11institutetext:  Swinburne University of Technology, Australia
22institutetext: CISRO Data61, Australia

# Bitcoin Inscriptions: Foundations and Beyond

(Tech Report)

Ningran Li 11 Minfeng Qi 11 Qin Wang 22 Shiping Chen 22

###### Abstract

Bitcoin inscription marks a pivotal moment in blockchain technology. This
report presents a primary exploration of Bitcoin inscriptions. We dive into
the technological underpinnings and offer a detailed comparative analysis
between Bitcoin inscriptions and NFTs on other blockchains. Further, we
explore a wide range of use cases and significant opportunities for future
innovation, including inscription derivative protocols, Bitcoin Layer2
solutions, and interoperability techniques.

###### Keywords:

Inscription BRC-20 Ordinals Bitcoin Layer2

##  1 Bitcoin New Page

When people mention blockchain, the first thing that comes to mind is Bitcoin
[47]. Despite the past decade (an era also known as Web3 [75]) witnessing
flourishing innovation in numerous public blockchains such as Ethereum [12],
BSC [8], and Solana [81] in terms of decentralization, scalability, security,
and privacy, it is undeniable that Bitcoin remains the largest and most
valuable cryptocurrency asset in the world [14]. The price trend (Fig.1) of
Bitcoin from 2021 to the present shows that its price has experienced multiple
significant rises and falls. Since reaching its historical peak of about
$69,000 in October 2021, the price of Bitcoin has been on a continuous
decline. It was not until 2023 that Bitcoin welcomed a new round of “bull
market”. Behind this, in addition to market sentiment and economic environment
factors, the technological development of Bitcoin is the key driver igniting
this round of market enthusiasm.

Figure 1: Bitcoin Price Trend from 2021 to Present (Jan. 2024)

The Ordinal protocol [52], crafted by Casey Rodarmor and launched on the
Bitcoin mainnet on January 20, 2023, has opened new avenues for users to
innovate within the Bitcoin blockchain. This is achieved through the creation
of “inscriptions”, which function similarly to non-fungible tokens (NFTs) [74]
found on other blockchains. Specifically, it is realized by adding non-
transactional data (typically in JSON style) to Bitcoin transactions. These
inscriptions can include a variety of data types, ranging from simple text to
complex images or code. Following its launch, Bitcoin inscriptions quickly
garnered significant attention in the cryptocurrency market. As of now, there
have been over 55 million [30] Bitcoin inscriptions created, with text-based
data types comprising over 95% of these inscriptions (Fig.2). Bitcoin
inscriptions enhance the capabilities of Bitcoin, pushing the boundaries of
what was once deemed impossible.

Previous studies have explored various aspects surrounding this new hype. Razi
et al. [59] present a thorough overview of NFT (including Bitcoin NFT) and
survey the current landscape of NFT applications across various domains. Wang
et al. [76] delve into the surge of interest and activity surrounding BRC-20
tokens and critically examine the narratives of their hope and hype based on
market sentiment. Louis [7] delves into the factors influencing transaction
fees in the context of Bitcoin Ordinals and assesses their overall impact on
the Bitcoin network. Yu et al. [83] present a detailed design of a lightweight
bridge to facilitate communication and asset operation from the Bitcoin
network to Ethereum blockchains. Kiraz et al. [37] introduce a novel mechanism
for conducting NFT transactions on the Bitcoin blockchain. They propose an
off-chain receipts method that allows for the certification of authenticity
and ownership transfer of digital assets.

While these works have contributed elegant insights, our research
distinguishes itself by offering a distinct perspective. We focus on providing
a clear and comprehensive interpretation of the most fundamental aspects of
inscriptions, delving deeper than the surface-level usage or construction
discussed in prior works. We summarise our key contributions as follows:

  * •

We provide the first technical report dedicated to the topic of Bitcoin
inscriptions (Sec.2), covering its necessary preliminary technologies,
including SegWit, Schnorr Signatures, Taproot, Tapscript, and Ordinal Theory.

  * •

We present Bitcoin inscriptions’ operational mechanisms (Sec.3), detailed by a
historical overview, an examination of the working principles, and a
comparative analysis with conventional NFTs and the potential use case built
on Bitcoin inscriptions highlighting their versatility across different
domains, such as BRC-20, digital arts, and gaming assets.

  * •

We discuss the challenges and opportunities from a forward-looking perspective
(Sec.4), identifying areas for future research and industry development. In
particular, we emphasize the promising prospects of Bitcoin Layer2 and
derivative protocols related to inscriptions, drawing parallels with their
success in Ethereum ecosystems.

Figure 2: Different Inscription Types Over Time

##  2 Entree: Preliminaries and Background

In this section, we provide a detailed exploration of technological
underpinnings, including Segregated Witness, Schnorr Signature, Taproot,
Tapscript, and Ordinal Theory within the Bitcoin network.

###  2.1 Segregated Witness

The Bitcoin network consistently verifies a new block approximately every 10
to 15 minutes, with each block encompassing a specific number of transactions
[47]. Consequently, the size of these blocks directly influences the number of
transactions that can be confirmed within each block. Segregated Witness,
commonly known as SegWit, represents one of the key protocol upgrades [79]
addressing scalability and transaction malleability issues.

Before SegWit, Bitcoin transactions included a component called the signature
data within the transaction structure. This data, crucial for the verification
of transactions, contributed to two primary issues: scalability and
transaction malleability. Specifically, each Bitcoin block has a size limit
(originally set to 1MB), which constrains the number of transactions that can
be processed in each block. The inclusion of signature data within
transactions consumed significant space, limiting the overall transaction
throughput of the network. In addition, the transaction ID (txid) was
generated by hashing the entire transaction data, including the signature.
Since signatures could be altered without invalidating the transaction, the
txid could also be changed, leading to potential issues in tracking and
confirming transactions.

SegWit addresses these issues by changing the way transaction data is
structured and stored in the blocks (cf. Fig.3). Firstly, A SegWit transaction
consists of two main components, the original transaction structure (without
the signature) and a separate witness section containing the signatures and
scripts. It is worth noting that the signature data is separated from the main
transaction data. The witness information is still transmitted and stored in
the blockchain but is no longer a part of the transaction’s txid calculation.
The txid is now calculated without including the witness data, effectively
resolving the transaction malleability issue. This change means that the txid
remains constant even if the signature data is altered. Secondly, SegWit
introduces a new concept called block weight, which is a blend of the block’s
size with and without the witness data. The maximum block weight is set to
4MB, while the size of the non-witness data is still capped at 1MB [66]. This
effectively allows for more transactions to be included in each block,
improving the network’s capacity.

Figure 3: Bitcoin Transaction Data Structure (SegWit)

We present the advantages provided by SegWit for Bitcoin inscription.

  * •

Increased inscription transactions: SegWit increases the number of
transactions that can fit into a block by changing how data is counted towards
the block size limit. This indirectly benefits Bitcoin inscriptions by
allowing more space for these types of transactions, which can sometimes be
data-heavy.

  * •

Enhanced transaction efficiency: By optimizing the space within each block,
SegWit makes the Bitcoin network more efficient. This efficiency can be
beneficial for Bitcoin inscriptions, as it potentially leads to faster
confirmation times and lower fees.

  * •

Enhanced transaction security: For Bitcoin inscriptions, which may rely on
unaltered transaction IDs for their operation, SegWit ensures that the
modification of the signature part does not affect the transaction ID. It is
crucial for maintaining the integrity of inscription transaction references.

###  2.2 Schnorr Signature

The Schnorr signature scheme was proposed by Bitcoin core developer Pieter
Wuille via Bitcoin Improvement Proposal (BIP)-340 [77] in January 2020. The
proposal includes the Taproot/Schnorr soft fork upgrade [78] to replace the
Elliptic Curve Digital Signature Algorithm (ECDSA) [35] employed in Bitcoin’s
digital signature mechanism.

The Schnorr signature consists of three main algorithms: key generation,
signing, and verification [50]. Key generation establishes a secure private-
public key pair. The signing algorithm then creates a unique signature for
each message, combining a random nonce, a hash function, and the private key.
The verification algorithm checks the signature’s validity against the message
and public key.

Key generation. Key generation (Algorithm 1) initiates the Schnorr signature
process. It involves generating a private key $d$ and a public key $Q$. The
private key is randomly selected from the set $\mathbb{Z}_{n}^{*}$,
representing the group of integers modulo $n$ (excluding zero), where $n$ is
the order of the elliptic curve. The public key $Q$ is computed as the product
of the private key $d$ and the generator point $G$ of the elliptic curve. The
generator point $G$ is a pre-defined point on the elliptic curve, known to all
parties in the cryptographic system. The output of this algorithm is the pair
$(d,Q)$.

Algorithm 1 Key generation

0: Generator point $G$, order of the curve $n$

0: Private key $d$, Public key $Q$

1: $d\leftarrow$ randomly choose from $\mathbb{Z}_{n}^{*}$

2: $Q\leftarrow d\cdot G$

3: return $(d,Q)$

Signing procedure. Signing (Algorithm 2) is responsible for creating a digital
signature for a given message. It starts by selecting a random nonce $k$ from
$\mathbb{Z}_{n}^{*}$. This nonce is a random number that ensures the
uniqueness of each signature, even for repeated signings of the same message.
The algorithm computes a point $R$ on the elliptic curve by multiplying $k$
with the generator point $G$. Subsequently, it calculates a hash value $e$
using a cryptographic hash function, taking as input the concatenation of $R$,
the public key $Q$, and the message $m$. The signature component $s$ is then
computed as $(k-e\cdot d)\mod n$, where $d$ is the private key. The resulting
signature for the message $m$ is the pair $(R,s)$.

Algorithm 2 Signing

0: Private key $d$, message $m$

0: Signature $(R,s)$

1: $k\leftarrow$ randomly choose from $\mathbb{Z}_{n}^{*}$

2: $R\leftarrow k\cdot G$

3: $e\leftarrow\text{Hash}(R\parallel Q\parallel m)$

4: $s\leftarrow(k-e\cdot d)\mod n$

5: return $(R,s)$

Signature validation. Verification (Algorithm 3) determines the validity of a
given signature for a message. It requires the public key $Q$, the message
$m$, and the signature $(R,s)$ as inputs. The algorithm first computes the
hash value $e$ similarly to the signing algorithm. It then calculates a
verification point $V$ on the elliptic curve, which is the sum of $s\cdot G$
and $e\cdot Q$. The signature is deemed valid if and only if this verification
point $V$ equals the point $R$ in the signature. If $V=R$, the algorithm
returns True, indicating the signature is valid. Otherwise, it returns False,
indicating the signature is invalid.

Algorithm 3 Verification

0: Public key $Q$, message $m$, signature $(R,s)$

0: Validation result

1: $e\leftarrow\text{Hash}(R\parallel Q\parallel m)$

2: $V\leftarrow(s\cdot G)+(e\cdot Q)$

3: if $V=R$ then

4: return True {The signature is valid}

5: else

6: return False {The signature is invalid}

7: end if

Employing Schnorr signatures is particularly important to Bitcoin inscription
technology for several reasons that align well with the cryptocurrency’s goals
of security, efficiency, and privacy. Here are the key reasons.

  * •

Efficient data embedding: Schnorr signatures, known for their efficiency in
terms of size, enable more data to be embedded within a transaction while
minimizing the space it occupies on the blockchain [33]. This efficiency is
crucial for inscription technology, which involves embedding additional data
(like digital artifacts) on the blockchain. The compact nature of Schnorr
signatures allows for more inscriptions without significantly increasing the
size of the blockchain.

  * •

Enhanced privacy and security: Inscription can potentially expose more
transaction details. Schnorr signatures help mitigate privacy concerns by
making multi-signature transactions indistinguishable from single-signature
ones. This feature is vital in maintaining user privacy, especially when
inscriptions are used in transactions involving multiple parties.

  * •

Scalability and throughput: The reduced size and increased efficiency of
Schnorr signatures directly contribute to Bitcoin’s scalability. By allowing
more transactions (and thus more inscriptions) to be included in each block,
Schnorr signatures can improve the overall throughput of the Bitcoin network.
This is particularly important as the volume of transactions, including those
with inscriptions, continues to grow.

  * •

Flexibility for complex transactions: Schnorr signatures offer greater
flexibility for complex transactions, which is beneficial for advanced
inscription use cases. They enable sophisticated scripting possibilities,
which can be used to create more intricate types of inscriptions and digital
artifacts on Bitcoin.

###  2.3 Taproot and Tapscript

BIP-341 [10], commonly known as Taproot, is an enhancement to BIP-340. The
core idea is to combine the strengths of Merkelized abstract syntax trees MAST
[9] and Schnorr signatures by committing a single Schnorr public key in the
output that can represent both a single public key spend and a complex script
spend. It introduces a new Taproot output (SegWit version 1) that includes a
signature, a control block, and a script path. Moreover, it also specifies the
rules for spending the Taproot output, which can be either a key-path spend
(using a single signature) or a script-path spend (using one of the scripts
committed to in the MAST structure). It achieves privacy and efficiency by
allowing users to mask complex smart contracts as standard single-signature
transactions.

Tapscript proposed in BIP-342 [11] introduces improvements to the Bitcoin
scripting language, particularly focusing on the integration of Schnorr
signatures and used for Taproot script-path spends. The primary motivation
behind BIP-342 is to address certain limitations within the existing Bitcoin
scripting system, especially in terms of compatibility with the semantics of
certain opcodes. BIP-342 modifies the signature opcodes OP_CHECKSIG and
OP_CHECKSIGVERIFY to verify Schnorr signatures as specified in BIP-340. It
presents a new opcode, OP_CHECKSIGADD, which facilitates the establishment of
multi-signature policies that can be verified in batches. This enhancement
significantly boosts the efficiency and scalability of transactions involving
multiple signatures.

In comparison, BIP-341’s Taproot allows for the compression of data in
inscription transactions, reducing their size and improving scalability.
BIP-342 enables batch verification of signatures, which is crucial for multi-
signature transactions often used in inscriptions. To further illustrate the
working principle of BIP-341 and BIP-342, we consider a situation where a
Bitcoin address is controlled by three parties: A, B, and C. We created a
Taproot output address that allows for flexible spending conditions using MAST
and Tapscript (shown in Fig.4). The spending conditions are as follows: 1\.
Any two of the three parties (A, B, C) can jointly spend the funds. 2\. If the
funds are not moved for a year, party A can unilaterally spend them (a time-
lock condition). Initially, the parties aggregate their individual public keys
(Pk_A, Pk_B, Pk_C) to form a single Schnorr Internal public key P. This
aggregate key, alongside the Merkle root derived from two hashed scripts
(Script1 adds up the valid signatures and ensures that at least two signatures
are provided; Script2 uses OP_CHECKSEQUENCEVERIFY to enforce the time-lock,
ensuring the script can only be executed after a year. Then it checks the
signature from A), and forms the Taproot output. When it’s time to spend, the
parties can opt for a key-path spend using P for a private transaction, or a
script-path spend, revealing the chosen script and its corresponding Merkle
proof to fulfill specific conditions.

Figure 4: Taproot and Tapscript

###  2.4 Ordinal Theory

Bitcoin Ordinal Theory [53] introduces the uniqueness within the Bitcoin
ecosystem. It revolves around the idea of assigning distinct identities to
individual satoshis (sats), the smallest unit of Bitcoin (100 millionths of a
Titcoin) [47], allowing for their precise tracking and utilization in various
applications.

Numbering scheme for satoshis. Satoshis are numbered in the order they are
mined, and this numbering is maintained as they are transferred from
transaction inputs to outputs, adhering to a first-in-first-out principle.
Ordinal numbers are essentially a numbering scheme for satoshis, allowing each
satoshi to be tracked and transferred as an individual entity.

Ordinal numbers can be represented in several distinct formats [53]. Taking
Inscription #34,595,802 as a case in point.

  * •

Integer notation: The ordinal number assigned according to the order in which
the satoshi was mined. E.g., 1938930000000000.

  * •

Decimal notation: Combines the block height at which the satoshi was mined
with the offset of the satoshi within the block. E.g., 792288.0.

  * •

Degree notation: A unique representation that makes the rarity of a satoshi
easy to see at a glance. E.g.,
$0^{\circ}162288^{\prime}0^{\prime\prime}0^{\prime\prime\prime}$.

  * •

Percentile notation: The satoshi’s position in Bitcoin’s supply is expressed
as a percentage. E.g., 92.33000010156304%.

  * •

Name: An encoding of the ordinal number using characters a through z. E.g.,
acqgzfkezav.

Rarity system. Ordinal Theory introduces a system of rarity based on periodic
events in Bitcoin, such as blocks, difficulty adjustments, halvings, and
cycles. This system categorizes satoshis into different rarity levels like
common, uncommon, rare, epic, legendary, and mythic [53].

Bitcoin experiences regular events that vary in frequency, creating a natural
framework for categorizing rarity. These events include:

  * •

Blocks: New blocks are mined about every 10 minutes.

  * •

Difficulty adjustments: Occurring every 2016 blocks or roughly every two
weeks. The network adjusts the difficulty level required for block acceptance
in response to hash rate fluctuations.

  * •

Halvings: Approximately every four years, or every 210,000 blocks, the number
of new satoshis generated per block is halved.

  * •

Cycles: A special event, known as a conjunction, happens every six halvings,
approximately every 24 years 111The LCM is the smallest number that is a
multiple of 2016 and 210,000.:  $\text{1260,000 = LCM}(2016,210,000)$ , where
halvings and difficulty adjustments align. The period between these
conjunctions is termed a cycle, with the next one anticipated around 2032.

Based on these events, satoshis can be classified into different levels of
rarity:

  * •

Common: Any satoshi that isn’t the first in its block.

  * •

Uncommon: The first satoshi in each block.

  * •

Rare: The first satoshi in each difficulty adjustment period.

  * •

Epic: The first satoshi in each halving epoch.

  * •

Legendary: The first satoshi in each cycle.

  * •

Mythic: The very first satoshi from the genesis block.

For example, Inscription #34,595,802 is rare. We can use degree notation to
highlight the rarity of this satoshi straightforwardly.

$1^{\circ}1^{\prime}0^{\prime\prime}0^{\prime\prime\prime}\quad\\\ $

$1^{\circ}$ | Second cycle
---|---
$1^{\prime}$ | Not the first block in halving epoch
$0^{\prime\prime}$ | First block in difficulty adjustment period
$0^{\prime\prime\prime}$ | First sat in block

####  2.4.1 Impact of Ordinal Theory on Bitcoin inscriptions:

Ordinal Theory allows for the creation of unique, non-fungible assets directly
on the Bitcoin blockchain. By assigning distinct identities to individual
satoshis, it becomes possible to attach specific data or digital artifacts to
these satoshis, effectively turning them into unique digital assets.
Additionally, with Ordinal Theory, each satoshi can be tracked through its
transaction history. This level of traceability is crucial for establishing
the provenance and ownership history of inscribed assets.

##  3 Staple-I: Understanding Bitcoin Inscriptions

This section offers a comprehensive understanding of Bitcoin inscriptions,
illustrating the history of Bitcoin-related NFTs, technical working
principles, a comparative analysis distinguishing Bitcoin inscriptions from
NFTs on platforms like Ethereum, and the exploration of use cases.

###  3.1 Historical Overview

Bitcoin’s creation in 2009 laid the groundwork for blockchain technology, but
initially, it was focused on cryptocurrency rather than NFTs. Namecoin in 2011
[36] was a pioneering project that forked from Bitcoin. It focused on using
blockchain technology for decentralized domain name registration, representing
an early exploration of blockchain’s potential beyond currency. Its
limitations included limited adoption and being overshadowed by Bitcoin’s
growth.

One of the earliest concepts related to NFTs on the Bitcoin blockchain was
“Colored Coins” [62] in 2012. Colored Coins implemented a method known as
“metadata injection” to incorporate additional metadata. This process utilized
the scriptSig field within a transaction’s input script. However, this
approach was inefficient and faced limitations because it was not designed for
storing extensive metadata, leading to scalability issues.

In 2014, Counterparty [18] emerged as a significant development, building on
the Bitcoin blockchain to enable the creation of unique tokens and digital
assets. This platform expanded the possibilities for asset representation and
transfer on Bitcoin. However, it was limited by Bitcoin’s transaction speed
and fee structure. The reliance on Bitcoin’s blockchain meant that
Counterparty transactions were subject to the same congestion and high fees
during peak times.

Spells of Genesis [69] proposed in 2015, one of the first games to integrate
blockchain technology, utilized Counterparty to create in-game assets as
tradable tokens. While it represented a novel blend of gaming and blockchain,
the game’s dependence on the Counterparty platform inherited its limitations.

In 2016, Rare Pepe [58] brought a unique cultural twist to blockchain tokens.
Using Counterparty, it allowed the creation and trading of digital assets
based on the popular Pepe the Frog meme, showcasing the diverse potential of
blockchain assets. However, it was constrained by the niche appeal of its
meme-based assets and the technical limitations of the Counterparty platform.
The project’s success was more within the crypto community than in broader
markets.

More recently, the concept of Bitcoin NFTs has seen a resurgence with the
introduction of Bitcoin Ordinals [53]. This approach involves assigning unique
ordinal numbers to individual satoshis, enabling them to be used as distinct,
trackable assets akin to NFTs. This has opened up new possibilities for
creating and trading digital artifacts directly on the Bitcoin blockchain.
Despite this, Bitcoin NFTs are still in their nascent stages. Challenges
include potential network congestion due to increased data from inscriptions
and the permanence of content issues (more discussions refer to Sec.4).

Table 1: Historical Overview of Bitcoin Inscriptions Year | Milestone |  Description |  Limitations
---|---|---|---
2011 | Namecoin |  Early fork of Bitcoin for decentralized domain name registration. |  Limited adoption and overshadowed by Bitcoin’s growth.
2012 | Colored Coins |  Early asset representation method on Bitcoin. |  Inefficient, capacity constraints.
2014 | Counterparty |  Platform for Bitcoin-based unique tokens. |  Bitcoin’s transaction speed and fee limitations.
2015 | Spells of Genesis |  Blockchain game using Counterparty for assets. |  Limited mainstream adoption, platform constraints.
2016 | Rare Pepe |  Digital assets based on Pepe meme via Counterparty. |  Niche appeal, technical limitations.
2023 | Bitcoin Ordinals |  Advancements for digital artifacts on Bitcoin. |  Network congestion, content permanence issues.

###  3.2 Working Principle

The following diagram (Fig.5) illustrates the process of inscribing data onto
the Bitcoin blockchain and associating it with a specific ordinal (satoshi).

The working principle is as follows: Firstly, the data intended for
inscription is first prepared in a suitable format. This often involves
encoding the data into a byte string that can be embedded in a Bitcoin
transaction. The data is typically accompanied by a MIME type [65] that
specifies the nature and format of the content (e.g., image/jpeg, text/plain),
ensuring compatibility with web standards. This alignment with web standards
means that inscription content can be retrieved and rendered by standard web
browsers, similar to how they handle regular web content served from a server.

Then, inscription content is encapsulated within a structure known as an
“envelope”, which uses Bitcoin taproot script-path spend script [53] opcodes
OP_FALSE, OP_IF, …, OP_ENDIF. Taproot scripts benefit from the witness
discount [78] introduced by SegWit, which reduces the size and cost of storing
witness data compared to other transaction data.

Figure 5: Working Principle of Bitcoin Inscriptions

Creating the inscription transaction has two phases. In the first phase
(called commit transaction), a taproot output is created, which commits to a
script containing the inscription content. This script is constructed in such
a way that it cryptographically references the data without revealing it. The
transaction is then broadcast and included in a block on the blockchain. In
the second phase, a subsequent transaction (reveal transaction) is made to
spend the output from the commit phase. This spending transaction includes the
actual inscription data within its script. When this transaction is confirmed,
the inscription data becomes permanently recorded on the blockchain.

Finally, the unique ordinal number of the selected satoshi is tracked through
these transactions. As ordinals follow a first-in-first-out principle, such
ordinal number is effectively transferred from the input satoshi to the output
satoshi (the commit transaction) and then to the inscribed satoshi (the reveal
transaction).

###  3.3 Differences Between Bitcoin Inscriptions and Other NFTs

Bitcoin inscriptions and NFTs on other blockchains (majorly, EVM-compatible
platforms) represent two distinct approaches. This comparative analysis
(summarised in Table 2) aims to discuss the fundamental differences between
these two paradigms, highlighting their unique characteristics and
implications.

Table 2: Bitcoin Inscriptions vs. NFTs on Other Blockchains Aspect |  Bitcoin Inscriptions |  Other NFTs
---|---|---
Description Method |  Digital Asset, Inscription, Oridinal |  NFT
Protocol Form |  Ordinal Protocol |  ERC-721, ERC-1155, etc
Storage Method |  Entirely stored on-chain |  Stored on IPFS or Arweave, not 100% on-chain
Immutability |  Inherent |  Variable
Minting |  Currently not possible without a node, only possible via third-party designed services |  Mostly can directly interact with the webpage
Trading Method |  NFT Marketplace |  NFT Marketplace
Scarcity |  Limited by Bitcoin usage |  Potentially less scarce
Royalty Models |  None |  Common, with challenges
Integration |  Difficult due to Bitcoin’s scripting limitations |  Easier due to programmable smart contracts
Energy Consumption |  High due to Proof of Work consensus |  Depends on the consensus algorithm of the platform
Advantages |  Scarcity, characteristics of luxury goods |  Mainstream NFT mode, high user base
Disadvantages |  1\. Block speed is slow, and not suitable for bulk minting. 2. Difficulties in minting and trading. 3. Wallet entry is complex |  No special gimmicks or fame, easily overlooked

Protocol and description method. Bitcoin inscriptions operate on the Ordinal
protocol, embedding data directly into individual satoshis, and are described
as digital assets, ordinals, or inscriptions. In contrast, NFTs on platforms
like Ethereum utilize standards such as ERC-721 [26] or ERC-1155 [25], and are
commonly referred to as NFTs. This fundamental difference in protocol form
shapes the inherent properties and possibilities of each asset type.

Storage and immutability. Bitcoin inscriptions are entirely stored on-chain,
ensuring complete immutability and permanence. Once an inscription is embedded
in the Bitcoin blockchain, it becomes unalterable. This method ensures the
durability of the inscribed content, with the cost of inscriptions being
proportional to the content’s size. On the other hand, NFTs on other
blockchains often rely on off-chain storage solutions like IPFS [6] and
Arweave [3], introducing potential challenges in content availability and
permanence. The degree of immutability for these NFTs can vary, with some
being alterable or deletable by the contract owner. This variability
necessitates a thorough audit of the contract code to ascertain the
immutability of an NFT. The auditing process can be complex and technically
demanding.

Minting and trading. Minting Bitcoin inscriptions currently requires a node or
third-party services, and the trading of these inscriptions occurs through NFT
marketplaces. Other NFTs can often be minted directly through web interfaces
and are also traded on NFT marketplaces. However, the integration of Bitcoin
inscriptions with other platforms is challenging due to Bitcoin’s scripting
limitations, while NFTs on programmable blockchains offer more seamless
integration.

Scarcity. Bitcoin inscriptions are inherently limited by the nature of the
Bitcoin blockchain. Since they are directly tied to individual satoshis, their
scarcity is intrinsically linked to the total supply of Bitcoin, which is
capped at 21 million coins. This finite supply of satoshis imposes a natural
limit on the number of possible inscriptions. On platforms like Ethereum, the
creation of NFTs is often governed by smart contracts that allow for flexible
minting policies. Creators can generate large quantities of NFTs with minimal
cost, which can potentially lead to a saturation of the market. While some NFT
projects on other blockchains impose a cap on the number of tokens, others do
not, allowing for an unlimited supply. This flexibility means that the
scarcity of NFTs on these platforms can vary significantly from one project to
another.

Royalty models. Bitcoin inscriptions do not inherently support on-chain
royalty models. This means that when a Bitcoin inscription is transferred or
sold, there is no automatic mechanism within the Bitcoin blockchain to provide
a percentage of the sale back to the original creator. Many NFTs on platforms
like Ethereum utilize smart contracts that can include on-chain royalty
models. These contracts automatically enforce that a certain percentage of
every secondary sale of the NFT is paid to the original creator. The presence
of on-chain royalty models offers ongoing compensation for creators but
introduces complexity and standardization challenges.

Integration and energy consumption. Bitcoin inscriptions benefit from direct
integration into the largest and most established cryptocurrency market, with
immediate access to a vast and liquid market, but it is difficult to integrate
into other platforms due to Bitcoin’s scripting limitations. On the other
hand, their energy consumption is high due to Bitcoin’s Proof of Work
consensus. In contrast, NFTs on other blockchains are confined to specific
ecosystems with varying energy footprints based on the consensus algorithm of
the platform.

Advantages and disadvantages. Bitcoin inscriptions offer the advantages of
scarcity and the characteristics of luxury goods. However, they face
challenges such as slow block speed, complexities in minting and trading, and
a complex wallet setup. Other NFTs enjoy a mainstream mode and a high user
base but may lack unique features or recognition, potentially leading to
market saturation.

###  3.4 Use Cases

Token Standard for Fungible Tokens on Bitcoin: BRC-20. On March 8, 2023, an
anonymous developer named domodata launched the BRC-20 [20]. The BRC-20 token
standard represents an experimental approach to creating fungible tokens using
ordinal inscriptions. This standard is akin to Ethereum’s ERC-20 [24] but is
uniquely tailored for the Bitcoin network [76]. Specifically, it requires
users to fill in various parts according to a standardized JSON format, with
the following specifications as shown in Fig.6:

Figure 6: BRC-20 Protocol Standard

  * •

‘p’: protocol type. This is a mandatory keyword that defines the operation
based on the BRC-20 protocol, helping other systems to identify and process
BRC-20 events.

  * •

‘op’: event type. This is a mandatory keyword that defines the type of event,
whether it’s deploy, mint, or transfer. For example, the content of ‘op’ as
‘transfer’ means the event type is a transfer.

  * •

‘tick’: BRC-20 token identifier. This is a mandatory keyword that defines the
name of the BRC-20 token, composed of 4 letters. In this case, the content of
‘tick’ as ‘ORDI’ means the BRC-20 token being transferred is $ORDI.

  * •

‘amt’: the amount of BRC-20 token being transferred. This is a mandatory
keyword that defines how many BRC-20 Tokens will be transferred.

  * •

‘max’: maximum supply. This is a mandatory keyword that defines the maximum
supply of the BRC-20 token.

  * •

‘lim’: the maximum number of BRC-20 tokens that a single inscription can
accommodate. This is an optional keyword that defines how many BRC-20 tokens a
user can obtain from minting a single inscription. If set to 1000, minting a
single inscription can obtain a maximum of 1000 BRC-20 tokens.

ORDI [19] is the first BRC-20 token issued on the Bitcoin network, with a
total supply of 21,000,000 tokens. Unlike Ethereum’s ERC-20 tokens, ORDI is
not a smart contract token. It operates without the support of underlying
technology, project teams, real-world project applications, or defined use
cases. The valuation of ORDI is essentially driven by community consensus and
the dynamics of market interest (also known as the meme coins [82]). Creating
a new meme coin comes at no cost; each one faces competition from other, more
’meaningful’ meme coins. For instance, another BRC-20 token, SATS [17],
competes in this space. Each Bitcoin can be divided into 100 million satoshis,
and this BRC-20 token named SATS has set its total supply at 21 trillion,
mirroring the maximum number of 21 trillion satoshis.

Digital art and collectibles. Bitcoin inscriptions can offer artists and
collectors an innovative approach to creating and trading digital works. It
leverages the capability to inscribe digital assets directly onto individual
satoshis on the Bitcoin network, ensuring each piece’s authenticity and
permanence. A notable example of this is the creation of Ordinal Punks [42],
which draw inspiration from the iconic CryptoPunks [39] on the Ethereum
network. These pixel-art characters, each with unique features and levels of
rarity, are inscribed onto satoshis, turning them into highly desirable
collectibles within the digital art sphere. Furthermore, writers and poets are
finding a new medium for their work through Bitcoin inscriptions. Entire poems
or short stories can be inscribed onto satoshis, creating a unique form of
literary art. For instance, a poem by Ana Maria Caballero sold for 0.28
Bitcoin (equiv. $11,430) at Sotheby’s [13], one of the world’s most famous
auction houses.

Gaming assets. Leveraging the immutable nature of the Bitcoin blockchain,
gaming assets inscribed as ordinals provide players with ownership of unique
in-game items, characters, or even entire game worlds. The “Pizza Ninjas”
gaming project [51] intertwines the thrill of gaming with the world of digital
collectibles. Each Pizza Ninja character is not only a playable asset but also
a piece of art. By inscribing these unique characters and narratives onto the
Bitcoin blockchain, the project ensures the rarity and ownership of every in-
game element.

Record of messages. The use of Bitcoin inscriptions for creating an immutable
record of messages is another feasible application. Inscribing messages can
serve as proof of existence for documents or intellectual property. By
embedding a hash of the document or a reference to the work in a Bitcoin
transaction, creators can prove the existence of their work at a specific
point in time. In some scenarios where the integrity of communication is
crucial, such as in legal contexts, this way ensures that the content of the
communication remains unaltered and verifiable.

##  4 Staple-II: Our Discussion

###  4.1 Challenges

Blockchain bloat. It refers to the increase in the size of the blockchain due
to the accumulation of data over time [68]. In the context of Bitcoin
inscriptions, blockchain bloat is exacerbated by the addition of non-financial
data embedded directly into the blockchain. As the blockchain grows in size,
the storage requirements for nodes also increase. In addition, new nodes or
nodes catching up to the current state of the blockchain may experience slower
synchronization times due to the larger amount of data that needs to be
processed and verified. Moreover, larger block sizes can impact the efficiency
of the network and potentially undermine the decentralized nature of Bitcoin.

Limited smart contracts and compatibility. It refers to Bitcoin’s inherent
design, which prioritizes security and simplicity over complex
programmability. Unlike platforms like Ethereum, which are designed to support
a wide range of decentralized applications through smart contracts, Bitcoin’s
scripting language is more restricted. This limitation impacts the
blockchain’s ability to support complex transactions and scalable
applications, particularly those requiring intricate logic and interactions,
such as DeFi protocols [34].

Security threats. The United States National Vulnerability Database (NVD) has
identified a significant cybersecurity risk associated with the Ordinals
Protocol in Bitcoin [48]. This recognition highlights a significant security
flaw associated with the development of the Ordinals Protocol in Bitcoin. The
vulnerability allows for bypassing the datacarrier limit by disguising data as
code in certain versions of Bitcoin Core and Bitcoin Knots. This exploit has
been utilized by inscriptions, leading to the addition of substantial non-
transactional data to the blockchain. Moreover, with the rising popularity of
Bitcoin inscriptions, this ecosystem has attracted various types of scams. For
example, scammers construct JSON fields for transferring inscriptions and
encode them as hex for users to inscribe [31]. This can result in the theft of
users’ inscriptions. Additionally, on trading platforms, users often encounter
numerous inscriptions with the same name, making it challenging to identify
authentic ones. Scammers exploit this by forging inscription series and adding
invalid fields to mimic genuine ones.

User-friendliness and accessibility. Although minting and transferring Bitcoin
inscriptions can be done directly on Bitcoin, for many users, especially those
not deeply familiar with blockchain technology, accessing and interacting with
Bitcoin inscriptions may require specialized wallets and marketplaces. Most
Ethereum users utilize wallets and tools optimized for interacting with ERC
standards, which may not be compatible with Bitcoin inscriptions. This
necessitates the use of Bitcoin-specialized wallets (e.g., Gamma.io [28],
Ordinals Wallet [54]) or third-party services (e.g., UniSat [72], Magic Eden
[43]), which is a significant educational gap for users transitioning from
Ethereum to Bitcoin inscriptions. In addition, users accustomed to Ethereum’s
transaction speed and fee structure may find Bitcoin’s inscription system less
efficient and economical.

Increased transaction costs. Bitcoin transaction costs are usually influenced
by several factors, such as the size of transactions, network congestion, and
priority of transactions [22]. Inscriptions often involve embedding additional
data into a Bitcoin transaction. The larger and more complex this data, the
more space it occupies in a block, driving up transaction fees. As
inscriptions become more popular, they contribute to network congestion,
further elevating the costs. Therefore, users might become more selective in
creating inscriptions due to higher fees. Cost barriers will lead users to
perceive inscribing on Bitcoin as most appropriate for artworks that are
either small in size or of high value.

###  4.2 Opportunities

Inscription derivative protocols. After the surge in popularity of Bitcoin
inscriptions, the trend quickly spread to other public blockchains, leading to
the emergence of numerous inscription derivative protocols and imitation
projects. These innovative projects and protocols have further enriched the
inscription ecosystem. We categorize mainstream inscription protocols based on
their respective public blockchains, analyzing and comparing the inscription
protocols on each chain (shown in Table LABEL:tab:inscription_projects).

As discussed before, the BRC-20 protocol faces limitations with only four-
letter tokens and susceptibility to front-running attacks. To improve BRC-20,
ARC-20 [5] removes the four-character limit, allowing for more diverse
gameplay. A unique project within this framework is “Realm” [60], where each
registered entity is a prefix text, ultimately owning the pricing rights to
all suffixes. Rune [41], proposed by Ordinals founder Casey, is designed to
issue Fungible tokens by inserting token data directly into UTXO scripts.
Rune’s implementation is similar to ARC20, while it includes the token
quantity in the script data, making it more legitimate. In addition, RGB [61]
represents an ultimate scaling solution, turning smart contract states into
concise proofs inscribed in BTC UTXO output scripts. RGB offers low
transaction costs and high scalability. It is considered a Layer2 for BTC,
leveraging BTC’s security for smart contracts.

For other blockchains, DRC-20 [21] on Dogecoin (PoW chain) is similar to
BRC-20 but popular due to low transaction costs and strong meme appeal.
Ethscriptions protocol [27] on the Ethereum chain introduced “dumb contracts”,
bringing functionality and practicality. ASC-20 [4], BSC-20 [29], PRC-20 [56]
on other EVM-compatible chains also enable inscription and index building for
projects like AVAL, BNBS, and POLS. SOLs [23] on Solana began in November
2023, with a total of 21,000,000 inscriptions. The main focus is on NFTs, with
indexing based on image or file hashes. SFNs [63] is recognized as the first
inscription on the EOS chain. It adopts the AtomicAsset standard [55], which
provides a powerful feature set while minimizing unnecessary complexity and
focusing on RAM efficiency. In addition, MRC-20 [15] powered by the Move
blockchain offers an efficient and user-friendly approach to token management.
APT-20 [2] is an experimental token standard that facilitates the creation and
transfer of fungible tokens through the Ordinals protocol on the Aptos
blockchain.

Table 3: Comparative Analysis of Inscription Derivative Protocols |  |  |  |  |
---|---|---|---|---|---
|  |  |  |  |
Icon |  Protocol |  Chain |  Inscription |  Total Amount |  Feature Description
|  BRC20 [20] |  BTC |  Ordi |  21,000,000 |  First Bitcoin-based inscription protocol
|  ARC20 [5] |  BTC |  Atom |  21,000,000 |  Removes the four-character limit
|  Rune [41] |  BTC |  Pipe |  2,100,000 |  Embeds token data in Bitcoin’s UTXO
|  RGB [61] |  BTC |  RGB |  2,100,000 |  Converts smart contract states into concise proofs
|  DRC20 [21] |  Doge |  Dogi |  21,000,000 |  Similar to BRC-20, popular for low costs
|  Ethscription [27] |  ETH |  Eths |  21,000,000 |  Introduces ”dumb contracts”
|  ASC20 [4] |  Avax |  Avav |  21,000,000 |  EVM-compatible chain protocol
|  BSC20 [29] |  BSC |  Bnbs |  21,000,000 |  EVM-compatible chain protocol
|  PRC20 [56] |  Polygon |  Pols |  2.1e+15 |  EVM-compatible chain protocol
|  AtomicAsset [55] |  EOS |  Snfs |  21,000,000 |  Efficient and powerful feature sets
|  SPL20 [23] |  Solana |  Sols |  21,000,000 |  NFTs with indexing based on file hashes
|  MRC20 [15] |  Move |  Moves |  21,000,000 |  User-friendly approach to token management
|  APT20 [2] |  Aptos |  Apts |  21,000,000 |  Based on Ordinals protocol

Bitcoin Layer2 solution. BTC Layer2 is a layer above the BTC network,
primarily aimed at solving issues of insufficient transaction throughput, high
transaction costs, and scalability challenges in the BTC network [64]. In
simple terms, Layer1 refers to the Bitcoin public chain. To address the
throughput issues of the BTC network and avoid high fees, transactions can be
processed on Layer2 and then the results returned to Layer1, thereby reducing
network pressure on the Bitcoin network. As the volume of inscription
transactions on the Bitcoin network continues to grow, maintaining the
stability of the settlement layer (Layer1) while encouraging innovation in the
upper layer (Layer2) is the current and future main direction of development.

The core concept of ZK Rollups [49] is to bundle multiple transactions into a
single transaction on the Bitcoin blockchain. This process uses zero-knowledge
proofs to verify bundled transactions without exposing details. The current
versions of ZK rollups have raised concerns about centralization, as they
primarily rely on centralized sequencers. In many existing implementations, a
single entity is responsible for aggregating transactions, generating validity
proofs, and submitting batch data to the Bitcoin network. This places
considerable trust in the sequencers. In the future, a hybrid model combining
multiple types of provers to accommodate different use cases may emerge. For
example, a threshold scheme [71] can distribute power to a dynamic group of
sorting nodes based on equity or rotation; An opcode scheme [45] can enable
bidirectional transfer of Sats and assets between the Bitcoin base layer and
ZK rollups.

In addition to ZK rollups, other Layer2 technologies are also maturing. Two
notable examples are Rootstock and Stacks. Rootstock (RSK) uses merged mining
to ensure security comparable to Bitcoin and achieves expansion, efficiency,
and advanced functionalities [40]. Merged mining allows Bitcoin miners to
process and validate BTC and RSK transactions within the same block. In this
mode, miners can mine simultaneously on the parent chain (larger blockchains
like Bitcoin) and the child chain (smaller blockchains like RSK). By
leveraging the computational power of the more powerful parent chain, the
smaller chain gains additional security. Despite progress, RSK still faces
challenges. RSK has difficulty attracting enough users, and the complexity and
novelty of its merged mining mechanism also pose risks. Stacks is a Layer2
smart contract protocol designed specifically for Bitcoin, aiming to bring
decentralized applications and smart contract functionalities to the Bitcoin
ecosystem [32]. Stacks introduces decentralized mining/bridging with Bitcoin.
However, bottlenecks such as user experience, fees, and network effects may
still be barriers to its broader adoption.

In 2023, the payment channels on the Lightning Network (LN) circulated over
5400 BTC, valued at over 230 million USD [16]. LN micropayment channels
establish a relationship between two parties, allowing them to continuously
adjust balances without broadcasting each transaction to the blockchain [57].
This method delays broadcasting the total balance between the two parties to a
future point in time, effectively processing the total balance in one
transaction. This approach allows financial relationships to exist without
trust in the other party, free from the risk of default. The Taproot asset
protocol [38], announced in November 2023, further supports asset issuance
through LN and provides customizable asset destruction features. Although
high-fee events caused by network congestion have exposed LN’s ongoing
scalability limitations, LN solutions are expected to continue to be
integrated into a wider range of applications as decentralized payment
channels.

Interoperability for Bitcoin inscriptions. Bitcoin inscriptions currently face
limitations in interoperability and lack effective liquidity mechanisms.
Establishing the infrastructure to provide liquidity for Bitcoin inscriptions,
such as interoperability mechanisms [73], is one of the key directions to
propel the development of the Bitcoin inscription ecosystem. Interoperability
techniques allow Bitcoin inscriptions to be traded or utilized in various
blockchains. This opens up a larger market for these assets, as they can be
accessed by users on different blockchain platforms, not just those on the
Bitcoin network.

In 2023, Ordinals Market and Bitcoin Miladys jointly released the BRC721E
standard [44]. This standard enables the migration of verifiable ERC721 NFTs
from Ethereum to Bitcoin Ordinals. During the bridging of NFTs, BRC721E
encodes NFT data directly into a burn transaction. This burn transaction also
acts as a request for a Bitcoin chain inscription, specifying a Bitcoin
address to receive the inscription. It’s important to note that the burn
transaction is irreversible, which means that currently, it’s not possible to
convert an Ordinal back into an ERC-721 NFT. Therefore, we consider this
reversibility a potential research direction for the future.

In addition, several cross-chain bridging protocols support the transfer of
BRC-20 assets across chains, such as MultiBit [46], TeleportDAO [70], and
SoBit Bridge [67]. MultiBit is a cross-chain protocol between BRC20 and ERC20.
It enables the transfer of tokens between BRC20 and ERC20. Similar to
MultiBit, TeleportDAO has established a cross-chain Ordinals market,
supporting the transfer and trading of assets between BTC and Polygon. SoBit
Bridge allows users to transfer their BRC20 assets to Solana, enabling the
creation of equivalent tokens on the Solana blockchain. Additionally, Allins
[1] is a decentralized exchange (DEX) that employs an automated market maker
(AMM) [80] method to establish asset liquidity for inscriptions. Allins
encapsulates the inscription scripts of different chains in its unique virtual
machine and continuously updates assets through an indexer. Leveraging smart
contract-based liquidity pools, users can buy and trade inscriptions via AMM
and earn income from inscription assets in the Farming market.

## Dessert: Very Short Summary

In this report, we present an exploration of Bitcoin inscriptions, dissecting
their technological roots. We compare Bitcoin inscriptions with traditional
NFTs, revealing unique characteristics and broad use cases. Despite several
challenges, we still highlight significant opportunities provided by Bitcoin
inscriptions, especially for derivative protocols, Layer2 solutions, and
interoperability techniques.

## Sides: Bitcoin-related Standards

We further present a table that includes a list of Bitcoin-related standards
mentioned in this report, providing a quick reference for readers.

Standard and Proposal |  Title |  Blockchain Platform |  Year
---|---|---|---
BIP 114 |  Merkelized Abstract Syntax Tree |  Bitcoin |  2016
BIP 141 |  Segregated Witness (Consensus layer) |  Bitcoin |  2017
BIP 340 |  Schnorr Signatures for secp256k1 |  Bitcoin |  2020
BIP 341 |  Taproot: SegWit Version 1 Spending Rules |  Bitcoin |  2020
BIP 342 |  Tapscript |  Bitcoin |  2021
Ordinal |  Ordinal Protocol Documentation |  Bitcoin |  2023
BRC-721E |  BRC-721E Token Standard |  Bitcoin |  2023
Rune |  Rune Issuance Tool |  Bitcoin |  2023
RGB |  RGB Blueprint: Scalable & Confidential Smart Contracts |  Bitcoin |  2023
ARC-20 |  ARC-20 Tokens - Atomicals Guidebook |  Bitcoin |  2023
DRC-20 |  DRC-20 Standard |  Bitcoin |  2023
Ethscriptions |  Introducing Ethscriptions |  Ethereum |  2023
ASC-20 |  Overview - ASC-20 AVAX Market |  Avalanche |  2023
BSC-20 |  Understanding BNB Chain Inscriptions |  BSC |  2023
PRC-20 |  PRC-20 Contract |  Polygon |  2023
AtomicAsset |  AtomicAssets Smart Contract Repository |  EOS |  2023
SPL-20 |  Unlocking the Future: Inscriptions on Solana |  Solana |  2023
MRC-20 |  What’s Going On With MOVE: Smart Inscription (MRC20) |  Move |  2023
APT-20 |  APT-20 Protocol |  Aptos |  2023

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