What Are Bitcoin Inscriptions and Ordinals, and How Do They Work?

If you've been following Bitcoin Twitter trends, you may have heard about "NFTs" making a comeback on Bitcoin through "inscriptions" or "ordinals." This movement began with the recent release of the ord command-line wallet and block explorer, marking the first implementation of a new mechanism for publishing arbitrary data on the Bitcoin blockchain.

Here, we'll explain inscriptions and ordinals—but first, let’s revisit the history of arbitrary data storage on Bitcoin and why this isn’t entirely new.

A Brief History of Arbitrary Data on Bitcoin

The idea of using Bitcoin’s block space for purposes beyond peer-to-peer financial transactions dates back to the protocol’s early days. As early as 2010, discussions on BitcoinTalk.org proposed building a DNS system atop Bitcoin, ultimately leading to Namecoin in 2013.

During this period, the term "colored coins" described protocols that tagged (or "colored") Bitcoin’s unspent transaction outputs (UTXOs) for off-chain purposes. Initially, transactions could store nearly unlimited data, provided basic script semantics were followed and miners were paid to process them. Early systems like Counterparty (2014) exploited this by "hacking" multisig transaction scripts to mint tokens.

However, this practice threatened Bitcoin’s scalability, as all UTXOs must be tracked by nodes to validate new transactions. Arbitrary data outputs were essentially dead weight, consuming resources without serving most users.

Enter OP_RETURN

In March 2014, Bitcoin Core v0.9.0 standardized OP_RETURN, allowing senders to mark outputs as unspendable. Nodes could discard such data, freeing UTXO space. Initially capped at 40 bytes (later 80 bytes), OP_RETURN became popular for embedding data—from NFTs like Rare Pepes to text messages.

For deeper context, read this BitMEX Research article.

Inscriptions: Bitcoin’s New Data Frontier

Inscriptions are a modern method to write arbitrary data onto Bitcoin—dubbed "digital artifacts" in Ordinals documentation. Unlike OP_RETURN, inscriptions store data in witness data (signatures/segregated data introduced by SegWit in 2017 and Taproot in 2021).

Key Advantages:

Larger Data Capacity: No 80-byte limit; leverages Bitcoin’s script flexibility.
Discardable Post-Validation: Like OP_RETURN, witness data needn’t burden nodes indefinitely.
NFT-Like Functionality: Inscriptions create Bitcoin-native "artifacts" tied to individual satoshis (sats), transferable via standard transactions.

How It Works:

Envelopes: Data is encoded in "envelopes"—OP_FALSE OP_IF … OP_ENDIF scripts wrapping arbitrary pushes. These no-operation scripts don’t alter locking logic.
Witness Embedding: Data is stored in transaction inputs’ witness fields, revealed only when spent (e.g., this JPEG inscription).

👉 Explore real-world inscription examples

Ordinals: Tracking Sats with Social Consensus

Proposed by Casey Rodarmor in 2022 (though rooted in 2012 ideas), Ordinal Theory assigns numbers to sats based on mining order, enabling tracking via "first-in-first-out" transaction logic.

Core Concepts:

Sat Numbering: Each sat is numbered chronologically (e.g., the first sat in block 0 is ordinal 0).
Rarity Levels: Certain sats gain collectible status (e.g., the first sat mined after a halving is "epic").
Inscription Ownership: Ordinals link inscriptions to specific sats, enabling NFT-like transfers without sidechains.

Why It Matters:

Collectibility: Rare sats may trade above face value.
Decentralized Assets: Ordinals enable Bitcoin-native digital artifacts, bypassing Ethereum’s NFT dominance.

FAQs: Your Top Questions Answered

1. Do ordinals harm Bitcoin’s fungibility?

While ordinals introduce "uncommon" sats, Bitcoin’s core fungibility remains intact. Most users treat sats interchangeably, just as dollar bills circulate despite serial-number collectors.

2. Will inscriptions bloat the blockchain?

Inscriptions pay standard fees, competing for block space like any transaction. Data storage costs align with financial transactions—no free lunch.

3. Could illegal content be stored via inscriptions?

Yes, but this isn’t unique to Bitcoin (see: OP_RETURN history). Nodes discard witness data post-validation, limiting exposure.

4. How does this impact Lightning Network?

Ordinals don’t directly affect Lightning but may increase competition for on-chain space, potentially raising fees during congestion.

👉 Dive deeper into ordinals’ technical specs