Introduction

In the world of blockchain, inscriptions refer to any data that is written onto the blockchain. For instance, Bitcoin inscriptions are a method of embedding content into BTC satoshis. The inscribed information can include text, images, videos, and audio. Bitcoin’s inscription ecosystem is arguably the earliest and most mature, and this is attributed to the unique block structure of the Bitcoin blockchain.

Evolution of Asset Issuance on Bitcoin

Bitcoin stands apart from prevalent Layer 1 blockchain like Ethereum and Solana, and Layer 2 solutions like Op Mainnet and Arbitrum, in its non-Turing completeness. Turing Completeness in computer science denotes a system’s ability to execute any computational task expressible through an algorithm or valid program. In simpler terms, Turing-complete systems can tackle any computable problem given sufficient time and storage.

While Bitcoin has simple smart contract functionality, it only supports limited transaction types and operations, such as transfers and multi-signatures. On the other hand, Turing-complete blockchains like Ethereum allow developers to write smart contracts and decentralized applications (DApps). These programs can execute any complex computational tasks. Due to Bitcoin’s non-Turing complete nature, it cannot issue ERC-20 tokens like Ethereum, let alone NFTs and SFTs.

However, the Bitcoin community has long been experimenting with asset issuance using other techniques. One of the earliest asset issuance methods was called “Colored Coin.” Coloring refers to adding specific information to Bitcoin UTXOs to differentiate them from other Bitcoin UTXOs. This introduces heterogeneity among otherwise homogeneous bitcoins. Similar to inscriptions, specialized software is required to recognize them. In late 2013, Flavien Charlon proposed the Open Assets Protocol, utilizing Bitcoin’s public key cryptography tools. This protocol enabled multi-signatures for the issuance of “colored coin”-like assets.

In 2014, ChromaWay introduced the EPOBC (enhanced, padded, order-based coloring) protocol. The protocol included two operations: genesis and transfer. Genesis was used for asset issuance, and transfer was used for asset transfer. Asset types could not be distinguished through encoding. Each genesis transaction issued a new asset, and the total supply was determined at the time of issuance. EPOBC assets had to be transferred through transfer operations. If an EPOBC asset was used as an input to a non-transfer operation transaction, the asset would be lost. This information was stored through the nSequence field in Bitcoin transactions. This storage did not incur additional memory, but since there was no asset ID for identification, each EPOBC asset transaction had to be traced back to the genesis transaction to determine its category and legitimacy.

In addition to these two methods, Mastercoin, which officially launched in 2013, offered its own approach. This method had a lower reliance on Bitcoin and opted to maintain the state off-chain, with only minimal information stored on-chain. Mastercoin can be considered to treat Bitcoin as a decentralized logging system, issuing asset change operations through arbitrary Bitcoin transactions. For transaction validity verification, it continuously scanned Bitcoin blocks and maintained an off-chain asset database. This database stored the mapping relationship between addresses and assets, where addresses reused the Bitcoin address system.

Mastercoin could also be considered the earliest ICO (Initial Coin Offering) project. However, Mastercoin later turned out to be more of a scam and eventually disappeared. Nevertheless, during the subsequent ICO craze, many projects issued their own tokens through a crowdfunding-like model. With the advent of Ethereum, this Turing-complete blockchain made it easier to build dApps and issue assets. In the following years, a new ICO boom erupted on Ethereum, giving rise to DeFi, NFTs, and other related assets and tracks. Asset solution practices in the Bitcoin ecosystem became less common.

Turning Point

The landscape of Bitcoin inscriptions took a significant turn with the introduction of Bitcoin’s Segregated Witness (SegWit) upgrade and Taproot update.

In Bitcoin transactions, information is primarily divided into two parts: base transaction data and witness data. The former comprises data about the transaction, while the latter is used to verify user identities. Witness data occupied a considerable amount of storage space, yet its direct relevance to users was minimal. The larger the volume of information, the lower the efficiency of Bitcoin network transfers and the higher the transaction packaging costs.

Later, the SegWit technology addressed this issue by segregating witness data from the main transaction data, storing it independently. This optimization improved storage space utilization, consequently enhancing transaction efficiency and reducing costs. Within the same 1MB block size constraint, SegWit enabled each block to accommodate more transactions. The isolated witness data (various signature scripts) could occupy an additional 3MB of space, laying the groundwork for the Taproot update.

Taproot marked a crucial soft fork upgrade to the Bitcoin network, aiming to enhance the privacy, efficiency, and smart contract handling capabilities of Bitcoin scripts. This upgrade was considered a major advancement following the SegWit upgrade in 2017.

The Taproot upgrade encompassed three distinct Bitcoin Improvement Proposals (BIPs): Taproot (Merkle Abstract Syntax Tree, MAST), Tapscript, and a novel multisig-friendly digital signature scheme known as Schnorr signatures. Taproot’s objective was to provide multiple benefits to Bitcoin users, including enhanced transaction privacy and reduced transaction costs. Additionally, it aimed to empower Bitcoin’s ability to execute more complex transactions, thereby expanding its application scope.

Reference：BTC ecosystem expansion plan review: Where does the inscription go?

Following these two updates, developer Casey Rodarmor introduced the Ordinals protocol in December 2022. This protocol assigned unique serial numbers to each Satoshi and tracked them within transactions. Anyone could utilize Ordinals to append additional data, including text, images, and videos, to the Taproot script of a UTXO.

At the time, participants primarily uploaded images, sparking the first wave of “BTC NFTs.” This generated widespread discussions, with some viewing it as “littering” the BTC chain, while others hailed it as a breakthrough, empowering Bitcoin with new use cases. This data (images, videos, etc.) needed to be “inscribed” into the script of a transaction. Upon upload, a tool called an indexer would track and identify these “inscriptions.” The term “inscription” was not yet widely understood at this point.

In the following March, an anonymous Twitter user known as domo announced the creation of a standardized token based on the Ordinals protocol, called BRC-20. Users could issue corresponding tokens by simply adhering to the format and writing standardized text into transactions. Subsequently, developers created “inscription” tools, simplifying the process. Users could deploy, mint, and transfer BRC-20 tokens by simply entering a name and quantity.

While this remained a niche activity, with most BRC-20 transactions occurring over-the-counter (OTC), the landscape shifted with the listing of Ordi, Sats, and other tokens on major exchanges. These tokens generated significant wealth effects, altering the attitudes of Web3 participants. Speculators flooded the inscription market, and developers actively deployed corresponding “XRC-20” standards on various public chains. Revitalized by inscriptions, some legacy projects embarked on new ventures. Major exchanges began listing related tokens, providing opportunities for ordinary participants to engage.

Reference：The Path of Blockchain Applications Behind Inscriptions

Chapter Summary

• Inscription refers to any data written on blockchain.
• Bitcoin’s non-Turing completeness sparked the community’s exploration of asset issuance solutions on the Bitcoin chain.
• Before the emergence of inscriptions, Colored Coins, EPOBC, and Mastercoin all appeared as Bitcoin asset solutions.
• The SegWit upgrade and Taproot update allowed for more transactions per block, improved transaction privacy, and reduced transaction costs.
• Ordinals chose to inscribe serial numbers on Bitcoin’s smallest unit, Satoshi, and add data to UTXO to achieve the “inscription” effect.
• BRC-20 is a protocol designed based on Ordinals. Its simple and easy-to-understand protocol instructions and wealth effect quickly fueled the popularity of inscription.