The Rise and Fall of the Inscription Protocol: The Collision of Technological Innovation and Market Reality

Introduction

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." - This sentence inscribed in the Bitcoin genesis block witnesses the beginning of an era.

Today, as Bitcoin reaches new heights, we are witnessing the end of another once glorious era - inscription and rune.

From the emergence of the Ordinals protocol at the beginning of 2023, to the frenzied speculation around BRC20, and then the successive appearances of protocols like Runes, Atomical, CAT20, RGB++, and Alkanes, the Bitcoin ecosystem has undergone an unprecedented "inscription revolution". These protocols all attempt to transform Bitcoin from a mere store of value into an underlying platform capable of supporting various asset protocols.

However, when the carnival is over, we must face a harsh reality: the fundamental limitations of the inscription protocol destined this beautiful bubble.

As a practitioner deeply involved in the development of the inscription protocol from a technical perspective, having personally implemented the underlying components of each protocol, I have witnessed this ecosystem evolve from its nascent stages to its explosive growth, and now to its rational return.

This article will connect the innovations and limitations of multiple inscription protocols, discussing why this once-glorious track has rapidly reached its current endpoint.

1. The Evolution Chain of Inscription Protocol

1.1 Ordinals protocol: The beginning of the inscription era

The Ordinals protocol has ushered in the "inscription era" of Bitcoin. By numbering each satoshi and utilizing the principles of submission revelation technology, it achieves on-chain storage of arbitrary data. It combines the UTXO model with the concept of NFTs, using the serial number generated with each satoshi as a locator identifier, allowing each satoshi to carry unique content.

From a technical perspective, the design of Ordinals is quite elegant and perfectly compatible with the native model of Bitcoin, achieving permanent storage of data. However, simply writing data also limits it, as it cannot meet the strong market demand for the "issuance" of BTC combined with other assets.

1.2 BRC20 protocol: Business Breakthrough and Consensus Trap

BRC20, based on the technical foundation established by Ordinals, injects soul into on-chain data through a standardized content format - making the originally static inscription come to life. It defines the complete asset lifecycle of deploy-mint-transfer, converting abstract data into tradable assets, and realizes for the first time the issuance of fungible tokens on Bitcoin, meeting the market's strong demand for "issuance" and igniting the entire inscription ecosystem.

However, its account model fundamentally conflicts with Bitcoin's UTXO model. Users must first inscribe the transfer inscription and then proceed with the actual transfer, resulting in multiple transactions to complete a single transfer. More importantly, the fundamental flaw of BRC20 is that it merely binds "certain data" but completely fails to share its consensus power. Once the off-chain indexer stops supporting it, all so-called "assets" will instantly turn into meaningless garbage data.

This vulnerability is fully exposed in repeated Satoshi events - when multiple assets appear on the same Satoshi, the protocol parties collectively modified the standards, meaning that the consensus of the entire ecosystem is actually held in the hands of a minority. Even more confusing is that the subsequent "optimizations" such as single-step transfers introduced by relevant institutions did not actually address the core pain points of the market, but instead brought the cost of migrating various platforms to adapt to the new version.

This reflects a deeper issue: for the past two years, the designers of the inscription protocol have been stuck in the single area of "issuance," lacking in-depth consideration of the application scenarios after issuance.

1.3 Atomical protocol: A correction and disconnection of UTXO nativism

Regarding the UTXO compatibility issues of BRC20, Atomical has proposed a more radical solution: to make the asset quantity directly correspond to the number of satoshis in the UTXO, and to introduce a proof-of-work mechanism to ensure fair minting. This achieves native compatibility with the Bitcoin UTXO model, where asset transfer equals the transfer of satoshis, and to some extent addresses the cost and interaction issues of BRC20.

However, the iteration of technology has also brought the cost of complexity - transfer rules have become extremely complicated, requiring precise calculations of UTXO splits and merges, with the risk of asset burning, making inscription players hesitant to operate easily.

Even more deadly, the proof-of-work mechanism has exposed serious fairness issues in actual operation, with large holders using their computing power advantage to complete minting first, completely contrary to the mainstream narrative of "fair launch" in the inscription ecosystem at that time.

The subsequent product iterations further reflect the development team's misunderstanding of user needs - complex features such as semi-colored assets consume a lot of manpower and resources, yet contribute very little to improving user experience, instead leading to high costs for major institutions to restructure on-chain tools.

However, the long-awaited AVM has arrived late, and the entire market has already shifted, missing the best development window.

1.4 Runes protocol: the official authoritative elegant compromise and application blank

As the "official" issuance protocol of the Ordinals founder, Runes has absorbed the lessons learned from the aforementioned protocol. The use of OP_RETURN data storage avoids the misuse of witness data, and through clever coding design and the UTXO model, it has found a relative balance between technical complexity and user experience.

Compared to the previous protocol, the data storage of Runes is more direct, the encoding is more efficient, and it significantly reduces transaction costs.

However, the Runes protocol is also trapped in the fundamental dilemma of the inscription ecosystem - apart from issuing tokens, this system does not have any special design.

Why does the market need a token that can be obtained without any barriers? After obtaining it, besides selling it in the secondary market, what practical significance does it have? This purely speculative driven model determines that the protocol's lifespan is limited.

However, the application of opreturn opened up ideas for subsequent protocols.

1.5 CAT20 protocol: Ambitions of On-Chain Verification and Realistic Compromises

CAT20 indeed achieves true on-chain verification through Bitcoin scripts. Only state hashes are stored on-chain, ensuring all transactions adhere to the same constraints via recursive scripts, thus claiming "no indexer required". This has been the holy grail of the inscription protocol for a long time.

However, the "on-chain verification" of CAT20 is not entirely so. Although the verification logic is indeed executed on-chain, the verifiable state data is stored in hash form in OP_RETURN, and a hash cannot be reversed, so in actual operation, an off-chain indexer is still needed to maintain the readable state.

From a design perspective, the protocol allows for non-unique token name symbols, leading to confusion with similarly named assets. Additionally, during the early development phase, the UTXO contention issue under high concurrency scenarios resulted in an extremely poor initial minting experience for users.

Later, a hacking incident occurred, and the underlying principle was that internal data lacked a delimiter when connecting two numeric values, resulting in the same hash result for both 1 and 234 and for 12 and 34. The attack forced a protocol upgrade, but the prolonged upgrade plan made the market forget the initial enthusiasm.

The case study of CAT20 illustrates that even if some breakthroughs are achieved on a technical level, it should not be too advanced. If it completely exceeds the user's understanding, it will be difficult to gain market recognition.

And the threat of hackers always hangs over the project team like the sword of Damocles, reminding everyone to maintain a sense of awe.

1.6 RGB++ protocol: technological idealism and ecological dilemmas

A certain public chain attempts to solve the functional limitations of Bitcoin through a dual-chain architecture using an isomorphic binding scheme. By utilizing the Turing completeness of this public chain to verify Bitcoin UTXO transactions, it is technically the most advanced, achieving a more enriched meaning of smart contract verification, with the most complete technical architecture, making it a "technical pearl" in the inscription protocol.

But the gap between ideal and reality is fully reflected here - the complexity of the dual-chain architecture, high learning costs, and the threshold for institutional access.

More critically, the project's team itself is relatively weak and has to face the dual challenge of advancing both the chain and the new protocol, making it difficult to attract sufficient market attention.

In this field, which heavily relies on network effects and community consensus, it has become a "well-received but not widely adopted" technical solution.

1.7 Alkanes protocol: The final sprint and resource scarcity

The off-chain indexed smart contract protocol, which integrates the design concepts of Ordinals and Runes, aims to realize arbitrary smart contract functionalities on Bitcoin. This represents the final sprint of the inscription protocol towards traditional smart contract platforms.

In theory, it is indeed possible to implement arbitrarily complex contract logic. Moreover, it coincided with the opportunity presented by the Bitcoin upgrade that lifted the 80-byte opreturn limit.

However, the harsh reality of cost considerations ruthlessly shatters this technological ideal. Not to mention the enormous performance bottlenecks brought about by complex contract off-chain operations, even the self-built indexers in the early stages of the project have been overwhelmed multiple times. Moreover, deploying a custom contract requires nearly 100KB of data to be put on-chain, a cost far exceeding that of traditional public chain deployments. Additionally, the operation of contracts is not under control, still relying on indexer consensus, and high costs are destined to serve only a very small number of high-value scenarios. High-value projects do not trust ordinary indexers; even if a certain large platform strongly aligns itself, the market does not buy it. If this had been proposed a year ago, the timing and circumstances might have been completely different.

2. Fundamental Dilemma: The Minimalist Philosophy of Bitcoin and Over-Design

The cumulative effect of technical debt

The evolution of these protocols demonstrates a clear yet contradictory logic: each new protocol attempts to solve the problems of its predecessors, but in doing so, it introduces new complexities.

From the elegance and simplicity of Ordinals to the technical stack of subsequent protocols, in order to stand out, complexity continues to increase, until every player has to learn a bunch of terms and constantly guard against risks.

Moreover, all the attention is focused solely on the logic of the token issuance platform. If that's the case, why wouldn't players choose a place with lower costs, easier manipulation, more significant price increases, and more完善 platform mechanisms?

Long-term chewing on the same topic has also led to user aesthetic fatigue.

vicious cycle of resource scarcity

The fundamental reason for the resource scarcity of these project teams may lie in the centralization of the Bitcoin system and the fairness of its launch - how can institutions lacking incentives invest heavily in platforms that do not provide advantages?

Compared to the block rewards of miners, operating an indexer is purely a cost. Without the distribution of "miner" rewards, naturally, no one is there to solve technical and operational issues.

Speculative Demand vs Real Demand

It has been found through multiple user education sessions that as long as it is an off-chain protocol, its security cannot be equated with the consensus of Bitcoin. The cooling of the market is not coincidental, but rather reflects the fundamental issues of the inscription protocol: they do not address real needs, but rather speculative demands.

In contrast, truly successful blockchain protocols have succeeded because they solve real problems: consensus, functionality, and performance are all essential. However, the contribution of inscription protocols in this regard is almost zero, which also explains why their popularity cannot be sustained.

3. Transition of the RWA Era: From Market Dream Rate to Market Share Rate

Market awareness maturity

As the market matures, users have gone through several rounds of bull and bear cycles and have learned to cherish their attention - what a precious resource it is.

They no longer simply trust the information sources monopolized by KOLs and influential communities on social media, nor do they blindly believe in the "consensus cannon fodder" of white papers.

The threshold for issuing platforms is very low, and in the current market environment, this "low-hanging fruit" has already been picked. The industry is shifting from simple token issuance to more practical application scenarios.

However, it is worth noting that if the RWA field only sees a pile of issuance platforms, then this opportunity will also come and go quickly.

The Return of Value Creation

The technological innovations of the inscription protocol era often carry a "show-off" quality, pursuing technical cleverness rather than practicality. The development logic of the new era has shifted from "market dream rate" to "market share," placing greater emphasis on forming a genuine network effect through user reputation.

Real opportunities belong to teams that pursue product-market fit - creating products that truly meet user needs, have cash flow, and possess a business model.

Conclusion: Rationality and Restraint