assets. They have significant technical advantages and are expected to become a new starting point for blockchain asset management. Ordinals Protocol can increase miners' income, solve Bitcoin network security budget problems, and enhance network security. BRC20 is essentially the same as Bitcoin, anonymous and decentralized, and has a certain degree of anti-regulatory capabilities.

Ordinals Protocol and BRC20 promote the emergence of new tokens, protocol standards, and ecological content for Bitcoin, and also open up a broad application space for Bitcoin. This will surely enrich the Bitcoin ecosystem, promote technological development, and value realization.

1. What is BRC20

BRC20 is a new token format developed based on the native Ordinals protocol of the Bitcoin network. The Ordinals protocol is a scheme for numbering the smallest unit of the Bitcoin network, the Satoshi, and is also an NFT protocol based on the Bitcoin network. Satoshi is the basic unit in the Bitcoin network, and 1 Satoshi is always equal to 1/100 million of a Bitcoin.

The Ordinals protocol assigns a unique serial number to each Satoshi based on the order in which the Satoshi is mined, making it non-homogeneous, and following the first-in-first-out rule when the Satoshi is transferred. Since both the numbering scheme and the transfer scheme rely on order, the protocol is named Ordinals.

The Ordinals protocol runs on the core full node of Bitcoin. Users can use the Ordinals protocol to bind any data such as text, pictures, videos, etc. to a single "Satoshi" and add it to Bitcoin transactions to form an inscription. Based on the Ordinals system, these "Satoshis" can be tracked. Because these inscriptions are unique, permanent, traceable, and transferable, Bitcoin NFTs are derived. The Ordinals protocol does not need to rely on side chains or tokens outside of Bitcoin, and can be used without making any changes to the Bitcoin network. Compared with Ethereum's NFT, NFTs engraved on Bitcoin have the following characteristics:

Figure 1 Features of Inscription NFT on Bitcoin

The storage cost of Bitcoin NFT is relatively low, mainly because it uses the Ordinals protocol to store data. Since the output of a Bitcoin transaction can be very small, even containing only a single "satoshi", low-cost data storage can be achieved. In contrast, the storage cost of Ethereum NFT is relatively high, mainly because it uses smart contracts to store data. Ethereum's smart contract is a piece of code, and the entire contract code needs to be stored on the blockchain. In addition, Ethereum supports richer data types and operations, which also leads to higher storage costs.

In addition, the storage permanence of Ethereum NFT is relatively low, mainly because Ethereum's smart contract storage data usually stores the data at a certain location on the chain and stores the hash value of the location in the contract. Ethereum's NFT data is actually stored elsewhere outside the chain, such as distributed storage systems such as IPFS or other centralized storage systems. While this approach enables greater data storage and greater flexibility, it also increases the cost of storing and maintaining data, and may result in the loss or modification of off-chain data, which can affect the accessibility and usability of NFTs. In contrast, the data of Bitcoin NFTs is stored on-chain, which can achieve higher reliability and permanence.

BRC20 is essentially also a Bitcoin NFT, which is a set of data in a fixed format that is engraved on "Satoshis", turning "Satoshis" into digital assets with custom attributes and rules. Through the agreed data format for deploying, minting, and transferring tokens, users can use the Ordinal protocol to inscribe inscriptions on "Satoshis" in a fixed format, thereby realizing the deployment, minting, and transfer functions of tokens. Combined with the corresponding indexing tools, the entire process of token issuance and circulation based on the Bitcoin network can be realized.

Figure 2 Deployment inscription of BRC-20 Genesis Protocol ordi

2. Can BRC20 continue the unregulated nature of Bitcoin?

Regulation has always been a hot topic in the cryptocurrency market. In recent years, with the rapid development of the cryptocurrency market and the continuous expansion of the market size, regulation has become an unavoidable issue. However, due to the anonymity and decentralized nature of cryptocurrency, it is easily exploited by money laundering and terrorist financing, which is also the focus of central bank regulators in various countries. As one of the world's largest securities regulators, the U.S. Securities and Exchange Commission (SEC) continues to promote legislation, expand its jurisdiction, and strengthen supervision of the crypto market.

As early as the end of February this year, SEC Chairman Gary Gensler publicly stated that all cryptocurrencies except Bitcoin can be considered securities. This is because the SEC believes that most cryptocurrencies meet the definition of "investment contracts" in the US securities law. "Investment contracts" refer to contracts or arrangements in which investors invest money and expect to get returns through the efforts of others. Most cryptocurrency issuers promise future returns to investors, so they are considered investment contracts and need to comply with securities regulations.

The trading and management of Bitcoin does not rely on any central agency or government, but is achieved through a decentralized network. This allows it to exist as a commodity. Other cryptocurrencies usually involve token sales, promising that future value will increase with the development of the protocol or ecosystem, so most of them may be considered to have "investment contracts" and may be identified as securities.

The emergence of the BRC20 protocol has sparked discussions about its relationship with Bitcoin. BRC20 is a token protocol used to create and manage tokens, and Bitcoin is a digital currency used for value exchange and storage. Since BRC20 tokens are based on Bitcoin native assets, BRC20 has a close relationship with Bitcoin. If the project party issues tokens through BRC20 and avoids the use of "investment contracts", it will be difficult for regulators to define the attributes of these tokens. In essence, all BRC20 tokens are the smallest unit of Bitcoin, "Satoshi", which is more like the format of NFT products such as ERC721 or ERC1155. If BRC20 is regulated, Bitcoin must be regulated first, which is a contradiction. However, Bitcoin currently has the highest status, market value and degree of decentralization, and has industry specificity, so it is difficult to shake, including the SEC Chairman also admitting that BTC will be independently regulated.

Therefore, BRC20 is essentially the same as Bitcoin, and BRC20 will be independently regulated together with Bitcoin. This provides new options for token issuance for project parties who are worried about regulatory risks, which may give birth to the next 100 billion-level cryptocurrency market. However, the BRC20 ecosystem is not yet perfect, and currently there are mostly speculators, but with the money-making effect and ecological development, more ecosystem builders will join.

III. Ordinals Protocol and BRC20: The cornerstone of a new era of smart contracts on the Bitcoin network

3.1 Controversy about the Ordinals Protocol and BRC20

Crypto-asset technologies designed to promote value storage and transfer have appeared frequently in recent years. As one of the newer expansions, the Ordinals Protocol and BRC20 have sparked some controversial discussions. From a neutral perspective of scientific and technological reviews, it is normal for any new technology to face doubts in its early stages. However, judging on the basis of rational discussion may have a positive impact. The current main disputes between the Ordinals Protocol and BRC20 are in two aspects:

First, some people believe that the Ordinals protocol and BRC20 are not the first blockchain-based way to mark and issue assets. Although early practices such as Namecoin (BIP15) and Omni layer have initially attracted attention, their market impact has been minimal so far. Whether the Ordinals protocol and BRC20 will repeat this path and become a cloud of smoke and dust is worth worrying about. However, it should also be considered that the constraints faced by early practices in the Bitcoin ecosystem are different from those of the Ordinals protocol and BRC20. The latter may play an important role due to technological progress and increased market recognition.

Second, some people believe that the Bitcoin network is designed for financial transactions rather than storing large amounts of files. Excessive storage is bound to affect network functions and performance, so there are concerns. However, Bitcoin continues to expand and its processing power continues to increase. It may be able to make up for it to a certain extent, and this aspect is worth discussing. At the same time, we should also recognize the diversity of technological development. A network designed to achieve value transfer does not exclude its use for other purposes, which is particularly evident in distributed ledger technologies such as blockchain.

As an emerging method of managing crypto assets, it is normal and necessary for Ordinals protocol and BRC20 to trigger discussions on key issues. However, judgments should be made on the basis of openness and rationality. It is inevitable to be misleading if you rush to a conclusion. The unpredictability of technological development means that its potential impact is difficult to determine. Open discussion helps to discover positive application prospects. In view of this, any doubts in the early stages of new technologies should not be a reason for accusations or boycotts. Open-minded discussions are crucial, and this is also the perspective that technology reviews should uphold.

3.2 Ordinals Protocol and BRC20: A different starting point from the original Bitcoin storage protocol

First, we need to understand the two biggest differences between the Ordinals Protocol and the original Bitcoin storage protocol:

a. The timing of appearance is different;

b. The underlying implementation technology is different;

a. The timing of appearance is different

The Ordinals Protocol and BRC20 are not the first to create a way of marking and issuing assets based on blockchain. So compared with their predecessors such as Namecoin and Omni layer, what are the differences between the Ordinals Protocol and BRC20? This is mainly reflected in three aspects:

First, with the widespread use of blockchain technology and cryptocurrency today, the timing of the emergence of the Ordinals protocol and BRC20 is more mature, which is very different from the early days of Bitcoin. Today, the digital currency market is large in scale, the investment environment is more favorable to the new model of blockchain value creation, the user group is large, and capital is abundant. Users and investors have a deeper understanding of new technical means and innovations, and are more supportive and encouraging of these attempts. The Ordinals protocol and BRC20 are also more likely to obtain support from capital and the community, and obtain sufficient traffic and funds to ensure their development. This creates favorable conditions for them to truly play their due role.

Secondly, in the context of the popularity of the concepts of "smart contracts" and "DeFi", the Ordinals protocol and BRC20 can use other more mature Bitcoin second-layer networks to more easily realize established functions and expand application scenarios. This also gives it a broader space for development, which is difficult for its predecessors to do.

Finally, with the continuous evolution of blockchain technology, especially the upgrade of the Bitcoin network, the Ordinals protocol and BRC20 can achieve more complex and large functions. The optimized performance and rich development tools of the Bitcoin network also provide technical support for the innovation and development of the Ordinals protocol and BRC20.

In summary, the Ordinals protocol and BRC20 are new things developed on the basis of a more mature industry environment, optimized technical conditions and a good market. This gives it a greater probability of success and a broader space for development than its predecessors. Timing creates opportunities. The timing of the emergence of the Ordinals protocol and BRC20 may be conducive to its becoming a new starting point for blockchain asset management.

b. Different underlying implementation technologies

The Ordinals protocol is significantly different from its predecessors in terms of underlying implementation logic. This is mainly reflected in three aspects:

First, the Ordinals protocol is based on the Bitcoin Taproot upgrade, which brings two major advantages to its implementation:

First, Taproot greatly simplifies the transaction verification process and increases transaction efficiency, which enables the Ordinals protocol to support higher frequency and larger-scale asset management interactions, which has obvious advantages over the Omni layer protocol based on the early Bitcoin network. The Bitcoin network after the Taproot upgrade has stronger scalability, which also provides a broader technical foundation for the Ordinals protocol.

Secondly, Taproot supports more complex and flexible scripting languages, which enables the Ordinals protocol to achieve richer and more innovative functions. In contrast, the Omni layer protocol is based on the simple OP_RETURN operation, with relatively single and limited functions, and it is difficult to express complex business logic. Taproot also supports redundant conditions, which increases the breadth and depth of the Ordinals protocol's expressive power.

Secondly, the Ordinals protocol is compatible with the Lightning Network, which enables it to utilize the high-speed and low-cost cross-chain capabilities provided by the Lightning Network to achieve interoperability with more public chains. As an Omni layer protocol built on the early Bitcoin network, it is more difficult to achieve similar cross-chain interoperability, and its scalability is relatively weak.

Finally, the Omni layer protocol uses the OP_RETURN operation to encode data into multiple transaction outputs, and each transaction output can only store a small amount of data. This limits the data capacity that can be expressed. To store a larger capacity of data, it needs to be dispersed into multiple transaction outputs, which increases the number of transactions and the amount of data, affecting the performance of the Bitcoin network. In contrast, the Ordinals protocol uses Taproot's witness area to achieve a larger storage space, which also gives it a greater advantage in data expression capabilities.

In summary, the Ordinals protocol has three significant advantages over its predecessors in terms of underlying implementation logic: it is built on a stronger technical foundation, has a wider data expression capability, and can achieve more efficient cross-chain interoperability. This makes the Ordinals protocol different from the Omni layer protocol in terms of implementation path and method, opening up a new path of exploration in the field of asset management. The Ordinals protocol is the closest to success among the current attempts at Bitcoin tagging.

3.3 Ordinals Protocol: A Market-based Path to Solving Bitcoin's Network Security Budget Problem

While some people are critical of the Ordinals protocol, warning that it will inflate the blockchain or damage homogeneity, many institutions, including Grayscale, have proposed the positive impact of the Ordinals protocol on network security and miners' income:

First, the emergence of the Ordinals protocol has increased the total transaction fees received by miners. For example, on May 4, 2023, the volume of transactions driven by the Ordinals protocol was close to 310,000, accounting for 54% of the total transaction volume of the Bitcoin network. Bitcoin generated a total of 682,000 transactions on that day, a record high, far exceeding the peak during the 2017 bull market, which inevitably led to a significant increase in transaction fees received by miners. The increased transaction fees can establish a sustainable transaction fee baseline, incentivizing miners to maintain sufficient hash rate to ensure network security, which helps solve the security budget problem facing the Bitcoin network.

Secondly, the increased miner revenue can allow more miners to join the network, thereby expanding the overall computing power and security of Bitcoin. Higher computing power means that attackers need to invest more resources to launch a 51% attack, etc., which enhances the resistance and security of the Bitcoin network.

In summary, the Ordinals protocol has a positive impact on the Bitcoin network in two aspects by increasing miner revenue:

First, it helps solve the security budget problem and incentivizes miners to maintain sufficient network security. The increased transaction fees can establish a sustainable transaction fee baseline to ensure the long-term security of the network.

Secondly, it can attract more computing power to join the network and expand the overall security of Bitcoin. Second, it can attract more computing power to join the network and expand the overall security of Bitcoin.

3.4 The combination of Ordinals protocol and Bitcoin blockchain may open a new chapter in the field of digital assets

As a technical means of embedding data into the Bitcoin blockchain, the emergence of the Ordinals protocol has triggered a series of positive changes. First, the birth of BRC20 has inspired the blockchain industry. The numbering, engraving and indexing functions of the Ordinals protocol allow developers to easily customize their own Token standards and protocols. Developers only need to write simple readable text on the blockchain, use the positioning capabilities of the Ordinals protocol and third-party indexers to read and convey Token rules, and they can establish new Token or protocol standards. This is an extremely concise way for development teams to quickly launch application-level Tokens and protocols, and also make it easier for users to understand and learn these standards. This will surely enrich the Bitcoin ecosystem, expand the scope of its technical application, and bring sustained vitality to the Bitcoin network. At present, we have seen the prototypes of the new BOP data compression type token standard, ORC20 extended token standard and AMM smart contract.

Due to the launch and development of the Ordinals protocol and BRC20, the relevant ecological content is also rapidly enriched. This includes proxy inscription services, trading markets and BRC20 games, etc. Large blockchain institutions are also actively entering the market. OKX and Element NFT Marketplace are preparing or have already launched BRC20 trading markets, which provides a broad application scenario for the Ordinals protocol and BRC20 Token, and will inevitably drive the vigorous development of the entire blockchain ecosystem. These rich applications not only meet the needs of users, but also push up the technical value of the Ordinals protocol and BRC20 Token themselves, which lays a solid foundation for their continued use in the future.

Figure 3 Ordinals protocol ecosystem, quoted from BingVentures Twitter

However, as the scale of Ordinals protocol applications has grown significantly, there are still some urgent problems to be solved:

a. Network congestion

Large-scale adoption of the Ordinals protocol may lead to network congestion, which requires data compression, second-layer expansion, or integration with the Lightning Network. Data compression can reduce the total amount of stored data, second-layer expansion can move some transactions to the side chain, and the Lightning Network can achieve rapid liquidation of assets under locked conditions. These measures can effectively reduce the impact of the Ordinals protocol on the main network and create a broader space for its expansion. In terms of data compression, new data formats have been proposed by the project party.

b. Issues with transparency and decentralized operation of indexers

Currently, under the Ordinals protocol, emerging digital asset standards and smart contracts such as BRC20 mainly rely on third-party indexing tools to read on-chain data and confirm the ownership of key operations such as asset casting and transfer according to the contract rules pre-deployed by the Token issuer. These indexing tools actually assume important functions similar to "oracles", and they are one of the most critical components of the entire Token ecosystem. However, this also means that the Token ecosystem needs to guard against potential malicious behavior or data abuse risks from the operators of the indexing tools. To this end, future indexing services will inevitably need to adopt open source and transparent code forms, turn to decentralized operating mechanisms, and even need to build these services directly on existing or new blockchain networks.

Recently, UniSat, the largest trading platform for BRC20 Token, announced the source code of its BRC20 Token indexing tool. This move means that the core infrastructure that was previously prone to security risks will eventually continue to evolve in the direction of open source and decentralization. This will also help smaller developers in the ecosystem to quickly make up for their shortcomings in this area and reduce their technical barriers. Overall, open source and decentralization of indexing services is undoubtedly the right direction to build a sustainable Token ecosystem. It can minimize the risks brought by centralized operators, enhance the robustness and security of the system, and make it easier for participants to understand the operating mechanism of the system. This is a project that technical teams and institutions in the Token field need to explore in depth and jointly promote. Currently, some project teams have begun to develop decentralized indexers.

Figure 4 UniSat releases BRC20 indexer source code

It can be said that the Ordinals protocol has opened up more possibilities for the Bitcoin network. It allows developers and users to customize their own tokens or protocol standards using the Bitcoin blockchain, which will surely promote the technological progress and true value realization of Bitcoin.

Fourth, Conclusion

As a data technology embedded in the Bitcoin blockchain, the Ordinals protocol has brought a series of positive impacts to the industry:

First, it has inspired the emergence of more tokens and protocol standards. Ordinals has opened up a broader application space and potential possibilities for the Bitcoin network, making the Bitcoin ecosystem richer and richer, and further realizing technological progress and value.

Secondly, the Ordinals protocol has promoted the expansion and upgrade of the Bitcoin network. To mitigate the impact, measures such as data compression and second-layer expansion need to be taken. These changes will surely promote the advancement of Bitcoin technology.

Finally, the Ordinals protocol has a positive impact on the Bitcoin network in two ways by increasing miners' revenue:

Second, it can attract more computing power to join the network and expand the overall security of Bitcoin.

Despite this, the Ordinals protocol still faces certain limitations. As a new feature embedded in the Bitcoin network, it needs to rely on the infrastructure of the Bitcoin blockchain and is limited by its scalability and governance mechanism. In addition, how to achieve the efficient operation of the Ordinals protocol without affecting network security is also a direction that the technical team needs to work hard to explore.

Reference Materials

1. Grayscale Report: https://grayscale.com/can-ordinals-unlock-new-potential-for-bitcoin/

2. BRC20 White Paper: https://domo-2.gitbook.io/brc-20-experiment/

3. Ordinal Protocol White Paper: https://docs.ordinals.com/introduction.html

4. A 10,000-word article interpreting Ordinals: From peer-to-peer electronic cash system to NFT infrastructure, the paradigm evolution of Bitcoin consensus: https://www.panewslab.com/zh/articledetails/8f14ih2v9s8z.html

5. https://twitter.com/CCheingg/status/1653403485801463809