A Guide to Bitcoin's Ordinals, Runes, and Native Digital Assets

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Bitcoin has evolved far beyond a simple peer-to-peer electronic cash system. It now supports inscriptions and will soon feature runes, which are protocols for creating Bitcoin-native digital artifacts and tokens. These innovations open up new possibilities for unique digital assets on the world's most secure blockchain.

However, these assets currently face a significant challenge: the lack of decentralized trading venues. While assets on other blockchains are commonly traded using automated market makers (AMMs), Bitcoin's design presents unique obstacles and opportunities.

The Challenge with Automated Market Makers

AMMs pool assets together and use mathematical formulas to dynamically price swaps between different tokens. They are efficient from an on-chain transaction cost perspective but still require on-chain operations, which adds transaction overhead compared to the swaps themselves.

These systems also produce inefficient prices because AMM prices can only change as a result of on-chain activities like deposits, withdrawals, and executions—all of which incur costs. More importantly, Bitcoin lacks the Turing-complete smart contracts necessary for implementing traditional AMMs.

Fortunately, there exists an alternative that is more efficient both from a transaction cost and pricing perspective: light pools.

Understanding Light Pools for Bitcoin Asset Trading

The concept behind light pools is elegantly simple. Users who wish to offer swaps between Bitcoin-native assets (such as rare sats, inscriptions, or runes) run nodes that quote prices for these swaps.

These quotes are signed messages gossiped between light pool nodes. Each quote must include BIP-322 signatures of the UTXOs containing the assets offered in trade. This signature requirement eliminates spam, as quotes can be rate-limited on a per-UTXO basis. Additionally, when UTXOs are spent, corresponding offers are automatically dropped from the pool.

When a market taker wants to accept a market maker's quote, they use the information in the quote to construct a Partially Signed Bitcoin Transaction (PSBT) that includes their signatures. This transaction is then broadcast to the network. These messages can also be gossiped and rate-limited based on the taker's UTXOs.

The maker receives this message (possibly asynchronously), countersigns it, and broadcasts the completed transaction to the Bitcoin network for confirmation. These PSBTs and transactions are not vulnerable to mempool sniping because signatures commit to all inputs and outputs.

Implementation Considerations for Light Pools

Light pools require more implementation work than traditional AMMs. Developers need to create implementations for the gossip network, quote message format, and PSBT construction and finalization. However, these are all achievable with dedicated effort and don't require solving the open research problems that plague much of cryptocurrency development.

The user experience of light pools should be quite favorable. Users can run their own node to accumulate an order book or rely on a third-party service. Prices can update in real-time between blocks without any on-chain activity, creating a more responsive trading environment.

Little work has been done on decentralized asset trading on Bitcoin simply because the market cap of Bitcoin-native assets was historically small. With the advent of rare sats, inscriptions, and soon runes, the foundation has been laid for significant growth in this area. Light pools represent a promising avenue for exploration in Bitcoin's evolving ecosystem. 👉 Explore more trading strategies

Introduction to Bitcoin Ordinals

I've been working on a numbering scheme for satoshis that allows tracking and transferring individual sats. These numbers are called ordinals, and they constitute a numeric namespace for Bitcoin. Satoshis are numbered in the order they're mined and transferred from transaction inputs to transaction outputs in first-in-first-out order.

Ordinals don't require a separate token, another blockchain, or any changes to Bitcoin. They work right now on the existing Bitcoin network.

Representing Ordinals

Ordinals can be represented in several notation systems:

A block explorer is available at ordinals.com, where users can explore recent blocks and look up ordinals by number, decimal, degree, or name.

Arbitrary assets such as NFTs, security tokens, accounts, or stablecoins can be attached to ordinals, expanding Bitcoin's functionality beyond simple currency transactions.

Ordinals is an open-source project developed on GitHub. The project includes a BIP describing the ordinal scheme, an index that communicates with a Bitcoin Core node to track the location of all ordinals, a wallet for making ordinal-aware transactions, a block explorer for interactive blockchain exploration, and functionality for minting ordinal NFTs.

Understanding Ordinal Rarity

Since ordinals can be tracked and transferred, collectors naturally seek rare and desirable sats. Bitcoin's periodic events create a natural system of rarity:

This creates the following rarity levels:

Degree Notation Explained

Degree notation provides an unambiguous representation that makes rarity immediately apparent:

A°B′C″D‴
│ │ │ ╰─ Index of sat in the block
│ │ ╰─── Index of block in difficulty adjustment period
│ ╰───── Index of block in halving epoch
╰─────── Cycle, numbered starting from 0

Ordinal theorists often use the terms "hour," "minute," "second," and "third" for A, B, C, and D respectively.

Supply Statistics

Total Supply

Current Supply

Currently, even uncommon ordinals are quite rare. As of this writing, 745,855 uncommon ordinals have been mined—approximately one per 25.6 bitcoin in circulation.

Naming Convention for Ordinals

Each ordinal has a name consisting of letters A through Z that get shorter as the ordinal number increases. This naming approach ensures that the good, short names aren't trapped in the unspendable genesis block.

For example, ordinal 1905530482684727°'s name is "iaiufjszmoba." The name of the last ordinal to be mined will be "a." Every combination of 10 characters or less either exists now or will exist in the future.

Exotic Ordinals

Ordinals may be prized for reasons beyond their name or rarity classification. Some might have mathematical significance, such as having an integer square or cube root. Others might be connected to historical events, like ordinals from block 477,120 (where SegWit activated) or ordinal 2099999997689999° (the last ordinal that will ever be mined).

These ordinals are termed "exotic," and their value is subjective. Ordinal theorists are encouraged to seek out exotics based on their own criteria.

Historical Context and Archaeology

A vibrant community of archaeologists has emerged dedicated to cataloging and collecting early NFTs. There's an ongoing discussion about whether ordinals qualify as historically significant NFTs.

In one sense, ordinals were created in early 2022 when the specification was finalized. In another sense, ordinals were actually created by Satoshi Nakamoto in 2009 when the Bitcoin genesis block was mined. This latter perspective suggests that ordinals, especially early ones, hold significant historical interest.

Historical evidence shows that the concept of ordinals was independently discovered on at least two separate occasions long before the modern NFT era began:

  1. On August 21, 2012, Charlie Lee posted a proposal to add proof-of-stake to Bitcoin that used the ordinal algorithm (implemented but never deployed).
  2. On October 8, 2012, jl2012 posted a scheme using decimal notation with all the important properties of ordinals (discussed but never implemented).

These independent discoveries suggest that ordinals were an inevitable mathematical consequence of Bitcoin's design rather than a completely new invention.

Frequently Asked Questions

What are Bitcoin ordinals?
Bitcoin ordinals are a numbering scheme that allows tracking and transferring individual satoshis. Each satoshi is assigned a unique number based on the order it was mined, creating a numeric namespace for Bitcoin without requiring changes to the protocol.

How do light pools differ from traditional AMMs?
Light pools operate through a gossip network of nodes quoting prices for swaps, using signed messages and BIP-322 signatures. Unlike AMMs, they don't require on-chain operations for price updates, making them more efficient and better suited for Bitcoin's architecture.

What makes certain ordinals more valuable?
Ordinals gain value based on rarity levels tied to Bitcoin's periodic events (blocks, difficulty adjustments, halvings, and cycles) and subjective factors like historical significance or mathematical properties. The first sat of each block is uncommon, while the first sat of the genesis block is mythic—the rarest type.

Can ordinals support NFTs and other digital assets?
Yes, arbitrary assets including NFTs, security tokens, and stablecoins can be attached to ordinals. This functionality expands Bitcoin's use cases beyond currency transactions while maintaining the security and decentralization of the base layer.

How can I participate in the ordinal ecosystem?
You can explore ordinals through block explorers like ordinals.com, run your own ordinal-aware wallet, or participate in developing tools and infrastructure. The ecosystem is open-source, with development happening publicly on GitHub.

What are the benefits of light pools for Bitcoin trading?
Light pools enable real-time price updates between blocks without on-chain activity, reduce transaction overhead compared to AMMs, and are specifically designed for Bitcoin's architecture. They create a more efficient trading environment for Bitcoin-native assets.

The Future of Bitcoin Native Assets

The development of Bitcoin-native assets through ordinals, inscriptions, and future protocols like runes represents a significant expansion of Bitcoin's capabilities. While challenges remain in creating decentralized trading venues, solutions like light pools offer promising approaches that leverage Bitcoin's unique strengths.

As the market cap of Bitcoin-native assets grows and more developers contribute to this ecosystem, we can expect to see continued innovation in how we create, trade, and value digital artifacts on the world's most secure blockchain. The groundwork has been laid for a vibrant ecosystem of Bitcoin-native assets that maintain the security and decentralization principles that make Bitcoin unique.

The convergence of numbering schemes like ordinals with trading mechanisms like light pools creates a compelling foundation for the next chapter of Bitcoin's evolution—one that extends far beyond digital cash into the realm of digital artifacts, collectibles, and unique digital assets. 👉 View real-time trading tools