An in-depth analysis of Bitcoin inscriptions

Part.1 Insight

In-depth analysis of Bitcoin inscriptions

Introduction

Bitcoin has come a long way from its origins as “digital cash” for anonymous transactions . Since the introduction of Inscription in 2021, Bitcoin has begun to open up new possibilities in programmable money and decentralized finance, exciting Web3 pioneers as well. Leveraging an extensible scripting language to enable customizable ownership logic and on-chain state, Inscription promises to usher in a new era in which Bitcoin serves as the underlying settlement layer for downloadable data, whether images, audio, or text. Although still in its early stages, the inscription-based protocol has demonstrated the future possibilities of Bitcoin, not just as a payment instrument, but perhaps evolving into a foundational layer for programmable property rights and digital ownership. But for investors, there are still risks in the gray areas of technology implementation, market environment, and regulation.

The history behind the inscription

"Staining Colored BTC

In the early days of Bitcoin, it was only used for peer-to-peer transactions and stored value. Since 2012 there have been “colored coins” – tokens marked Satoshi to represent real-world assets such as stocks or property. It colors Bitcoin’s Unspent Transaction Outputs (UTXOs) for use in other off-chain protocols. However, tracking these particular coins proved unsustainable, causing Bitcoin’s UTXO collection to bloat. Despite severely limited capacity, there are first attempts at injecting metadata via transaction scripts.

In 2014, due to the need to remove useless UTXO data, OP_RETURN output appeared, marking a 40-byte unspendable script for containing arbitrary data. The 2017 SegWit upgrade addressed transaction variability and block capacity limitations. It proposes a separate block called the witness block to inject metadata, which has a larger storage capacity. Bitcoin’s witness blocks also enhance the space for embedded data scripts.

The 2021 Taproot upgrade introduces Schnorr signatures and Merkelized Alternative Script Tree (MAST) data structures, improving efficiency, privacy, and script complexity. Schnorr signatures allow keys and signatures to be aggregated across transactions, meaning the network can process more transactions faster and cheaper. Using MAST as data storage allows the Merkle branch to only record the results of executing the script to the blockchain, rather than all possible ways to execute the script, thus greatly reducing the space occupied by transactions, especially more complex transactions. The most critical thing is that Tapscript removes the script size limit by modifying Bitcoin's scripting language to enable it to read Schnorr signatures, allowing complex inscription protocols to be encoded directly on Bitcoin's base layer. After years of incremental improvements to increase flexibility and capacity, Bitcoin has set the stage for a new era of tiered digital ownership in the cryptocurrency space.

How inscriptions work

Ordinal numbers Requirements for a protocol

The Ordinal Protocol was created by Bitcoin Core developer Casey Rodarmor and gives an order to Bitcoin’s smallest unit, the Satoshi. Before the advent of ordinal protocols, all satoshis were homogenous, with no identifiable order or unique metadata. The ordinal specification provides a way to assign a sequence number to each satoshi in turn, based on the order in which they are mined or transferred. This allows each satoshi, which would otherwise be indistinguishable, to receive a unique identifier based on its ordinal position.

According to the ordinal protocol, when making a Bitcoin transaction, the lowest numbered available satoshi will be spent first. By applying this rule consistently across the entire blockchain, every existing satoshi since the inception of Bitcoin can be assigned a verifiable order and sequence number.

Professional Bitcoin browsers and wallets follow ordinal specifications, using off-chain indexers to accurately display ordered satoshi balances in order to find the desired set of inscriptions. Users can therefore know exactly which ordinal satoshis they control and transfer specific numbered satoshis when needed.

Establishing ordinal order is critical for identifying and tracking custom Satoshi-based metadata such as inscriptions. Without ordinal numbers, there is no way to reliably pin data to a single Satoshi. The Bitcoin Inscription protocol therefore relies heavily on a centralized off-chain indexer to enable the distribution and proof of ownership of digital artifacts that are tied to numbered Satoshis.

BRC20 - the icing on the cake

March 2023, An anonymous developer using the alias @domodata launched BRC-20 based on the ordinal protocol, which sparked a speculative boom in Bitcoin dominated by meme tokens. BRC20 is a token standard introduced for the Bitcoin blockchain, inspired by the popular ERC20 specification on Ethereum. BRC20 allows users to create tokens other than BTC on the Bitcoin blockchain by allowing users to define, mint, track and transfer customizable token supplies directly on Bitcoin’s base layer.

On a technical level, the BRC20 token leverages the capabilities of Bitcoin Inscription and Ordinal Protocol Unlocking. Designating a BRC20 token involves creating specialized inscription data that labels the token parameters and minting rules. This data is burned into individual serialized satoshis.

A typical BRC20 deployment inscription will define attributes such as the token name, total supply, minting limit per ordinal satoshi, etc. Subsequent inscriptions encode relevant state changes, such as the issuance of new token supply or the transfer of tokens between addresses.

The Bitcoin transactions that move these inscribed Satoshis implement these BRC20 state changes. By tracking inscription history, BRC20-enabled wallets and block explorer software can sequence events and calculate current ownership balances. Therefore, users can issue and exchange user-defined tokens through the underlying Bitcoin ledger.

Unlike Ethereum’s account-based token balance tracking, BRC20 relies on minting and sorting through an ordinal protocol and a centralized off-chain indexer. Shift inscription chronology to explain BRC20's rule set; token balance changes are not reflected as native blockchain state changes like EVM. What was originally a storage mechanism designed to store arbitrary data has evolved into an "alternative" ledger system that is used more traditionally. Are technically non-homogeneous and can only be exchanged within a predefined set of inscriptions. But in general, BRC20 provides similar token functions directly on Bitcoin, but fails to implement smart contract functions.

Overview of the development of inscription technology

Yes Impact of other projects on the EVM chain

Figure: Inscriptions on EVM: https://dune.com/hildobby/inscriptions

Around bits The craze for coin inscriptions has other blockchain projects racing to replicate similar features. Networks such as Ethereum, Arbitrum, and Avalanche have begun launching Inscription-like projects by encoding data into calldata and relying on external indexers.

Compared to Ordinals on Bitcoin, the price has dropped because the fees for interaction and imprinting on other chains are lower; however, compared with Smart Ordinals on Ethereum Unlike contract-driven NFTs, this method cannot achieve complex functions such as distributing royalties.

Inscriptions in EVM: https://bitpushnews.medium.com/inscriptions-a-recent-fad-or-here-to-stay-79214f66cd44

However, peak on-chain traffic in a short period of time puts some network infrastructure under great pressure. Congestion and outages on chains such as Avalanche, Polygon, Arbitrum, zKSync, Near, and Cosmos due to peak activity highlight the potential risks of putting speculative needs ahead of sustainability planning.

General pattern summary

Ordinals data analysis

Source: https:/ /dune.com/dgtl_assets/bitcoin-ordinals-analysis

Most burned Ordinals are text, meaning they are BRC20 tokens.

Inscriptions on Bitcoin: https://dune.com/dgtl_assets/bitcoin-ordinals-analysis

Inscription technology in digital collections, tokenization, payment And autonomous identity authentication based on Bitcoin security has opened up new application scenarios. But at the same time, critics pointed out that early tools and infrastructure related to Inscription posed the risk of centralization in transaction verification, mining, wallets and software. In addition, the legal regulations on emerging on-chain activities also bring certain uncertainties.

Taken together, Bitcoin Inscription, while full of attractive possibilities, will require sustainable infrastructure and fair governance as its usage increases. Mechanics are still very critical.

Continuous Analysis

Trend Review< /strong>

A review of recent precedents provides insights into the growth trajectory of emerging innovations like Bitcoin Inscription. Two previous cryptocurrency trends have shown clear similarities - the rise and fall of algorithmic stablecoins, and the NFT craze in 2021.

Algorithmic stablecoins promise to achieve price stability through complex incentive mechanisms without the need for collateral. However, the complex economics of tokens confuse many users who are attracted by speculation rather than their actual utility. Users are mainly attracted by the attractive consumer-oriented features of algorithmic stablecoins, such as the lack of collateral. But as market conditions change, like TerraUSD’s collapse in May 2022, these projects fail to maintain parity with the U.S. dollar as confidence erodes.

Similarly, the NFT trend quickly lost interest after the craze, having previously been temporarily filled with hype. Users struggle to find practical uses that match the scale of short-lived promotions. To maintain market share, there is increasing reliance on building actual applications before users shift their attention.

Unless the applications of inscriptions go beyond mere speculative needs, they appear to be following a similar path. Incorporating inscriptions into addressing practical needs such as transparency, credentials, identity verification, and content authentication appears to be critical to its ability to avoid repeating previous cycles of boom and bust.

Continuous community development can cultivate sustainable utility while avoiding the mistakes of the past, but technological innovation will still need to be complemented by equitable integration into the real world.

Overall market analysis

In addition to infrastructure limitations, Bitcoin Inscription also faces barriers to external adoption. The hype cycle surrounding applications such as NFT collectibles or meme tokens, although strong, proved short-lived, had no basis in practical use, and still lacked sustained long-term appeal.

The sparse peak of inscription transactions mentioned above also highlights the relative immaturity of current inscription-based products. Critics point to the lower quality of these protocols and experiences compared to other mature Web3 areas such as decentralized finance. In order to get rid of niche interests, it is necessary to improve accessibility and functionality.

At the same time, there are questions about: Do these emerging experiments go beyond financial speculation? Projects that focus solely on minting tokenized derivatives and lack practical use may be limited to the crypto trader community and struggle to reach the mainstream market.

In addition, legal jurisdictions are only beginning to understand crypto-native ownership models, and excessive interference may hinder innovation.

Overall, Bitcoin Inscription offers compelling potential, but as its usage grows, ensuring universal access, a durable foundation Facilities and equitable governance are increasingly important.

Technical defect analysis

Although technologies like Taproot Innovation offers new possibilities for inscription-based protocols, but the infrastructure to scale these concepts faces certain limitations.

First, the rapid growth in the number of inscriptions may have an impact on the performance of the Bitcoin base layer. Adding non-transactional data to the UTXO set will ultimately impact storage capacity, bandwidth and computing requirements, especially for network nodes. Although storage technology has made significant progress, Internet bandwidth technology has not fully kept pace. As such, this could hinder node participation by significantly increasing the time and cost of the initial block download (IBD), potentially limiting Bitcoin's otherwise attractive scalability and usability.

In addition, complex inscription rule sets and scripts may pose cybersecurity risks if not rigorously reviewed. Attacks leveraging disguised Inscription logic have appeared in vulnerability databases - Inscription was recently listed as a cybersecurity risk in the National Vulnerability Database (NVD). Rigorous auditing and formal verification of inscriptional architecture is particularly important.

At the same time, there is a problem of centralization of the indexer. Tools provide interfaces to access inscription-based networks. Since BRC20 and ordinal protocols do not reflect token balance changes on-chain and therefore rely on off-chain and centralized indexers, these systems rely on proprietary indexes to decode on-chain transaction data into a readable and intuitive format.

It can be said that BRC20 expanded the capabilities of Bitcoin inscription too quickly, resulting in a certain degree of damage to reliability, security and decentralization at the current stage. Confidence. In contrast, focusing on the functionality of immutable data anchoring carries less risk than over-engineering a tokenized abstraction that relies on external indexer operations.

Conclusions

The above analysis is not meant to belittle The current value of the inscribed product. Especially on Bitcoin, it provides more diverse cases for the use of Bitcoin, helping to enrich its culture and ecosystem activities. For EVMs, it offers a cheaper and more secure on-chain alternative to existing NFTs, allowing any type of data to be stored on-chain, even code - an attractive option for crypto users .

However, for the overall Bitcoin ecosystem, there are shortcomings such as: low level of continued appeal, immaturity of the technology, lack of practicality, security threats, and previously observable trends. These factors make widespread adoption very difficult. It can be used to transcend current NFT standards and attract niche traders in the market, such as through NFTFi or provide better incentives for user activity (similar to airdrops), but it is not enough to become a market leader within the crypto ecosystem .

Despite the challenges of growing both technically and integrating into practical applications, Inscription appears poised to unlock Bitcoin’s future potential beyond just payments. While Inscription appears to be setting the direction to reinvent the ownership structure of digital assets through tokens, collectibles, and data anchoring, achieving this goal will require overcoming a series of challenges. Such as risks in terms of infrastructure constraints, legal uncertainty, miner centralization pressure and real economic practicality.

For investors, it is important to differentiate between a sustainable platform and "hype" when making speculative investments in Inscription-focused protocols and services during these early stages of development Very important. In the development of Bitcoin as a programmable currency network, as it transitions from early experimental stages to mature real-world applications: we also need to adopt cautious skepticism and curb the blind enthusiasm in the market.

Part.2 Investment and FinancingEvents

Re-pledge protocol Renzo completes US$3 million in seed round financing

* Restaking

According to reports on January 16, according to The Block, Renzo, the liquidity re-pledge protocol of the Eigenlayer ecosystem, announced the completion of a US$3 million seed round of financing. This round of financing was led by Maven11,IOSG Ventures, SevenX Ventures, Figment Capital, OKX Ventures and others participated in the investment.

According to reports, the core of Renzo is ezETH, which is a liquid re-pledge token (Liquid Restaking Token, LRT). Users can use Ethereum to Or deposit LST into Renzo to mint this token. ezETH can be further used in other DeFi protocols to earn compounding returns. Renzo abstracts all the complexity for end users, allowing them to participate in re-staking in the Eigenlayer ecosystem with a low threshold.

Ethereum staking platform Kiln completed $17 million in financing

* Restaking

Ethereum staking platform Kiln has completed a round $17 million in financing. This round of financing was led by 1kx, with participation from IOSG Ventures, Crypto.com, Wintermute Ventures, KXVC and LBank. This is an extension of Kiln’s $17.6 million Series A funding round announced in November 2022. Kiln said the funds raised will be used for the company's global expansion, including opening its Asia Pacific headquarters in Singapore, and further developing its products. Kiln has raised a total of $35 million in funding from investors since its founding.

Digital Infrastructure, a decentralized automotive data network, completed $11.5 million in Series A financing, led by CoinFund

* DePIN

Focus on decentralized physics Infrastructure network startup Digital Infrastructure recently completed $11.5 million in Series A financing. This round of financing was led by cryptocurrency investment company CoinFund, with participation from Slow Ventures, ConsenSys Mesh, Borderless Capital, Bill Ackman’s Table Management, and former General Motors CEO G. Rick Wagoner Jr.. The company will use this round of funding to strengthen developers' ability to build new tools on the DIMO network to enhance its utility and value. Additionally, Alex Felix, CoinFund’s general manager and chief investment officer, will join Digital Infrastructure’s board of directors. The Series A round brings Digital Infrastructure’s total funding to $22 million.

0xScope completed $5 million in Pre-Series Series A financing, led by HashKey Capital

* Data

Web3 Knowledge graph protocol 0xScope announced the completion of a $5 million Pre-Series Series A round of financing. This round of financing was led by HashKey Capital, with Redpoint China, OKX Ventures, GSR Markets, Amber Group, Antalpha and DHVC as well as existing shareholders Mask Network and Hash Global and XIN Family also participated in the investment.

In addition, 0xScope also released 0xScope V2. The future focus is to provide data support for Web3 AI applications through the proprietary Web3 data layer, and in the process Connect AI with Web3. It also announced that Scopechat is fully open for free registration and use. This product uses AI Agent to help users complete the process of selecting Tokens, checking Tokens, and deciding whether to purchase them within three minutes.

Bitcoin Layer 2 project MAP Protocol received strategic investment from Bitrise Capital’s fund

* BTC

Bitcoin Layer2 Project MAP Protocol Announced on the X platform, the project received a strategic investment of US$50 million from Bitrise Capital’s Bitcoin Ecosystem Growth Fund. The specific investment amount was not disclosed.

It is reported that the MAP Protocol was established in 2019 and took 5 years to develop. It is a Bitcoin L2 infrastructure focusing on point-to-point cross-chain interoperability. By utilizing the security mechanism of the Bitcoin network and the Bitcoin light client technology based on ZK, the MAP Protocol Bitcoin L2 infrastructure is not only secure by the Bitcoin network, but also allows assets and users of other public chains to interact with The Bitcoin network interacts seamlessly. Currently, MAP Protocol has more than 620,000 on-chain users and a complete second-layer ecological application, covering a complete series of Bitcoin L2 applications such as project launch, asset trading, lending, asset cross-chain, on-chain games and NFT.

Root Protocol, a Web3 digital identity service provider, raised US$10 million in two rounds of seed financing, led by Animoca Brands