Conceptual Analysis｜A Revolution on Inscriptions

On January 10th, Eastern Time, the SEC officially approved 11 Bitcoin spot ETFs! This historic moment is destined to be recorded in the annals of the cryptocurrency industry. A brand new concept surrounding Bitcoin—inscriptions—has also frequently appeared before investors worldwide.

With numerous wealth myths attached and a continuous influx of capital, inscriptions, a concept claimed to revolutionize the Bitcoin ecosystem, have become increasingly popular. Recently, as Bitcoin's market value has risen, the heat surrounding inscriptions has reached a boiling point.

However, the vast majority of people are still in the dark, seeing only the price surge while remaining largely unaware of the underlying technical implications. This state of partial understanding undoubtedly increases investment uncertainty. So, what exactly are inscriptions? How are they implemented? Don’t worry, this article will take about 10 minutes of your reading time to provide a comprehensive explanation of inscriptions.

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Origin—Bitcoin Inscriptions

In January 2023, the Ordinals protocol proposed by Casey Rodarmor announced the birth of Bitcoin inscriptions. The Ordinals protocol allows users to directly write data such as text, images, videos, and contracts onto the Bitcoin blockchain.

At first glance, isn’t this just Bitcoin's NFT? But the L2 networks on Bitcoin, such as Stacks, have long fulfilled this demand, right? Wait! Please note that Ordinals are written directly onto the Bitcoin mainnet, not a Layer 2 network. This change directly impacts the massive financial entity that is Bitcoin, and the amount of funds affected by this change is incomparable to Layer 2.

?️ So how does this protocol achieve that? It’s important to know that Bitcoin does not have a complete smart contract execution environment (EVM). How can new protocol support be added to Bitcoin?

This starts with the design principles of the entire BTC network and the repeatedly modified protocols. In Satoshi Nakamoto's original design, the Bitcoin ecosystem has a minimum indivisible unit—satoshi (1/100,000,000 of a bitcoin), and each satoshi is minted by miners after proving through PoW, naturally possessing a unique serial number. With this unique serial number, Bitcoin can trace back to its minter and owner. In the 2021 upgrade, the Taproot protocol was added, allowing some complex information to be written into notes and expanding the maximum information storage limit of a block from 1M to 4M, providing technical potential for writing richer information into the Bitcoin blockchain.

The essence of the Ordinals protocol lies in its expansion of the serial number information on satoshis. Specifically, the Ordinals protocol utilizes the unique characteristics of satoshis, extending the single serial number to include data such as text, images, videos, and contracts. This makes each satoshi a carrier of unique information, storing data on the Bitcoin chain and ensuring its immutability.
For example, we take a UTXO and prepare to inscribe the content "hello, world!" on it. We need to record the information of Ordinals in the Taproot note, and then in the transaction, inscribe this record on the first inscription of the UTXO, thereby recording the content of the inscription on-chain. (Of course, this content needs to be serialized before being deployed to the chain.)

If this transfer has no note or the transaction fails for special reasons, then this note message will not be considered valid content.

? In the early days of the Ordinals protocol, many users used it as a carrier for NFTs, but later on March 8, 2023, the BRC20 protocol was proposed, introducing a fungible currency protocol similar to ERC20 on the Ordinals protocol, thus giving rise to the initial market for inscriptions.

We use a simple example from an ordiscan to illustrate the process of ecological trading for this BRC20 currency:

First, the project team needs to deploy a series of inscribed assets so that subsequent users can mint this series of assets. How to do this? First, the project team records executable code (scription) that complies with the brc-20 rules on a satoshi according to the Ordinals protocol, and then sends this inscribed satoshi on-chain.

Specifically, the project team used the BRC20 protocol to deploy a token series called SAIX, with a maxSupply of 10,000,000, which is the information we inscribed on this satoshi.

On-chain, this satoshi with inscribed code is sent out and recorded by the Bitcoin blockchain. Meanwhile, off-chain, servers listening to the Ordinals protocol on the Bitcoin chain discover this code that complies with the protocol. Thus, the off-chain virtual machine executes this code. That is, the off-chain virtual machine deploys a brc20 token named SAIX and configures all attributes. After this, other users can use the mint method to mint their inscribed assets.

Subsequently, users needing to mint inscribed assets can use the brc-20 protocol in transactions to mint their inscribed assets. For example, a user calls the mint action, thus minting 6,250 SAIX. At this time, the owner of the inscription is the address receiving the funds after deducting the GAS fee, such as the address shown in the image bc1p4802…nqah89gr.

After successfully minting, if the user needs to transfer their inscribed assets, they can inscribe the brc-20 transfer action on the satoshi, transferring 6,250 BERU. Of course, the target address for this Bitcoin transaction will naturally own these brc-20 tokens.

So we can roughly understand that Bitcoin inscriptions actually rely on the Ordinals protocol to create another type of virtual asset recorded on the Bitcoin blockchain. The project team inscribes the information recorded by the inscriptions (including images, web pages, token names) on the satoshi according to the protocol. Then users perform financial operations such as minting and transferring assets based on special codes in transactions. Compared to previous Layer 2 solutions, the significance of Bitcoin inscriptions lies in directly expanding the massive Bitcoin mainnet, introducing the possibility of diversified assets, enhancing the flexibility of the Bitcoin ecosystem, and thus unlocking the potential of the Bitcoin ecosystem.

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Derivative Expansion—EVM Inscriptions

After Bitcoin inscriptions gained popularity, the EVM chains also introduced the concept of inscriptions. However, due to the design of smart contracts on EVM chains, the diverse information functionality brought by inscription design has long been realized by smart contracts, so the ecological story carried by EVM inscriptions is slightly different from that of Bitcoin inscriptions.
In Ethereum, due to the Gas design of smart contracts, any successful contract interaction requires a minimum of 21,000 GAS fees, which places a heavy GAS fee burden on users in the entire ecosystem. Ethereum inscriptions bypass the smart contract design, aiming to move the required operations off-chain by sending data fields to EOA. When the off-chain inscription virtual machine detects a data field on-chain that complies with the protocol rules, it executes the result and matches the execution result to the hash of the transaction sent at that time, thereby saving the transaction fee for executing operations on-chain.

Here we provide an example of an ERC-20 inscription protocol. First, the user transfers 0 ETH to their EOA address, triggering the ERC-20 inscription listening mechanism, which prompts the inscription server to parse the calldata content. At this point, the calldata content is similar to the BRC-20 protocol, consisting of p-protocol, op-action, a collection of tick-tokens, id-the current token id number, and amt-the operation number. Based on the content in the calldata, the off-chain EVM inscription server listens to this transaction and executes the transaction content, minting the corresponding token to the current EOA account and recording this token in the off-chain index.

Currently, the EVM inscription operation mainly aims to reduce the expensive fees on some EVM chains, making transaction costs cheaper. Although this design may easily remind people of Layer 2, Layer 2 mainly expands the mainnet and has a complete smart contract execution environment, while EVM inscriptions primarily focus on reducing transaction fees and do not possess a complete smart contract execution environment. Therefore, the current design of EVM inscriptions mainly emphasizes reducing transaction fees on EVM chains.

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Common Inscriptions Protocols

The Ordinals protocol is the cornerstone of Bitcoin inscriptions, and many common Bitcoin inscriptions protocols have emerged outside of the Ordinals protocol.

Bitcoin-related well-known projects
BRC-20: Ordi, sats, rats
ARC-20: ATOM, Realm
Bitmap
Rune: Pipe
Ethereum-related well-known projects
Ethscription: eths, Facet
IERC-20: ethi
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Current Status of the Inscriptions Ecosystem

As of January 11, 2024, the trading volume of the inscriptions ecosystem on BRC-20 is nearly $12.27M in 24 hours.

The current trading volume of the inscriptions ecosystem on ETH is nearly 53.66 ETH (139,516 U) in 24 hours as of January 11, 2024.

Overall, the current inscriptions ecosystem is still dominated by the Bitcoin ecosystem, with increasing trading heat, large trading volumes, and significant growth in total capital.

Conclusion

Through an in-depth exploration of the principles of inscriptions and their innovative role in the Bitcoin ecosystem, it is not difficult to see that the introduction of inscription technology is not just a temporary gimmick or a simple technical iteration. It represents a significant step forward for the Bitcoin network in terms of security, scalability, and practicality. The implementation of the Ordinals protocol and BRC20 protocol has opened new application scenarios for the Bitcoin blockchain. However, users still need to remain cautious, as the market for inscribed assets is still in its infancy, and its value and trading rules are continually evolving. Therefore, a deep understanding of how these new technologies work is crucial for anyone looking to invest or innovate in this field.