Sorting out the technical logical relationships between Bitcoin UTXO, Ordinals, and BRC20
Since the advent of Ordinals, the Bitcoin inscription market has been quite niche, but the emergence of the BRC20 standard has changed this situation.Author: Haotian
Since the advent of Ordinals, the Bitcoin inscription market has remained niche, but the emergence of the BRC20 standard has changed this situation. While the myth of ordi multiplying by ten thousand is still being spread, the Bitcoin NFT small image market has also broken its silence. With a hardcore popular science attitude, in the following thread, I will briefly outline the technical logical relationships between Bitcoin UTXO, Ordinals, and BRC20, exploring the narrative economics behind them.
After witnessing the market prosperity brought by the ERC721 standard to Ethereum, developers began to ponder whether they could inject NFT gameplay into Bitcoin. The uniquely characteristic UTXO data structure became the breakthrough: when a new BTC is added to an address, a UTXO is generated. When an address spends a BTC but does not fully spend it, a new UTXO replaces the original UTXO, allowing the tracking of UTXO to trace the Bitcoin address balance and other status information.
A UTXO consists of a TX hash value and an output pointing to an incrementing index number starting from zero, similar to the ID serial number of ERC721; each index number also corresponds to a public key script ScriptSubKey, which originally only describes the conditions and rules for spending that UTXO. After the Taproot soft fork, UTXOs can embed additional content such as images, text, audio, and JSON data packets in their output scripts.
These serial numbers and script data exist on the Bitcoin chain, and the Ordinals retrieval tool has emerged to parse them, providing a solution for moving NFTs to the Bitcoin network. It offers the functionality to retrieve the corresponding metadata from the public key output script based on the UTXO index number serial number, enabling UTXOs to carry NFT functionality. Inscribing means uploading the corresponding NFT data to the UTXO, generating the NFT in the process.
It is important to note that inscribing follows a first-come, first-served convention. If the same string of characters appears in the Bitcoin public key script, the inscription data corresponding to the earlier Ordinals serial number is considered the valid inscription. The interpretation rights belong to the third-party platform displaying the inscription; this is precisely why anyone can upload punk to the Bitcoin network, but only the earliest bitcoin punk is authentic, which is essentially a form of consensus!
Soon, the market derived various forms of Bitcoin image NFTs, domain name NFTs, text NFTs, file NFTs, and more. Compared to the Ethereum network where metadata is often presented in URL form, Bitcoin NFT metadata is directly stored in the Bitcoin public key script, leading many to claim that the Bitcoin public chain is the best place to carry NFT collectibles. However, this craze gradually cooled down amidst criticism of its consumption of network storage resources.
Nevertheless, the magical innovative power in the crypto field always rises and falls. In early March, a developer named @domodata designed a BRC20 inscription experiment, using JSON data packets in the public key script as a carrier, including parameters like deploy, mint, and transfer. Since BTC public key scripts only store data and do not support smart contract instruction execution, the JSON data packets allow off-chain platforms to record a set of ledger extension applications.
For example: domo deployed the BRC20 of ordi, specifying a total supply of 21 million, with a limit of 1000 per address. The off-chain accounting platform starts tracking the inscription data marked as mint from the deployment serial number of ordi; only the next 21,000 inscription data packets containing mint will be considered valid inscriptions, following the first is first principle. Subsequent inscriptions would exceed the total supply, which is clearly not allowed.
This is precisely why BRC20 requires a third-party platform to read and manage the accounts. Currently, functions like transfer and mint are simple and quick to track, but if BRC20 is to be upgraded to add features like deploy address taxation, it becomes complex, unlike Ethereum where multiple contracts can be publicly called. This puts a significant test on the platform's authority and fairness in reading, retrieving, and managing the ledger.
There are several technical challenges here, such as how the front-end interface controls the number of people minting inscriptions; how back-end on-chain transactions ensure transparency and fairness; and how the platform provides users with an entry to increase miner fees to improve packaging efficiency by tracking UTXO queue status. All these functions are experiences that third parties need to further optimize; amidst the chaos, naturally, some newcomers will be educated and baptized by the unknown market.
To put it simply: grabbing BRC20 inscriptions is like trying to buy train tickets on 12306; there are only so many valid seat numbers in the train car, so it’s first come, first served. If you push your way in, you might end up with a standing inscription, and sorry, please stand. Of course, you can also buy a valid ticket at a high price from a scalper; although it’s more expensive, at least you can sit down. But if you buy a standing ticket and ask the train station for a refund, how is that possible?
The key point is that although the accounting method of BRC20 is a bit rough, the narrative is quite interesting and easy to go viral. Anyone can deploy, anyone can mint, adding to the decentralized meme culture, and suddenly it became a FOMO moment. The significance of BRC20 is to bring retail investors into the Bitcoin NFT field at a low cost, supporting a series of NFTs benefiting from the ordinals framework. Therefore, the recent boom in the Bitcoin small image market is self-evident.
The technical aspects mentioned above are difficult to express too rigorously; I merely aim to logically break down the internal logical principles of the evolution of the Bitcoin UTXO mechanism, Ordinals, and BRC20 in the market, allowing everyone to feel how the Ordinals retrieval and BRC20 standard have flourished in the Bitcoin NFT market. I will also observe the market's future developments with a cautious attitude; before that, stay curious, participate cautiously, and leave it to time.
