Since Bitcoin’s inception in 2009, it has taken the world by storm. It has become a household name and a viable investment option for many who take part in digital asset trading. You can send and receive money using Bitcoin without the need for a centralised intermediary like a bank. However, understanding Bitcoin and its associated terminologies can be a daunting task, especially if you are new to the world of cryptocurrencies. One such terminology that has been the subject of much discussion within digital asset trading is Bitcoin ordinals. In this article, we will demystify Bitcoin ordinals and what you need to know.
What are Bitcoin Ordinals?
Bitcoin ordinals are simply the numerical representation of the position of a particular transaction in a block. Each block on the Bitcoin blockchain contains a series of transactions. These transactions are identified by a unique ID known as a transaction ID or TXID. The ordinals, on the other hand, are simply the position of the transaction in the block.
For example, if a block contains ten transactions, the first transaction in the block will have an ordinal of 0, the second transaction will have an ordinal of 1, and so on until the last transaction, which will have an ordinal of 9. It is important to note that the ordinal of a transaction can only be determined after the block has been mined and added to the blockchain.
Why are Bitcoin Ordinals Important?
Bitcoin ordinals are important for several reasons.
1. They are used to calculate the transaction fees paid by users.
When a user sends a Bitcoin transaction, they are required to pay a fee to the miners who add the transaction to the blockchain. The fee is calculated based on the size of the transaction in bytes and the current network congestion. Ordinals play a role in calculating the size of the transaction in bytes.
2. Ordinals are also used to ensure that transactions are processed in the correct order.
Since Bitcoin is decentralised, transactions are processed by a network of miners who compete to add new blocks to the blockchain.
By assigning each transaction a unique ordinal, the network can ensure that transactions are processed in the correct order, preventing double-spending and other types of fraud.
3. Ordinals are also used to calculate the confirmation time for a transaction.
When a transaction is first sent, it is considered unconfirmed.
As miners add new blocks to the blockchain, they confirm the transactions in those blocks, increasing their number of confirmations.
The number of confirmations a transaction has is important because it determines the level of security of the transaction. Ordinals play a role in calculating the confirmation time for a transaction.
Ordinals pave way for Bitcoin NFTs….
Typically, NFTs have been minted on blockchains such as Ethereum, Polygon, Solana, and Binance Smart Chain. However, Bitcoin Ordinals allow for the introduction of NFTs on the Bitcoin blockchain.
How are Bitcoin Ordinals different to traditional NFTs?
NFTs on blockchains such as Ethereum, Solana, and Binance Smart Chain have typically been made using smart contracts – the assets they represent are hosted elsewhere.
Ordinals, on the other hand, are inscribed directly onto individual Satoshis These individual Satoshis are then included in blocks on the Bitcoin blockchain. This means that Ordinals do not require a separate token as they reside fully on the blockchain. Therefore, ordinal inscriptions inherit the simplicity, immutability, security, and durability of the Bitcoin network – the most secure blockchain network.
Additionally, Bitcoin Ordinals have a fluid nature, meaning they can be fungible or non-fungible, depending on whether the owner wishes to preserve the individual Satoshi.
Therefore, if a Bitcoin user does not care about the data attached to an ordinal, it can simply be used like any other Bitcoin (e.g. to pay for network fees or sent as payment) with the data still attached. Ethereum NFTs, however, cannot act as a fungible token in the same way, as the Ethereum blockchain treats each individual token type differently.
Ordinals Pros
Ordinals have created another use case for the Bitcoin network beyond the transfer of value or HODL.
The increase in fees due to more competition for block space fees could be seen as a positive due to fees being a key incentive for miners to secure the blockchain.
Ordinal NFTs can bring a cultural value to the Bitcoin blockchain.
Ordinals Cons
Some Bitcoin maximalists believe that the simplicity of Bitcoin in its limitations to storing and transferring value should be preserved.
The rise of ordinal inscriptions is filling up Bitcoin’s block space and therefore driving up transaction fees.
According to Glassnode, a blockchain data firm, Bitcoin network’s 7-day moving average transactions reached 426,337.14 on April 29 – the highest it has ever been since December 2017.
This can largely be put down to the rise of inscriptions, as Dune analytics data shows that the number of inscriptions on Bitcoin is now over 2.5 million – on April 29th the daily inscriptions reached an all-time high of 223,311.
Bitcoin ordinals are a simple but important concept in the world of digital asset trading. They are used to calculate transaction fees, ensure that transactions are processed in the correct order, calculate the confirmation time for a transaction, and can be used to form NFTs on Bitcoin! While they may seem complicated at first, Bitcoin ordinals provide a framework for understanding the value of Bitcoin over time, and how it can evolve to include new features and use cases.
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