Should Bitcoin tokens unite onto Ordinals?

This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

After all these years, someone finally figured out how to do satoshi-based tokens on BTC: the ordinals, each based on a single satoshi and defined by an inclusion of a chunk of data (say a small image). A miner ‘mines’ ordinals (tokens) using a special add-on mining software designed according to a token protocol that defines the ordinals as distinctive tokens. The process of including a chunk of data is called ‘inscription,’ likened to inscribing (or more plainly ‘painting’) a mark over an existing satoshi to make it something different.

Ordinals has so far caused a stir in the BTC community. See more in Bitcoin and cybernetics.

Ordinals are now also on the BSV blockchain. This is unsurprising because BSV offers everything that an ordinal on BTC has, except at a price tens of thousand times lower and sizes and scales tens of thousand times greater.

Some are so attracted by the ordinals that they are calling for the BSV blockchain to have a single token protocol united unto the Ordinals. That can’t be serious.

Different token protocols serve different purposes

On BSV, currently, several different token protocols serve different purposes. This is not to argue that diversity in token protocol is in itself always a good thing. On the contrary, a strong argument may be made for the opposite. For one thing, at least, a unified token protocol will make wallet design and token trading/exchanges easier.

But the truth is that there are business scenarios and purposes that are so different and even contradicting to each other that it is hard for one token protocol to serve all the purposes well. At least not at this stage of development.

STAS tokens are designed for the type of assets that would benefit from dApp characteristics, meaning that once the token is issued, it is all on-chain, and both the token definition and the token business logic are verified and enforced by miners following the bitcoin mining protocol and consensus. The issuer bears the legal responsibilities and also keeps an exclusive authority of redemption of the tokens (at the request of the token holder), but other than that, the tokens exist on the Bitcoin blockchain and are transacted exactly the same way as the regular bitcoin (BSV) without reliance on an intermediary other than the decentralized Bitcoin mining network itself. This has enormous significance to many types of applications such as automated nano-businesses (e.g., SLictionary), stablecoins (e.g. the Centi Franc Stablecoin), and tokenization of many digital assets such as music (e.g. Soundoshi).

Tokenized, in comparison, is designed for the type of businesses and assets that emphasize more on expressive and complex off-chain control by the issuer and authorized administrative agents than the on-chain independence of the tokens themselves. Tokenized protocol still takes advantage of the immutable distributed ledger functions of the Bitcoin blockchain for transaction records and verifications but leaves the flexibility of token issuance and administration to off-chain businesses who are more interested in managing their existing real-world assets that they are already familiar with, rather than creating new kinds of digital assets that are best suited to natively reside on a blockchain.

Elas tokens, on the other hand, are best suited for large entities and organizations that are interested in their own separate blockchain-based ledgers that can be pre-designed with a complex structure, including multiple sub-ledgers and divisions.

The above different types of requirements come from different aspects of businesses and will involve different management models. As far as the business needs are concerned, the division of these different needs is long-term, perhaps even perpetual, rather than a mere result of a short-term compromise.

It is possible that in the future, the various token protocols on BSV, such as STAS, Tokenized, and Elas, could converge into one standard. But at the present stage, although they can each cover broad applications and overlap with each other, they are nevertheless each optimized for different types of needs with different design philosophies. Despite the inconvenience with the wallets and token exchange, this is a good thing because different applications may have an option to choose what’s best for them.

But what can ordinals do to satisfy the above different types of business requirements?

Nothing. Ordinals can’t do any of them, let alone all of them. Ordinals serve an entirely different market. They have their own reason of existence. Ordinals have a powerful appeal of collectibles that derive their values from the psychology of the collectibles market itself without having to rely upon an external economic fundamental. It is self-fulfilling and can form a nice niche. And for reasons that are hard to explain, they have captured the imagination of a speculative market and can be easily used to cause attention and participation in marketing. Ordinals, therefore, may possess magical powers over social media.

With that, can ordinals take advantage of the mass psychology and conquer the market first and then learn the abilities of the other tokens to become the token standard that unites them all? It is impossible to predict that kind of a long-term future, but let’s first look at ordinals under the hood.

Ordinals are very limited

It is not difficult to understand what an ordinals token is from a consumer viewpoint. But to understand its actual utility and value, you will have to compare its qualities with that of the other competing token protocols. That’s where it becomes difficult, and that’s where many stop.

The concept of ‘inscription,’ like ‘painting’ a mark over an existing satoshi to make it something different, is easy to understand and also readily catches people’s imagination.

But if you ask how utility and value are created by doing such ‘painting,’ then not only is what is painted relevant but also the quality of the paint, how the resultant paint and the token are managed as a property within a legal contract framework, etc. For example, is the paint persistent? Does the token have a reliable identity, flexible programmability, and manageable transferability? Etc.

To do that, we will have to look at how and why the ordinals token protocol was created in the first place.

Ordinals are a hack to circumvent BTC limitations.

Ordinals is a way to attach data to a satoshi. It works great on BTC, because it is a great trick to bypass the severe data size limitations on BTC both per transaction and per block. On BTC, OP_RETURN data size is limited to 80 bytes per transaction, and the total block size to 1 MB. Ordinals bypasses the BTC OP_RETURN data size limitation by placing the data in inputs instead of outputs and further takes advantage of the 4-to-1 discount of the bytes count to increase the total block size close to 4 MB. But beyond that, there’s no room to increase further. Therefore, the data-limit bypassing trick is useful but only to a limited degree.

On BSV, however, such tricks are not needed at all, thanks to its vastly greater data size permissions. The current OP_RETURN data size on BSV is 50 MB per transaction and will be fully increasing in the future, while the total block size is unbounded. In addition, BSV has the alternative OP_PUSHDATA4 to push data on-chain at 4.3G maximum data capacity per transaction.

But that is not even the greatest limitation of ordinals.

Ordinals’ data inscription is fragile.

An even greater problem is that the way ordinals protocol attaches (inscribes) data to a satoshi is both convoluted and unreliable.

It is convoluted because it takes multiple steps (and multiple transactions) to accomplish the thing that could be done using just one step on BSV by using OP_RETURN + data. The way used by ordinals is necessary on BTC to overcome BTC restrictions but unnecessary on BSV.

It is unreliable because it does not have a scripted design that guarantees the data attached to the satoshi remains attached and unaltered unless the token is specifically authorized to be redeemed.

It is the genius of STAS token protocol that does all this, and the method involves subject matters that are being patented. If the ordinals start to do the same, they would be becoming STAS tokens, which would then beg the question of what the ordinals is at all in the first place.

Ordinals’ token identification may not be rocksolid.

The most innovative thing about ordinals is its way of assigning distinctive ‘ordinals’ (sequential identifiers) to satoshis by a miner using specially designed software.

For what it is set out to do, it is effective. But again it is only necessary on BTC (to overcome the BTC limitations), but unnecessary on BSV because BSV already has much more reliable and sophisticated methods to create the distinctiveness of tokens and to further manage them.

Besides, the distinctiveness of the ordinals may not be that reliable. It is said that every satoshi token has a unique ordinal number ranging from 1st to 2.1 quadrillionth to ensure the uniqueness of each ordinal token. But that is only math in people’s minds. Unless you have an enforceable consensus, all kinds of things can happen within the same neatly defined math space.

“Ordinals are numbered sequentially based on the order/time they are mined” – but who actually decides the numbering? The numbering scheme is not part of the standard mining software but an add-on to the mining software. Nothing excludes another competing software to be introduced to start to number new ordinals in a different sequence. The PoW mining protocol does not prohibit this because it is outside of the PoW protocol.

On BTC, it’s possible that if the miners all want to do ordinals using a unified self-consistent scheme, they could come to a consensus to accept it as a unique standard and push the core developers to make it into the standard mining consensus, in which case it would be yet another fork. But the trouble is that the BTC core developers hate ordinals because the ordinals carry a message that contradicts the ‘digital gold’ narrative and thus fail to pass the BTC purity test (see BTC is a political system). Not only that, BTC miners don’t agree with each other. When a competitive and conflicting ordinals scheme does appear, the miners who don’t do ordinals don’t really care.

As a result, you may end up with conflicting ordinals. The contradiction may not affect the blockchain itself, but it certainly diminishes the usefulness and value of the ordinals.

On BSV, ordinals becoming an integral part of the standard mining consensus is both impossible (because the base protocol is locked on BSV) and unnecessary (because BSV is an open market that welcomes all business activities, competitive or not).

Ordinals are not designed for business purposes.

Beyond that, ordinals lack a ‘hard’ definition of tokens as assets to meet business needs.

Ordinals are Layer-2 (L2) tokens. People only notice that ordinals are satoshi-based, but forget that its business logic is off-chain. It is like the colored tokens. But these L2 ordinals are not comparable to L2 tokens such as Tokenized. While Tokenized is a platform provided for real businesses to tokenize their real assets in the real world, ordinals are for image creators and miners to generate tokens just because they can. Each serves its own purpose, but people should know the difference.

The question is, who is the issuer of the ordinals? The issuer is the one that assigns ordinals to satoshis, but multiple issuers may exist, and there is no guarantee that the ordinals assigned would be unique and consistent.

It’s important to note that the issuer of ordinals is not all miners but whichever miner that installs the Ordinals software and successfully mines a batch of ordinals in a particular block. Therefore, these miners as ordinals issuers really are playing a dual role. They will not only do the regular mining and block building but also mining ordinals and managing them.

The above distinction is important because they are two different types of work, and follow two different protocols, although they can be performed by the same entity.

Ordinals are not mined the same way bitcoin is.

It is said that ordinals are ‘mined’ by the BTC miners. This gives an impression that ordinals are mined on an equal basis as the native bitcoin. But this is not true. Fundamentally, the mining protocol of ordinals is not part of the bitcoin PoW protocol. Ordinals, therefore, are not mined by miners the same way as the native bitcoin.

But people can be easily confused and think they are the same and thus mistakenly believe that ordinals are some kind of a fundamental on-chain product of the bitcoin network mining protocol.

In summary:

Therefore, there is little value in ordinals for commercial applications, especially not for enterprise applications. The only advantage of doing ordinals on BSV is probably the market participation and expectation psychology. As said above, ordinals have great appeal for people who have a mindset of collectibles or memes.

But I do like them because they powerfully (albeit inadvertently) expose the inherent contradictions of BTC. They may also be a good gateway to lead people to the much more powerful business-oriented token protocols on BSV such as STAS, Tokenized and Elas. In addition, they do have an unexplainable market appeal characteristic of the crypto world and can capture the imagination of social meme lovers. If there’s one thing we have learned from the decade-long crypto frenzy, it is the power of social media.

For serious business applications, people need to know more about the tokenization protocols on BSV. Education is not going to be easy because very few want to make a serious effort on understanding. The fact that people are even suggesting all Bitcoin tokens to be united unto Ordinals is one indication of shallow understanding.

But the needs for tokenization on the genuine Bitcoin blockchain (BSV) are real, and so are the solutions offered by various tokenization protocols, including STAS, Tokenized, Elas, and even Ordinals. These needs and solutions will meet each other soon.

Watch: Ordinals on BSV! Luke Rohenaz explains their Utility and Value on the CoinGeek Weekly Livestream