With the approval of Bitcoin ETFs, the Bitcoin ecosystem finds itself on the cusp of widespread adoption. More capital inflows are driving up the price of Bitcoin, which in turn fuels innovation and growth across the entire cryptocurrency landscape.

Recently, there has been growing hype around inscriptions, an emerging digital asset class within the Bitcoin ecosystem. Additionally, many Bitcoin Layer 2 projects have gained traction as they race to bring Ethereum-like applications to Bitcoin.

This article will provide a comprehensive overview of the Bitcoin ecosystem in two parts. Part One will examine what inscriptions are and their potential impacts. Part Two will compare and contrast the different types of Bitcoin Layer 2 protocols and their unique capabilities.

Part 1 - Inscription

A Brief History

As the first blockchain network, Bitcoin enjoys inherent advantages, including the strongest community consensus, native global payment properties, and a robust decentralized nature.

On the other hand, Bitcoin's technical limitations have also become apparent over time. Bitcoin lacks native Turing-completeness, and factors like its UTXO design, blocksize limit, and more make the Bitcoin Layer 1 ill-suited for complex computations and verifications. 

These limitations led to early proposals for overlay protocols in 2010 to enhance Bitcoin's capabilities by layering other protocols and using Bitcoin as a database. This process was an early precursor to today's inscriptions.

In fact, inscribing data on Bitcoin has always been possible. Inscriptions like this go back to the earliest days of Bitcoin:

• Satoshi inscribed a newspaper headline in the genesis block's coinbase
• Luke Dash Jr inscribed Bible verses and prayers in 2011
• An anonymous user inscribed the entire Bitcoin whitepaper in 2013
  

However, apart from the above experiments, inscriptions remained generally overlooked and underutilized by the Bitcoin community for most of the chain’s history. It was not until the Taproot upgrade in 2021, which made Bitcoin storage drastically more cost-effective, that inscriptions gained widespread adoption.

The Ordinals Movement

The Ordinals protocol, invented by @rodarmor, demonstrated the new standard of inscribing data by using Taproot scripts to inexpensively store data on-chain. In essence, users could now store any kind of data as code with a cheaper onchain storage price than even Ethereum calldata. The invention of the Ordinals protocol propelled the new wave of countless NFTs (like Taproot Wizards), often known as ordinals, and other assets (like BRC-20) issued on the Bitcoin network.

Often conflated, the Ordinals protocol and inscriptions are related but different – the Ordinals protocol is the system of ordering sats to create NFTs. Inscriptions are the actual content of these NFTs. A couple examples of inscriptions are shown below in both test form and image form.

BRC-20 - Powered by The Ordinal Protocol

Shortly after the release of the Ordinals protocol, the BRC-20 standard was introduced by @domodata.The BRC-20 standard established a new standard for tokenized assets on the Bitcoin blockchain. Using the Ordinals protocol, BRC-20 tokens could now be minted as strings since the technical offchain backend could utilize Taproot script to store token data and offchain indexers to track those data.

The BRC-20 standard requires users to inscribe a string (e.g., {"p": "brc-20", "op": "deploy", "tick": "ordi", "max": "210,000,000", "lim": "1,000,000"}) into Bitcoin. Offchain clients (like UniSat explorer, and brc-20.io) will then use this as a data source to collect and compute for user balances or transactions. The token also has similar distribution capabilities to ERC-20. The token creator deploys a “contract” defining the maximum token supply. Users can then mint new tokens up to that limit and transfer tokens between addresses, like with ERC-20.

Technical Advantages

Compared to more mature smart contract platforms like Ethereum, inscriptions have limited computational capabilities as the Bitcoin scripting language is relatively simple when compared to Turing-complete languages. However, inscriptions do bring some recognizable advantages to the table.

1. Fully Onchain

The significant difference between an inscription and an ERC-721 NFT is that the inscription is stored entirely on-chain. While an ERC-721 NFT typically only records ownership on-chain with the NFT data stored offchain (often on decentralized storage providers like IPFS), inscriptions store both ownership and data directly on the blockchain.

Storing inscriptions completely on-chain provides full immutability for the asset. This allows meta assets to have the same immutable and public properties as fungible tokens.

2. Fair Distribution

Inscription launches are much fairer than ERC-20 distributions. After a token contract is deployed, anyone can mint via “proof of wasted blockspace." Here, retail participants have an equal participation right compared to institutional investors. This process differs from traditional ERC-20 launches, where the project team owns full distribution rights and controls the unlock schedule in a centralized fashion. With this proof of wasted blockspace, the need for a centralized authority's ownership of the majority of tokens is removed.

Inscription launch methods are more suitable for meme coins and NFTs, where community unity plays an important role. All community members should be offered equal opportunity to become token holders, instead of giving launchers unfair advantages in controlling token distribution. Such difference also appears to give inscription launches stronger compliance credentials compared to traditional initial coin offerings (ICOs).

3. Easy to Adopt

Due to its similarity to ERC-20 and NFT distribution approach, developers and retailers have quickly adopted this asset class. As the graph below shows, the Bitcoin network has recently seen a surge of activity related to NFTs and other digital assets. This influx of issuances has put strain on Bitcoin's capacity, leading average transaction fees on the network to spike to more than ten times previous averages.

The Bitcoin network is not the only blockchain facing strains from the growing hype around inscription launches and asset issuances. Other layer 1 (L1) and layer 2 (L2) networks have seen heightened inscription-based activity as well.

4. Cost Effective

Bitcoin's low data storage costs give it an advantage for hosting inscription-based assets, as illustrated by the image below shared by @ChainLeftist. Storing inscriptions on Bitcoin can be substantially cheaper compared to alternatives like Ethereum. For example, as highlighted by Eric Wall in a StarkWare session, inscription storage on Bitcoin is over 7 times less expensive than equivalent Ethereum storage.

5. Greater Security = Greater Miner Rewards

In addition, inscriptions can bring higher transaction fees for miners on the Bitcoin network. For example, inscriptions require storing additional data on-chain, which increases the overall transaction size in bytes. Larger transactions incur higher fees. Also, the complex inscription scripts require more computation to validate, so miners may charge more compared to simpler payment transactions. With miners earning increased fees from inscriptions, conducting 51% attacks also becomes more expensive, as attackers would forfeit significant fee revenue by attacking the network.

Other Protocols Trying to Do Better

The Ordinals protocol pioneered inscription launches on Bitcoin, giving it a first-mover advantage. However, Ordinals also has technical deficiencies. For instance, its BRC-20 standard only supports four-letter token tickers. Additionally, invalid Ordinals transactions (new mints exceeding the max supply) are still stored on Bitcoin, wasting space unnecessarily.

Recently, we have seen new protocols aiming to refine the inscription model. Each of these competitors boast unique value propositions as they attempt to improve upon what Ordinals started.

Atomicals

The Atomicals protocol is designed specifically for minting, transferring, and updating non-fungible tokens in an optimized way. In addition, the protocol natively defines the ARC-20 fungible token standard that employs a single satoshi to signify issued tokens, circumventing Ordinals’ four-letter ticker constraint. In contrast, Ordinals is more generalized for asset tokenization, with the BRC-20 fungible token standard implemented separately from the base protocol.

Runes

Ordinals Co-Creator Casey Rodarmor recently proposed a new UTXO-based fungible token protocol in a blog post. While Ordinals has been widely adopted for the creation of non-fungible assets, Runes provides a new solution for fungible tokens. This was designed to provide a user experience on par with the simplicity of transacting in bitcoin itself. 

Given Casey's influence in the community, the Runes protocol has the potential to make a significant impact. In anticipation of the Runes protocol, Runestone, an Ordinals project, was introduced as a fairdrop and has already gained considerable traction.

PIPE

Inspired by Runes and Ordinals’ BRC-20, PIPE combines concepts from both by adjusting its minting process to follow predefined deployment rules. PIPE's project team is also very active in the Ordinals ecosystem, including the development of the Tap Protocol, an alternative BRC-20 focused on enabling Ordinals’ DeFi use cases.

Stamps

Stamps is an alternative Bitcoin tokenization standard similar to inscriptions. The difference is Stamps store data in multisig UTXO, and Ordinals/inscriptions store data in witness (cheaper).

All of these solutions remain in very early-stage development and it remains to be seen if any will displace Ordinals as the primary protocol for Bitcoin inscriptions. For these newer platforms, critical user infrastructure like dedicated wallets and marketplaces still significantly trail solutions that have matured around Ordinals. As such, we believe that the Ordinals protocol still remains the leading solution for inscription projects looking to launch in the near term.

Dapps and Tools are Growing to Support Inscriptions

The establishment of inscriptions as a new asset class has also brought a proliferation of new dapps and tools. The current ecosystem encompasses wallets, marketplaces, minting tools, data trackers, bridges, and launchpads.

Wallets and marketplaces

As the primary gateways enabling users and assets to interact, wallets and marketplaces represent the most mature area of the inscription ecosystem so far.

Leading platforms in the space include OKX Wallet and Unisat (open-source, supports Ordinals and ARC20 standards). As the below image illustrates, these two make up most of the trading volume for inscription-based assets, with OKX in the lead and Unisat second. NFT-focused marketplace Magic Eden launched support for inscribed Bitcoin NFTs in early 2023 as well.

Minting Tools and Data Trackers

On the tooling front, LooksOrdinal offers an interface and templates to guide developers through deploying inscriptions and minting new assets, reducing the complexity of minting new inscription-based coins or NFT collections.

For data visibility, Ordiscan indexes live ordinal data and transactions, enabling browsing, queries, and alerts based on topic filters. BRC-20.io visualizes historical and real-time data on indexed BRC20 token contracts, holders, transfers and more. These explorers bring greater transparency and discoverability to activity happening on Bitcoin's Layer 2 inscription protocols.

Bridge and Cross-Chain Swap

Bridging and swap protocols aim to expand yield opportunities for inscription-based assets. The concept mirrors existing BTC bridges like WBTC into richer application ecosystems like Ethereum, or cross chain swaps like Thorchain allowing for exchange of native assets between two ecosystems. Projects such as MultiBit are enabling these features for BRC20.

However, there is debate over whether bridged BRC20 assets can accrue or retain fundamental value compared to native Bitcoin. This skepticism stems from inscription networks currently skewing toward meme or community coins without concrete underlying utility.

Launchpads

Several launchpads now leverage inscription hype to host BRC20 token distributions, such as Bounce Finance and Turtsat. Some employ a partial release model - with project owners pre-minting tokens before gradually launching portions to the public (similar to ERC20 projects). This approach surrenders the fair distribution ethos benefitting BRC20 community coins, but it arguably better suits structured teams, allowing founders and investors guaranteed allocations.

While BRC20 currently lacks some ERC20 advanced capabilities, being a native Bitcoin asset brings advantages like security and composability to the largest asset class in BTC. As the protocol develops further as well as bitcoin upgrades, it may catch up on functionality.

Where is This Heading?

The soaring market caps of leading BRC20 meme coins like "Ordi" (FDV $1.5B) and "sats" (FDV $1B) indicate strong investor and developer interest. Yet these organic communities lack an anchor or guide in the form of a foundation like what is seen in other major protocols (Ethereum, Solana, etc.).

In Dogecoin for example, the nonprofit Dogecoin Foundation advocates for the project. It remains unclear if similar leadership can evolve from a meme coin driven by speculation around concepts like Ordinals and inscriptions. For now, buyers seem to be betting on the popularization of these technical innovations.

Looking beyond memes, new Bitcoin layer 2 protocols facilitate issuance, distribution, and the exchange of a novel asset class – Bitcoin-native tokens and NFTs. With unparalleled security inherited from the base chain, Bitcoin shows particular promise for high-value digital collectibles and related use cases.

And while Bitcoin lacks native smart contract functionality, enhanced inscription capabilities open the door for more secure and optimized rollup designs compared to simpler sidechain models. In a sense, inscriptions themselves constitute a proprietary Layer 2.

With a $1T+ market cap, Bitcoin should naturally see surging demand for yield generating products and leverage. As adoption continues, especially among institutions, expect more pressure on miners and core developers to consider features that expand functionality. The early wave of inscription protocols likely marks just the beginning. ✦

‍

^{Legal Disclosure: This document, and the information contained herein, has been provided to you by Hyperedge Technology LP and its affiliates (“Symbolic Capital”) solely for informational purposes. This document may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Symbolic Capital. Neither the information, nor any opinion contained in this document, constitutes an offer to buy or sell, or a solicitation of an offer to buy or sell, any advisory services, securities, futures, options or other financial instruments or to participate in any advisory services or trading strategy. Nothing contained in this document constitutes investment, legal or tax advice or is an endorsement of any of the digital assets or companies mentioned herein. You should make your own investigations and evaluations of the information herein. Any decisions based on information contained in this document are the sole responsibility of the reader. Certain statements in this document reflect Symbolic Capital’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Symbolic Capital’s views on the current and future market for certain digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance may vary substantially from, and be less than, the estimates included herein. None of Symbolic Capital nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or any other information (whether communicated in written or oral form) transmitted or made available to you. Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of this information. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Symbolic Capital and, Symbolic Capital, does not assume responsibility for the accuracy of such information. Affiliates of Symbolic Capital may have owned or may own investments in some of the digital assets and protocols discussed in this document. Except where otherwise indicated, the information in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. This document provides links to other websites that we think might be of interest to you. Please note that when you click on one of these links, you may be moving to a provider’s website that is not associated with Symbolic Capital. These linked sites and their providers are not controlled by us, and we are not responsible for the contents or the proper operation of any linked site. The inclusion of any link does not imply our endorsement or our adoption of the statements therein. We encourage you to read the terms of use and privacy statements of these linked sites as their policies may differ from ours. The foregoing does not constitute a “research report” as defined by FINRA Rule 2241 or a “debt research report” as defined by FINRA Rule 2242 and was not prepared by Symbolic Capital Partners LLC. For all inquiries, please email info@symbolic.capital. © Copyright Hyperedge Capital LP 2024. All rights reserved.}