In today’s edition, we’re briefing you on Inscriptions. What started as a way to enable NFTs on Bitcoin has evolved and since spilled over to other chains, most recently Cosmos.
As inscriptions grow in marketcap and spread to new ecosystems, it’s important to evaluate the implications they may have on Bitcoin and crypto at large. What was once considered by some to be a shiny object in the Bitcoin space has grown into a $1B+ market and has presented new opportunities for builders and speculators alike.
Stay alert, stay informed ⬇
Origin of Inscriptions
Inscriptions are a relatively recently developed method for storing information on the blockchain. Data can be ‘inscribed’ in a more permanent manner. To understand inscriptions, it might be helpful to analyze their origin, which occurred on Bitcoin via Ordinals.
On Bitcoin, the idea of inscriptions originated with the Ordinals. Ordinals make it possible to ‘inscribe’ text, pictures, audio, or video on top of each satoshi or ‘sat’. A sat represents the smallest possible denomination of $BTC, like what a penny is for USD. Each sat of the Bitcoin network has a unique numerical value, making it, in a way, ‘non-fungible’.
This is helpful because Bitcoin cannot natively host smart contracts, NFTs, tokens, or anything of the sort. The reason is that certain opcodes were removed in BTC’s development process long ago, preventing the chain from having much programmability.
It is possible to implement a soft fork of Bitcoin and reinsert the missing opcodes (specifically, OP_CAT) that make the chain more programmable. This idea has been around for a while but has gained some more traction recently from Bitcoin proponents like Udi Wertheimer, among others.
Eric Wall of Taproot Wizards supports
Inscriptions and Ordinals originated as a form of NFT. But they eventually branched out to create the BRC-20 standard, seeing as fungible tokens are also not natively possible to create on Bitcoin.
Interface to purchase BRC-20s like $ORDI
The explosion of BRC-20s and Ordinals has resulted in an entire ecosystem rising up to support this new phenomenon. Because of the inherent lack of programmability that Bitcoin has, special wallets like UniSat have to be used to interact.
Impact of Inscriptions
Inscriptions make the most sense on chains that can’t natively host NFTs, like Bitcoin, as well as Celestia, and the Cosmos Hub. Nonetheless, they have gained popularity on other chains like Solana, Avalanche, and even Ethereum mainnet. The inscriptions craze drove up transaction fees and network congestion on chains like Avalanche and Arbitrum, among others, late last year.
There are still advantages, such as that inscriptions directly store a picture on the blockchain. Most NFTs are not stored on-chain, but rather on centralized servers, as infamously pointed out by Elon Musk.
There are movements promoting moving NFT images to be stored on InterPlanetary File System (IPFS). Artnome, a self-described Art analytics company, has launched a service aiming to help solve this problem. NFT project creators can back up their collection for under $17/mo, supposedly.
A photomosiac of all 40,000 Ethereum NFTs, by yournfts.org
Inscriptions originated as a workaround, a way to create NFTs and tokens on top of Bitcoin when it isn’t possible by default. It is clearly easier to deploy NFTs, tokens, and smart contracts on networks that were built with the purpose of supporting them. But even compared to other blockchains like Ethereum and its L2s, Solana, etc., many people will be interested and intrigued simply by the fact that these opportunities exist on top of Bitcoin. Inscriptions have grown tremendously in popularity and cannot be considered a gimmick; the memecoin marketcap alone on $BTC passed the $1B mark.
Inscriptions have given new opportunities to market players. For example, Magic Eden has risen to become a key player in facilitating the trading of Inscriptions. This has allowed the once no.1 Solana NFT exchange to find a new niche. As it pertains to Ordinals specifically, the protocol has its own native orderbook marketplace, Ordinals Market.
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When discussing the Layer-1 landscape, Bitcoin must now be considered. In our recently released Layer-1s Sector Overview, we reported that Bitcoin TVL had risen from $182M to $318M, a 74% increase in the past three months. This is primarily due to the trading of Ordinals and ‘NFT-like assets’. Total fees during this period came out to $529M, with $337M of this (64%) occurring in December. This surpasses even that of Ethereum. While Bitcoin OGs may not approve of speculative trading of NFTs and tokens on top of Bitcoin, the volume results in higher fees and miner revenues.
It’s also important to think about the potential risks that Inscriptions might have. The inscription movement has already caused congestion on multiple chains, including Bitcoin. For chains like Ethereum, Avalanche, etc. this is nothing new as similar events like hyped NFT mints have had the same result. For Bitcoin though, this activity is more unexpected as there isn’t much precedent.
Market participants may confuse the Ordinals protocol with the security of the Bitcoin blockchain. Complications could arise with miners realizing that certain blocks contain more valuable sats. The Ordinals protocols value the first satoshi of certain events like halvings, cycles, etc. more, placing a rarity score on them. This has yet to play out in any significant way, but it is a potential risk.
Inscriptions on Cosmos
Now, this approach has been replicated on multiple blockchains. Inscriptions are, in a way, required to trade NFTs or fungible tokens on top of Bitcoin, while this isn’t the case with other blockchains. Regardless, the market’s appetite for speculation has fueled inscriptions to grow in popularity across alt L1s and L2s.
Earlier this week, Asteroid Protocol was launched, backed by Delphi Labs and Astroport, a Cosmos perps platform. Asteroid brings inscriptions and CFT-20s (Cosmos Fungible Tokens) to the Cosmos Hub. The Cosmos Hub has long been criticized for governance disputes and subpar price performance. Another drawback is that the Hub, like Bitcoin, cannot support smart contracts.
Delphi Digital and Astroport, a Cosmos perps platform, aim to turn this lack of programmability into a strength. While not merely a copy and paste, Asteroid can be thought of as similar to what Ordinals is to BTC, but for ATOM.
Cosmos Hub Transactions following Asteroid Deployment according to Delphi Digital
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