What are Inscriptions?
Inscriptions are a method of embedding specific data into blockchain transactions. This feature enables the creation of NFTs within Bitcoin and offers a fresh perspective on non-fungible tokens for users of EVM-compatible networks.
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In November 2023, 95% of transactional activity in EVM networks involved Inscriptions. Inspired by the success of Ordinals, thousands have been actively deploying, creating, and trading these “new NFTs” across various blockchains like Avalanche, Polygon, and zkSync.
Daily Transaction Trends in Popular Networks. Source: blockscan.com
Inscriptions function by integrating specific data into blockchain transactions, similar to applying a stamp to a document. While they may seem akin to NFT architecture, they are distinct.
Let's examine the use of Inscriptions in the Bitcoin network as a case study.
Early Applications of Inscriptions
In Ethereum's blockchain, NFTs are created using smart contracts, which validate the ownership and unique nature of an asset. As Bitcoin lacks such contracts, Inscriptions are utilized for NFT creation.
The potential to embed various data types into Bitcoin transactions has long been discussed. Gary Gensler, for instance, alluded to this possibility in a 2018 MIT lecture.
Gary Gensler explained to MIT students that a hash function input could be “an entire movie, or a picture.” Four years later, Ordinals and Inscription emerged.
Bitcoin's smart contract functionality and the ability to create Bitcoin NFTs emerged after the Segregated Witness (SegWit) scaling proposal and the subsequent Taproot update.
Bitcoin NFTs are unique tokens formed by inscribing images into Bitcoin's smallest unit, the satoshi (SAT). With 1 BTC comprising 100 million satoshis, a vast array of such tokens can be created, given Bitcoin's maximum supply of 21 million.
The most popular protocol for generating NFTs in the Bitcoin network is Ordinals. It assigns a sequential number to each satoshi, enhancing its value (the ordinal number affects the token's price) and uniqueness. Tokens created in this way are called BRC-20 tokens, similar to ERC-20 in the Ethereum network.
Since its inception, Bitcoin has been considered a payment medium, but with Inscriptions, it has gained more functions, affecting the network in two ways. On one hand, it increases block size and makes Bitcoin more cumbersome, forcing miners to upgrade equipment, leading to centralization. On the other hand, a busy network allows miners to earn higher rewards.
Additionally, new ecosystems are evolving around Bitcoin-NFTs, including decentralized exchanges, NFT marketplaces, cryptocurrency wallets, and Inscription creation services.
BRC-20 Token Ecosystem. Source: coin98.com
For the Bitcoin blockchain, the advent of Inscriptions is a logical step. The technology has become a tool for creating non-fungible tokens, offering an alternative to Ethereum's ERC-721.
But what has driven users to use Inscriptions in EVM-compatible blockchains, solutions that already support NFTs?
Inscriptions in EVM-Compatible Blockchains
In November 2023, a significant development occurred in popular EVM-compatible blockchains as they began to incorporate Inscriptions. Within just two weeks, networks like Polygon, BSC, and Avalanche saw a surge in Inscriptions, reaching a total of approximately 325 million.
Daily Growth of New Inscriptions in EVM-Compatible Networks. Source: dune.com
Like Bitcoin's BRC-20 standard, these blockchains have developed their unique standards to facilitate Inscriptions: Polygon uses PRC-20, Binance Smart Chain utilizes BSC-20, and Avalanche employs ASC-20, among others. These standards play a crucial role in identifying Inscriptions within each blockchain.
In Bitcoin, information is attached to individual satoshis, whereas EVM-compatible blockchains utilize ‘calldata' for this purpose. Calldata comprises optional data included in transactions, which is read-only and cost-effective.
Inscriptions deviate from the traditional method of NFT creation, which typically involves smart contract interactions. Instead, Inscriptions require embedding specific details into calldata, such as:
- p: Protocol name (e.g., BRC-20, ARC-20). In EVM, the protocol's name often corresponds to the first issued token.
- op: Event types, like deployment, minting, or transfer.
- tick: Token ticker. BRC-20 limits to 4 characters, while EVM-compatible standards have no restrictions.
- max: Maximum issuance, often capped at 21 million tokens.
- lim: Mint limit. A low value increases transaction numbers for minting the total supply, whereas a high limit restricts minting for most users, hindering community growth.
- amt: The number of tokens to mint. Users can specify an amount up to the previously set limit.
To execute Inscriptions, a user sends a transaction to their own address with the relevant data in calldata. For example, minting 1,000 EXMPL tokens in the PRC-20 protocol, the calldata would be: {“p”:”prc-20″,”op”:”mint”,”tick”:”exmpl”,”amt”:”1000″}.
While ERC-20 token interactions rely on smart contracts, XRC-20 tokens (created via Inscriptions) are verified off-chain through indexers. These indexers interpret calldata, verifying token existence in the blockchain for successful minting.
Pros and Cons of Inscriptions in EVM-Compatible Blockchains
The primary advantage of Inscriptions lies in their ability to store NFT data directly on the blockchain, making it accessible to all. Additionally, they offer transactional economic efficiency: instead of storing information within a smart contract, Inscriptions utilize calldata, which is more cost-effective.
Inscriptions also democratize access since minting an NFT only requires paying the transaction fee. This is a stark contrast to exclusive ICOs where only a select group of users has the opportunity to purchase or mint tokens.
On the downside, Inscriptions rely heavily on indexers for verifying the blockchain's state, unlike traditional NFTs where this responsibility falls to the EVM. Another issue is network congestion: the ease of minting tokens via Inscriptions leads to an increase in transactions, which can drive up the gas prices for other blockchain activities.
Conclusion: Does Inscriptions Have a Future?
The surge in interest towards Inscriptions might be attributed to FOMO, especially among those who missed out on the BRC-20 token trend. In April 2023, for example, the cost of minting Ordinals was roughly equivalent to a transaction fee (about $1), yet these NFTs could later be sold for much higher values.
While some see Inscriptions as a potent tool for NFT creation, others perceive them as a potential risk to blockchain stability. Notably, the U.S. National Vulnerability Database (NVD) has classified Inscriptions as a cybersecurity threat.
Predicting the future of Inscriptions is complex. More time and observation are required to fully assess their long-term value and impact within the blockchain ecosystem.
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