Bankless - Nic Carter: The Second Bitcoin Civil War

Episode Date: February 27, 2024

Nic Carter rejoins the podcast to discuss Bitcoin’s second civil war. When did it begin? Where are the party lines drawn? How will it end? Possible solutions? David and Nic dig into all of these questions and much more.  ------ 📣SUI | Register for Sui Basecamp https://bankless.cc/SUI-podcast  ------ 🎧 Listen On Your Favorite Podcast Player:  https://bankless.cc/Podcast  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo    🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku    🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 💸 CRYPTO TAX CALCULATOR | USE CODE BANK30 https://bankless.cc/CTC  ------ TIMESTAMPS 0:00 Intro 7:30 The Bitcoin Civil War 10:32 Defining Side Lines  14:14 No Core Consensus  17:13 Filtering Out Transactions & Expressivity  22:39 Season Two  26:16 Lightning Doesn’t Work? 29:16 Ordinals & Bitcoin L2s  32:49 The Future of Bitcoin Core 35:16 Covenants Explained  37:26 Bitcoin Venture Capital 48:26 BitVM 51:64 Bitcoin Block Philosophy  1:02:10 Bitcoin Expressivity Going Too Far  1:07:36 Bitcoin Ideology 1:10:12 Closing   ------ RESOURCES Nic Carter https://twitter.com/nic__carter   ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. See our investment disclosures here: https://www.bankless.com/disclosures 

I think the technology and the financialization of Bitcoin are intertwined. And you can't have one without the other. And as we move into this intermediate term with ETF flows and things like that, these allocators will continue to ask themselves, is there interesting stuff happening on Bitcoin, why Bitcoin is supposed to any other blockchain? And just being the only crypto asset within an ETF, I don't think is sufficient. So we do have to continue to show that there's actual technological developments happening.

Bankless Nation, welcome to a conversation with Nick Carter. Over in Bitcoin World, there is a second civil war forming. It's been forming for a while. It's always been there. We unpack it here today on the conversation with Nick Carter. But this camp is the filtering camp versus the Bitcoin rationalist camp. There's not really any good names here. These are the monetary maximalism versus the Bitcoin expressivity camp.

The Satoshi's Only versus the Ordinals camp. Some of these people want to only. have Bitcoin the blockchain be good for BTC transfers. And the other camp is for Bitcoin expressivity, ordinals, BRC20s, layer two's on Bitcoin. And this has worked its way up to the Bitcoin core part of the stack. We're not going to have hard-fork the Bitcoin chain. That's never going to happen.

But there are still places where these different philosophies want to exert control. And so there's been political fights over what gets merged into Bitcoin core. And overall, there's just been a, divide in the Bitcoin community about what Bitcoin can do and what Bitcoin should be good for. Apparently, the very, very radical side of this camp wants to go so far even to make a filter that filters out Bitcoin transactions that have arbitrary data in them. Anything that's not just a simple raw BTC transfer doesn't go through the Bitcoin blockchain, at least at the surface level, not the actual chain. I think this is super interesting. And I love the fact that the Bitcoin

expressivity side of things, the ordinal's BRC 20 layer two side of things, have crescendoing momentum and in my opinion have a date with destiny of success. At least that's where I think things are going. But first we're going to talk about suey and the sui base camp, which is a in-person conference in Paris during Paris blockchain week, April 10th through 11th. So if you are interested in a parallelized layer one delegated proof of stake chain, the sui base camp might be for you. There is a link in the show notes to get 20% off of your path to the Suey base camp. This is the move ecosystem for all the devs out there who enjoy move. Suey is like the spiritual successor to the whole Libra project now turned into a layer one.

And so especially if you're a dev who's interested in parallelized new VMs that are parallelized, there's a link in the show notes to get started. Nick Carter and I unpack all of these different conversations and his opinions on this thing and where he stands. Nick has been very, very early to rejecting. Bitcoin fundamentalism, Bitcoin monetary maximalism, and been a fan and an investor in Bitcoin Expressivity, Bitcoin utility. And so I just wanted to check in with him and kind of peer over the fence as to what's going on in Bitcoin world because I think it's been interesting ever since Ordinals came about and it's only been growing in its interestingness. And so we have this

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Good, man. Good to be back. I feel like, uh, I don't know how many of these we've done now. A good number. Yeah. Well, you are number two number most frequent bank list podcast guests, but also the instances of where it's just been like you and me going at it is also like creeping up there pretty well.

Well, I'm honored to be back. I feel like it's been a while. So thank you. Yeah. Well, it's because there's like some shenanigans going on in the Bitcoin, the Bitcoin sector. I think there's like a lot. There's a lot to talk about in the Bitcoin world, which like isn't usually the case. But for the last like 18 months or so, like the conversations to be had about Bitcoin are like up only.

Are you, are you a bitcoiner? Do you consider yourself a bitconer turning the tables? Do I have to own Bitcoin to be a bitconer? uh yeah i think so in that case i'm not a bitcorner not even one mere sotoshi david not even a single set yeah a bitcoin believer bitcoin like i think bitcoin i believe in the bitcoin ideology and i i think the bitcoin bitcoin ideology like was extremely precise on a lot of very deep truisms about crypto very early. And there's an ideology that I, like, largely agree with in a lot of different respects. And so in that way, if I can define Bitcoinerism like that, then I am a Bitcoiner.

Okay. Well, we're a big tent. So we'll love you. Yeah. Okay. But one of the things that's going on recently is like that big tent is like splitting. There's like another Bitcoin civil war, like bubbling at a higher level in the stack. Is that how you would define the landscape and this present moment or would you change those words? Yeah, I mean, it's been going on. Don't you think there's been a Bitcoin Civil War for years? That's how I feel, at least. I mean, uh, between the laser-eyed Uber Maxis and the Bitcoin pragmatists? Yeah, like, I don't know what any of the camps are called anymore, but there's like basically the fundamentalists or the purest, the light, laser-eyed, maxis, if you want to call them that. And then there's like the moderates, maybe, the like, uh,

you know, integrationalists, um, the Bitcoin season twoers. Um, this is what CK was calling them. The Bitcoin, it was the fix the filter camp versus the Bitcoin season two people.

Yeah. I think the, so basically the core divide is like the, maybe call them Bitcoin monitorists. Like people that think the Bitcoin, the protocol should be only interested in moving around units of Bitcoin versus people that think it ought to do other things as well.

And, that debate has been happening on Bitcoin forever. I mean, like there was issues with counterparty back in the day, I think in 2013, maybe, if I'm not getting my timelines mixed up. There were debates over Op Return, Vatalik has referenced those in the past. I think he might have even mentioned that as a catalytic moment for him wanting to go the Ethereum direction, realizing that Opratern, was too limited and, you know, whole new protocol is required. So that same debate is happening.

And so, like, now, of course, the main concern is ordinals and inscriptions and, like, can the protocol filter out non-monetary data? Is this spam? Does the benefits towards fee accrual? Do those matter or do fees not matter? Should there be fees? Is there a security budget question? All these questions are pretty intertwined. And so I would say broadly, like the debate is that between folks that are interested in Bitcoin being more richly stateful to borrow the Ethereum term and between the folks that think Bitcoin is just about moving Bitcoin around and pretty much nothing else. But it's certainly come to the four recently in particular with ordinals. But we're also seeing that same debate with the Covenants proposal, right? the soft forked op-cap proposal and you're going to see it now with roll-ups as well as those

become you know something that is a thing on bitcoin i think in the next year uh and yeah so certainly like a pretty like heated uh episode uh in sort of like that that debate i think trying to actually define the line uh between these two camps has been like murky um but i think one perhaps definition that gets us, does a lot of work, a lot of good work is like, does this trend, this Bitcoin transaction have extra data beyond BTC transfers or does it not? And I think that definition kind of gets us most of the way there. But I heard there was like some like drama around this one, a coin join protocol, which was about Bitcoin privacy and Bitcoin, kind of like a tornado cash equivalent, just like a privacy tool for

a privacy gadget for Bitcoin transfers, which I think even like the Bitcoin, fundamentalists, the monetary maximalists, would say, like, we enjoy those properties. But if you filter out transactions from Bitcoin that have arbitrary data, then you also lose this one coin joint implementation. And so even that isn't a perfect definition because the coin join people are enhancing the monetary properties of Bitcoin, and you wouldn't really clump them into the ordinal's category. But they do need that. extra stateful data about Bitcoin in order to run their program. And so even that definition isn't perfectly precise.

But I think that that one line kind of gets us most of the way there in terms of determining who's on what side. Do you agree? Yeah. I mean, I think it's a silly debate because Bitcoin has always had non-monetary data in it literally from the first block, right? I mean, Satoshi put the Genesis block information in there. And people have always found ways to put arbitrary data.

into Bitcoin, including people that are on the filtering camp. They're on the side of filtering. So Luke Dash infamously in 2011 put Bible verses into Bitcoin. They're still in there. If you look, if you go to an explorer that supports text searching for arbitrary text data and Bitcoin, you can find his verses. I think they, I'm trying to remember exactly what they were. But he ran a mining pool called I think Allegiance, which I think is a biblical reference.

and you'll see that in there. I mean, Coinbase outputs always have non-monetary data, basically saying which mining pool mine them. And people have always found ways to insert non-monetary, arbitrary data into Bitcoin, even outside of Op Return, like using malform transaction types. So, and, you know, even very respected devs that have been very influential in Bitcoin, like Andrew Puellstra have made this point,

you can't actually really inhibit arbitrary data insertion into Bitcoin. You can maybe try and like soft fork out the blob space associated with inscriptions. You can't actually stop people do it. People find a way to do it. And it's just a matter of like how efficient it is and how useful for operating a node, like how burdensome that data is on node operators. So I find it to be silly. People will use Bitcoin for whatever they want.

And from my stance, I think it's very useful to have, you know, other transaction types on Bitcoin. I'm always of the view that we should have like a rich and active, you know, set of different patterns of network usage, whether that's L2s or inscriptions. I think the Ordinals thing is great. But I guess a lot of that comes from my view that, like having fees and usage is good. And some people would rather preside over a wasteland where no one ever moves their Bitcoin. Everyone just sits on the Bitcoin. And I guess a lot of people are content with that, but I'm not.

Why can't we have both? Because why can't we just have two versions of a Bitcoin node software, one that actually does filter out arbitrary data to satisfy the monetary maximus to satisfy the fix the filter camp, and then have a different implementation of a Bitcoin node software that does all of the expressive stuff. Why can't we have both? Bitcoiners generally are skeptical of multiple competing implementations. And I think Bitcoin Core is pretty much the only dominant form of software. And I think the risk is that there would be consensus issues with multiple implementations.

I'm not that up to date on Ethereum, but I think there's like, it's trending in the direction of one major implementation that people generally use. Am I correct in that assertion? or is it's still pretty fragmented. There's a nuanced conversation here. So like, guest dominance is on the execution layer, and there's been a very big push

to reduce guest dominance down from its heights of, like, 82 to 83%, where it is now at 75%. So still pretty dominant, but other execution layers are coming online, like Georgios from Paradigm is making rust,

so Rust Ethereum. And that's just on the execution layer, on the consensus layer, that we have actually a pretty good healthy state of diversity, afford different clients where you need to combine at minimum two of them in order to get over consensus thresholds. Yeah, so Bitcoiners, I think the general design philosophy is like there ought to be one major implementation and there's significant risk to consensus if there are different ones. So this is a fight over Bitcoin core? Yeah, in a sense,

from what I've seen of the fix-the-filter debate, and I've honestly kind of nor did because I think there's no chance for the like filtering camp to win here. It's very clear to me they're not going to win. They, I think, are mostly just talking about transaction propagation. And I don't think they're talking about some way to actually eliminate inscriptions, you know, in the sort of core protocol, like undo tap route or like undo Segwit or something. I think that would be very far-fetched. And so then what you might just get is a situation where people email transactions,

data to minors directly to get it. Let's say they did filter out and they made inscription transactions non-standard. You could just email your transaction data to a minor. And so, you know, you wouldn't really eliminate those transactions from the actual ultimate inclusion in the blockchain. You would just make it more unwieldy to get them in, but people would still do that. And it would create a shadow mem pool, which I think wouldn't be good at all. And it would create out-of-band transactions and things like that. So I don't know. It seems like pretty silly to me the whole thing.

And, you know, I don't think those people have like the critical mass to get anything done here. I do think it's interesting that there are these two different philosophies. Call it the monetary maximalist fix the filter camp versus the Bitcoin expressive camp. I like the, I really like the word expressive. And I think that's kind of like some of the ideology that's being expressed on the like arbitrary data. Where like adding more expressivity to Bitcoin is, I think it's no. coincidence that like Vitalik pushed out from that early like op code thing and then goes make literally a fully expressive smart contract platform. And so we're starting to see Bitcoin land dabble

into this. But like who has the incentive to filter out transactions? Is it like why are they so motivated to care so hard? Yeah. I mean, I think they don't want Bitcoin to host like, you know, NFT activity. They they don't want to reward those kinds of people and they don't want their node software. I mean, I don't want a lot of things in this world, but a lot of things don't also motivate me to get out of the bed in the morning to go, like, change the world in that particular state because I don't have the incentive to. Like, they can want that, but why do they fight so hard?

Yeah, I mean, I think it's about showing your adherence to the, you know, a specific breed of Bitcoin ideology and, like, showing how pure you are, basically. Okay. We're back here. And, you know, like, creating that signal and gaining, clout on that basis. But yeah, it seems like they're tilting a windmills. It's Virtues. It's Bitcoin Virtue signaling. Yeah, effectively. And I don't think there's any prospect of it happening. So I'm pretty puzzled by it, frankly. I think Ordinals are great. I think Bitcoin itself is a good host for

NFT data or other arbitrary data types in particular because the, you know, blockchain is small. and so we have like really good assurances that the data is going to be there and accessible you know 10 20 years from now so and you know like we've had um insertions of this kinds of data for a long time and inscriptions just codify it and do it in a pretty you know benevolent way from a user perspective so i see very very few downsides there i was um hanging out with Alex Aedleman and we were talking about just some of the natural incentives that comes with like an expressive

layer on a blockchain. I use the example of Bitcoin Media, Bitcoin Inc. One of the big media companies in the Bitcoin space were one of the first ones to do some ordinals initiative where they like minted an ordeal on the blockchain and that caused that was at the very beginning of like one of the schisms.

I mean it's the same schism as you've defined but the modern schism between these two camps, one, the Bitcoin fundamentalists that like pointed their way fingers at Bitcoin media for playing how dare they play in the ordinal space. Um, but somebody who like me, who works at a media company who understands media incentives, I see like Bitcoin expressivity as like a great compliment to a media company's business model because expressivity is like drama surface area is like there's things to talk about.

There's content to produce. There is more than just mini like mere BTC transfer. to talk about and as like BTC media who is going to be like one of the largest distributors of thought of narrative of content in this space probably loves the aspect that there is like expressivity happening on Bitcoin. There's ordnals, there's NFTs, there's datefulness in its essence. And so any sort of media ecosystem around Bitcoin is going to enjoy that because that is a boon to their business. They have more content to produce. And I think that is just one shard of which you could look at this, you could also look at it from the VC angle. Like, VCs also

will love the expressivity going on Bitcoin because there's this more investable surface area. So, like, we have, like, these ideological motivated side of the camp versus, like, the actual rational, more economically rational agents on the other side of the camp. To me, it's just like, well, I know which one's going to win here. Like, I know how this story goes. Yeah, I thought it was brave of BDC media to do that. And that was a signal to me that the, sort of like, let's say, purest camp, which they'd probably identified with more historically throughout the debates, like, that started, well, that have always existed, but in my case, like, there was a big fallout in 2021 where people got mad at me for investing in on Bitcoin

stuff, right? So that was, like, part of the Bitcoin Civil War, so sort of like Bitcoin Cold Civil War, maybe, like, it wasn't that bad. So I started to see fractures even in the purest camp, And now they seem very fractured. Now we see big debates around covenants between the purists. We see icing now a realization has set in that ordinals are not going anywhere. Inscriptions aren't going anywhere. And so I think that camp has been somewhat defanged because reality has just imposed itself on them. And they realized, well, this stuff is actually going to stick around regardless of whether you want it or not.

So I see the kind of purest side is very fractured and not very organized, not very coordinated. And I think like the Bitcoin season tours, whatever you want to call them, like the Oudies and Erics of the world, like very clear to me that they are in the process of winning or have won already, basically. Why is it called season two? Well, I guess the idea is that season one was to do with lightning and the previous big stuff. Civil War, which was the block-sized war, which was won by the small blockers, and Lightning was the output of that. So much effort went to Segwit and Lightning. That was one technological theme that characterized Bitcoin from 2015, let's say, when Segwit and Lightning were sort of first theorized to 2023. I would say that was sort of the thrust. Like Bitcoin early days

is just a thing people are trying to build, and then it's like, okay, scalability, how we're going to do it? going to do this. Then there was a period of slumber, you know, like relative complacency, I would say, is Bitcoin core and application developers were just focused on lightning. Now there's been a reinvigoration, you know, partially due to ordinals and inscriptions, but also due to a disillusionment with lightning as the ordained scaling method. And it's really puzzled me that lightning has been the focus. for so long, it's still the focus among many Bitcoin-focused VCs, among many application developers, founders that are building infrastructure on Bitcoin, and for core devs.

Like if you look at the core dev roadmap, it's still sort of like lightning-focused. And season two is just to pose the question, hey, is there like something else we could do here? You're like, is it all lightning? Is that the ordained scaling mechanism? are there other ways to do things? Are there other things we can do? And ordinals and descriptions, I think ordinals were invented, conceived of in late 22, maybe if I'm remembering that correctly and that, you know, they had a big 23.

And now is a new season for sure, from my seat, I see it happening of new L2s and contemplating things like roll-ups. So doing what Bitcoiners said they would always do. which is inherit the best tech from other blockchains. Let other blockchains experiment, make mistakes, learn things, and then we'll bring it over. Bitcoin is now considering, or Bitcoiners, are considering doing that thing that we said we would do, which is inheriting the best technology. But it does require making this heretical statement, hey, maybe lightning's not all it's cracked up to be.

And that takes a lot. And, you know, obviously people aren't going to be happy with that. because we have such a sunk cost, both like intellectually and positioning-wise in favor of lightning and a ton of capital as well. And just developer time has been sunk in a lightning. It takes a lot to acknowledge that it hasn't succeeded in the way that maybe we thought it would. If looking back, we look back at the way we thought about things in 2016-17, you'd be kind of brave to, you know, stick your hand up and say lightning didn't deliver. Also, because you never want to show weakness. But it didn't. Like, look at the stats. Look at the data. Look at the traction.

Lightning is useful for some types of transactions for certain transaction niches. But it's not a panacea. And it's certainly not the scaling method that's going to take Bitcoin of the promise land. It's not where, you know, these richly stable transactions are going to occur. It's clear to me. think I've a relatively good view into this stuff. It's time to explore alternatives. And I don't think this is, you're not alone here. I think there are people, if I'm remembering my Twitter timeline history correctly, there are like Bitcoin lightning developers who have stood up and being like, hey guys, I don't know about this. I've been working on this for a while.

I don't see the path forward here. Maybe you have more light you could shed on that? Yeah, I mean, we gave like, we gave lightning. the old college tribe. You know what I mean? So we passed Seguit and we fixed a malability bug for lightning. We fought this entire Civil War and the whole point was, hey, we don't need to expand the block size. We have this alternative thing that we're going to do, which is lightning. That's going to win a scalability. Bitcoin Core was lightning focused for the last five years. Hundreds of millions of dollars of VC. I know it doesn't seem like a lot, but for Bitcoin VC, it's a lot, went into building lightning infrastructure, building applications for lightning.

And as time went on, I think we had enough data regarding the usage of lightning and the drawbacks of lightning. We learned what some people theorized. Like, I'll actually give Cal Samani credit here. I remember him years ago saying, hey, lightning is capital efficient. U.X complexity is very significant. and that's true, basically. And like, we're investor in lightning companies,

and I don't mean to denigrate them. I think lightning is still useful in certain contexts, undeniably. But it does, I think the time is such that we know now that these challenges are fundamental, as opposed to merely contingent challenges where, like, oh, we haven't invested enough resources in this. We haven't sufficiently explored it. Now we know.

Now we know that the challenges of lining are actually fundamental. In particular, the costs and difficulty of pre-funding a channel, that's very unintuitive from a U.S. perspective, the capital and efficiency of immobilizing capital in the network in order to transact. It doesn't adhere to our intuitions as to what a payment network is like. and it's very much unlike the way that people transact in a blockchain context. We know now that these are fundamental challenges that have to do with the actual architecture of the network. They're not things that can actually really be designed away. And if you look at Lightning, that's why probably most Lightning transactions today are custodial through custodial wallets, as opposed to using Lightning itself.

We know now that Retail Ordinary Users are not going to just use Lightning wallets. in the way that was maybe intended. We know that it's a more centralized model. There's nothing wrong with that. That's how payment systems develop. But yeah, I think basically we have enough data now to say it has these fundamental challenges. Let's look at something else. And even Lightning, I kind of categorize this is still a project that is trying to express Bitcoin.

It's a payments network. It is just expressing it in a payment. modality, like a payments form factor, which counts. But now these, like, season two, like innovations are kind of, are meaningfully different. Like, ordinals is more about just, like, data, not about BTC transfers. It's about, it's about data. It's about NFTs. It's about JPEGs on the chain.

But then, and then there's also some newer innovations going on in the BitVM that is actually layer two's where maybe we can start to bring back the payments conversation, the BTC, the asset transfer conversation. but I see kind of these two, not camps, but two different ways of leveraging Bitcoin data. One is like the NFT ordinal's side of things. And then the second one is like the more further out actual true Bitcoin layer twos. Is there actually a line there or am I imagining things? No, but I think the like Bitcoin moderates like myself are supportive of both the creation

and fostering of an NFT ecosystem on Bitcoin. I think there's benefits there. and also alternative ways of making Bitcoin payments, ways of doing Bitcoin smart contracts. Right. But isn't one more real? Like the NFT ordinal thing is like undeniably real. We have the data.

Like that's that no one's really questioning that. But the Bitcoin layer two is still more researchy, engineering theoretical, correct? Undoubtedly. And Bivvm, which is the catalytic sort of technological leap forward, which I am personally very excited about. After having spent a fair amount of time with Robin, the inventor recently, that's still theoretical.

And there's projects out there saying they're building on BVM. BFVM barely exists, sort of still back in the napkin type stuff. And it may exist this year. I think it will exist this year, but doesn't really currently exist in a meaningful sense. But what I know about it is so exciting that I think we can make predictions about the infrastructure that BVM enables. namely, I think, optimistic roll-ups in like sort of a true sense on Bitcoin.

And so, well, okay, if people are already saying that they're building on BitVM, you can interpret that as like, well, you guys are crazy because you're building too far ahead of the curve, you're building on top of vaporware, or you could say like, well, no, they just see where the puck is going and they're going ahead of it.

Yeah, and look, we've funded Bitcoin L2's, like new alternative L2s like in 2021. in 23 as well, before we knew about BitVM. But BitVM is an unlock, which is a massive accelerant. And it means you can now build an L2 without the requirement of a soft fork, which is essential. Because there is a power vacuum in Core Dev. There's been a lot of turnover in CoreDev. I don't think people don't know about this.

And the champions that would have historically championed a soft fork, are not active for one reason or another. So if you're predicating your business on a soft fork, it's not going to happen for the foreseeable. There's very few soft forks that actually appear likely in the next 12 to 24 months. So BivVM is great because it allows us to sort of potentially circumvent that. Interesting.

Yeah, so what does this mean for the future of CORE? You talked about how CORE has been built, like in a lightning-centric design or in a lightning direction for so many years and it sounds like that we are thinking about new directions. What do you, if these new incentives at play around the Bitcoin ecosystem play out

as we are watching them play out, what do you think about, what does that mean for the future of Bitcoin Core? Core is pretty undeterred and, you know, steering Bitcoin Core is like steering an aircraft carrier or frankly, that's not even a good analogy because aircraft carriers

do move. you know they can be stared they can stare one Bitcoin core moves at its own pace which is glacial there's of course

a lot of work to make it you know root out bugs and keep it updated with like new operating system

developments but like soft forks there's conversations around like covenants but there's a bunch of different proposals so nobody wants

to really go to bat for one covenant proposal or another because there's so many and they're worried that they will pick the wrong one. So that's caused stasis. Okay. So I have heard that there is universal consensus that Bitcoiners enjoy covenants except for the filter people. It's just like what you're saying is like we need an implementation and deciding on which implementation has no consensus. Yeah, it's like a political consideration whereby people are worried about picking a specific approach to covenants and there's a lot and so

people are just waiting to see which one emerges but for one to emerge there need to be champions and the typical champions that we had in prior years around let's say top route or segue they're like basically retired you know

partially due to like Craig Wright harassing all the core devs and suing them so I don't blame anyone from stepping back or just due to general PTSD from like dealing with it with you know the activation of taproot or segue like it's very hard to be at the center of that I think it's a very emotionally challenging thing so yeah we're kind of in stasis right now with covenants which is weird because most people that are good agree the covenants are important so it's a kind of a like I would say pretty

frustrating situation this has probably been the first time the word covenants has been uttered on the bankless podcast, so we should probably define what it is. Can you unpack a covenant? Oh, man. I would say, this is like you asked me what a ZK roll-up or something. I was hoping you wouldn't do this. I would say a covenant is transaction where you can specify the conditions for the transaction, which sounds very vague. But it would allow you to do the, things like have automatic recovery if, you know, there's like a transaction which is unusual and maybe you've been hacked and like redirect your funds to a vault instead, basically setting the conditions for transaction success initially up front.

And my understanding is that unlocks a lot of, you know, like richer transaction types. There's a big debate right now in sort of like the more maxi-focused corner of Bitcoin around onboarding the Global South, onboarding hundreds, millions, billions, fuses. The views that covenants would enable that. And so there's like this class argument that's happening, whereby people that are anti-covenants are being accused of being classist because the fees would likely be prohibiting. without Covenants, if you wanted to onboard the whole world or whatever. Even though I'm pro-covenants, that argument doesn't seem very convincing to me because

I think there's a number of different L-2s in ways you can onboard people without requiring everybody to do sort of L-1 transfers. Like, I think scaling through exchanges and Bitcoin banks and side chains is a valid way to do things. So, yeah, that's like a weird subplot that's happening in Bitcoin land right now. Okay, so maybe like reductively, covenants are just expressive transactions. It fits inside of the expressive category. Yeah, definitely.

Yeah. So what's it like being a Bitcoin VC these days? Because kind of for the same way I was talking about earlier, like the expressiveness nature of Bitcoin is just like surface area for optionality about stuff. So I'd imagine being a Bitcoin VC. I don't know. Do you consider yourself a Bitcoin VC or just a VC? I'm just a VC, you know. Just a VC.

I'm a VC who happens to be Bitcoiner. Yeah. And a lot of people got it twisted and they thought that I'm a Bitcoin VC. And I think that I corrected the record on that, you know, pretty aggressively back in the day. Yeah, but you did it from the perspective of the angry Cyber Hornet Bitcoin Maxx, like fundamentalists who thought you were, who thought you were exclusively a Bitcoin VC. But when it's coming from like more of the Ethereum camp and I call you a Bitcoin VC, I'm just like, oh, he's a VC who knows all the Bitcoin deals. Yeah. So I'm having great time being.

Bitcoin VC or like a VC who looks at Bitcoin stuff because there's more stuff to invest in in Bitcoin than there ever has been actually. Like what have been the VC investments in Bitcoin historically? There was like Blockstream. There is a lot of money. There were some custodians or some exchanges, miners if you're into that. And then there were lightning application infrastructure deals. And that was it. And some, you know, some like custody stuff. Nothing other than the lightning deals, None of those categories were about the actual state inside of the Bitcoin blockchain. That's right. They're all about service provision and like ancillary services around Bitcoin.

Today, it's totally different. Something has changed. There really has been a shift. And we're seeing high quality founders that are coming to Bitcoin that are newly excited about building new infrastructures on it. And I would say specifically new L2s from the ZCCHA. rollout perspective, EVM compatible L2s, optimistic roll-ups, staking, like restaking, using Bitcoin security for other blockchains. So we've been, like, I would love to be more active on Bitcoin

in prior years. I would have loved to have been because that would have better aligned, like, what I care about with my fund. But now, really almost for the first time, there's finally a glut of deals and high-quality founders that I feel comfortable investing in, where I think the outcomes can be really big as well and very useful to Bitcoin. So it's pretty much like the best time ever to be a Bitcoin VC, but specifically one who's open-minded and more moderate, a lot of the Bitcoin-only VCs, ironically, won't participate in this season at all, which I think is a huge mistake, but that's fine with me.

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They're all like looking out at Bitcoin from the outside. And one of the things that like, one of the reasons why I kind of like skipped over Bitcoin and went straight for the Ethereum world was because like I saw the internal internal endogenous side of Ethereum. And that just kind of nerdsnipe to me that is something that Bitcoin didn't have. had internal defy. We had our own exchange. It was called unoswap. We had our own money market. It was called compound. And that internal side of things was just like the exciting thing to me. And that's the thing that like Bitcoin has never really had. Even with lightning, you can barely really call that internal, even though it is about, it does have some semblance of like statefulness about Bitcoin. But I think really this whole explosion of ordinals, the fact that it exploded so

quickly. And then it's also been followed on by even more akin innovations. I kind of think it just alludes to like the amount of like latent potential energy. There is demand for like an internal endogenous side of Bitcoin that has ever been able to be expressed before. Yeah, the conditions today are very suitable for that to finally be built. Like Ethereum has built a lot of this stuff. We know now after a lot of these experiments on Ethereum that some of these architectures work like optimistic roll-ups, I think. We have enough data to consider that

to be like a successful technology. We have this hotball of money that's a lot of its relatively new entrance to Bitcoin, focus on ordinals and inscriptions and BRC-20s, which is like silly as BRC-20s are, that's a proof point to people that people are willing to go through the brain damage

of using Bitcoin itself. if they think they can make money. And a lot of that's capital from the East, actually. And so that's another catalyst that makes builders think that they can attract liquidity in capital. Then you have the general excitement around Bitcoin with the rally, which is more of an ETF thing, and the halving, which I don't think matters, but other people think it matters. And so there's like new enthusiasm, there's a wealth effect in Bitcoin, maybe, okay, some people that are big Bitcoiners are going to be willing to do interesting stuff when these

applications get built. And very importantly, there's a disillusionment among lightning, among people that are sort of brave enough to make that assertion. So those catalysts are coming together to create like a perfect storm, basically, for actually funding new infrastructures on Bitcoin and getting the capital to make them worthwhile. And there have been side chains on Bitcoin. And there have been sidechains on Bitcoin. in the past, like root stocks and sovereign and stacks, I would say, represented itself as a side chain, I don't consider it a true side chain, but they didn't have the right catalyst, so the timing wasn't right. The timing is right now. And for that reason, it's a very exciting time in Bitcoin, despite, you know, all the mean stuff that I just said about it.

There's a meme that Chris Berniske put out there about Bitcoin, which is like Bitcoin is like soap. The more you touch it, the less you have. have of it. And I saw a retort to that meme, which, which is like, ETH is like soap, you should probably use it every single day, which is like, it has a lot of utility and you can do stuff with it. And that's why it's valuable. And so long as I've been watching Bitcoin, Bitcoin has always been just like, you know, stack sats, stay humble, grow your bitcoins, don't touch it, you know, put in cold storage, you know, low cost basis, no touchy, hands off. And that's been paired well nicely with like the lack of expressivity up on in bitcoin up until this point but now like

there's a there's a friction there where there's a lot of ordinal stuff and some people are like very happy to go start playing with their bitcoins and start playing in the ordinal's land but in terms of the total market cap of btc the one trillion dollars i'm going to still guess it's a large minority of total capital that's like playing in ordinal's expressive bitcoin land and so in really in order to get this endogenous side of bitcoin fully express we're going to need to like kind of change the culture of some of that no touchy bitcoins that cold storage deep cold storage bitcoins um i mean like we can have both but like there's still like there's still like a cultural divide here between like the come play with me bitcoin and the deep cold storage bitcoin yeah and also the ux of like

doing interesting stuff on bitcoin has been challenging in the past but i think that'll change the ordinal's thing has catalyzed the creation of new world wallets, better transactional experiences as well, which is really important. The major exchanges seem to care about it. Again, they're building like dedicated wallets and tools and things like that. They're realigning themselves with Bitcoin. So I feel good about it. I think the infrastructure is getting there. There's a lot of work to do. But yeah, I think overall it's a pretty good time in Bitcoin. What else in Bitcoin world is exciting to you? What else is worth bringing up? I mean, I think BIPVM is the key thing.

You know, I was writing some internal notes from my team recently about, like, what I care about. And I think BIPVM enables optimistic roll-ups on Bitcoin. Under the, you know, caveat, the security assumptions are at least one validator in the set or a sequencer, or whatever you want to call them, has to be honest. plus miners have to not censor the fraud proofs. Both of those caveats, I think, are fine. But this is in other conflict divisions. Bitcoiners tend to lionize the perfect at the expense of the good. And I think Ethereum's are the opposite.

They will iterate faster and pursue merely very good things and not try for perfect things. And a lot of Bitcoiners get lost in these. conversations because they look at that assumption that minors aren't going to create a cartel of whatever, 51% of hash rate and start censoring. And they think, well, it's not perfect. But that's fine with me. I find it very far-fetched that miners would decide to censor fraud proofs if there was an optimistic roll-up. Like, first of all, it would be very hard to get that many miners together. If a pool started misbehaving, people could immediately defect to a different pool.

And miners are a structurally long Bitcoin anyway, so why would they want to harm Bitcoin? I always found that incredibly far-fetched that people consider that a show-stopping objection. So my understanding is that, you know, Bitfium could be out as early as mid-year. And I know that there's a lot of optimistic roll-ups that are being built at the moment, being funded and being built with the intention of rolling out in 2024. And I think that changes things a lot, including from the investor perspective, like the Wall Street, finance people, like Main Street allocator types that are buying the ETF. I don't think we can coast on the ETF, like excitement forever. Like, these people care about the technology.

They don't maybe care enough to like dig into like how Bitcoin Core works or whatever. but they do when they're making their allocative decisions care about the vibrancy of the network. And if it's a total ghost town that nobody uses, I think they would be concerned about it. They'd be like, okay, am I just buying like a pet rock type thing? Like, can I really justify this? So I think you always do have to show, even if it's simply just for optics reasons, you do have to show technological development and like a positive vision of the future and a way in which this thing could become a dominant sort of transaction method

and a network that people actually use. So I think the technology and the sort of like financialization of Bitcoin are intertwined. And you can't have one without the other. And, you know, as we move into this like intermediate term with ETF flows and things like that, these allocators will continue to ask themselves, like, is there interest? stuff happening on Bitcoin, why Bitcoin is supposed to any other blockchain. And just being the only blockchain with an ETF or any, you know, the only crypto asset with an ETF, I don't think is sufficient. So we do have to continue to show that there's like actual technological developments

happening. Isn't the internal, expressive, endogenous side of Bitcoin kind of like the spiritual successor of the big blocker spirit? Well, I was a small blocker and I, believed in that approach. I don't know, maybe. I think the big blockers were wrong in that they felt that merely by adding block space would be sufficient to get Bitcoin to be adopted as a payments network. Like that was always the argument they made like, okay, how are we going to onboard millions of people in the global south if the blocks

are one megabyte or whatever? Now they're four megabytes. I don't think that was true because I don't think of the block. box size was the constraint at all. The constraint there is like, is there interesting stuff to do with it? You know, and I always felt, and also the other constraint is like people don't really want to use Bitcoin to transact with for like tax drag reasons and like because people would rather transact with dollars. Right. That's another thing the Bitcoin community has been really slow on the uptake about, which is stable coins. So I think they were wrong for other reasons. and I see like the notion of other alt-2s like roll-ups.

I think that those are actually consistent with like even the lightning philosophy, which is execute computation off-chain and then periodically sort of batch state and register it on-chain. Like I think that's the best way to do scaling, right? And I think Ethereum has that in common with Bitcoin, frankly. And like the Solana vision, the monolithic vision is the competitive. vision. So I tend to think the roll-ups and like other types of side chains and all twos are still consistent with like the dominant philosophy within Bitcoin, but it's going to take a lot of convincing to get the sort of like lightning crowd to sort of agree with that. Yeah, I kind of think

the reason why I asked this question is like the big blockers, uh, I agree were like wrong in their implementation, but not necessarily wrong in spirit. And this is actually kind of like my overall critique of Bitcoin as a system. And like when we opened up this conversation, I was like, oh yeah, Bitcoin ideology, spot on. But like Bitcoin, the blockchain as an product as an execution, incorrect. And Ethereum is correct. This is like my like high level view of the system. And but like small blockers, I've always thought like have the right ideology, the right design for how you build

the base layer, but then the big blockers are what you want to build on top of that. And so the big blocker philosophy to me is just like we can do more with our block space. We can do more with our bitcoins. And the small blocker philosophy is like we need to preserve base BTC transfers peer to peer at all costs, including the cost of like being able to do more with our bitcoins. But then, of course, we have like innovators and, you know, innovations and progress where we can, we can have both. We just have to figure out how to get there.

And so right now, like the small blocker is one. Like we had this, we have the small block size on Bitcoin. But the big, big blocker spirit is now returning with Bitcoin expressivity, bit VM, layer two is on Bitcoin, ordinals, using Bitcoin for data. And now we are seeing like a harmony and alignment between these two philosophies that's kind of creating some sort of like greater than some of his parts, which is like all you can see when you see like statefulness, vitality, vibrancy, like you've said, VC investment, content production coming around to Bitcoin. And all of a sudden, like, this is kind of what you get when you align people's incentives,

align people's ideologies, and you can make them both work inside of the same constraints, which is just Bitcoin. That's like kind of my like landscape definition here. Yeah, and I would say like I do perceive that as well. And I think the fundamental disconnect is between people that pursue layered scaling as the model and want side chains and, you know, L2s and things like that. In between people think that you can just sort of arbitrarily increase the data throughput. And that's like the monolithic versus modular debate, I guess, although Bitcoiners wouldn't call it that.

And from that perspective, I think Bitcoin and Ethereum are on one camp and then like Solana and Aptos, etc. are in the other one. But yeah, I just took Bitcoin a lot longer to realize that there should be more than one scaling solution. Like the comparison I'd draw, be like the sort of intellectual rot and stagnation that occurred in Bitcoin

would be like if Ethereum was still trying to do Raiden. Like if it was just Raiden. The percentage of listeners that know what Raiden is is like below 1%. Raiden was basically Lightning Network. on. Really?

Yeah. You have such little faith in bankless nation. We never talked about Raiden on the podcast before. Okay. Okay. I didn't know that's such a deep cut reference there. That was a deep cut, yeah. But think about that.

Like if all of Eith core dev in the year of our Lord, 24 was still focused on Raiden or for another, like plasma, maybe for instance or plasma catch. That's probably right, yeah. So, like, you just have to iterate. And, like, even leaving all the details aside, obviously a system that is adaptive beats a non-adaptive system. Like, that's obviously true.

Like, you can't be completely static in a world that changes. Bitcoin has endeavored to be static for five to seven years now. Clearly, we need to be empirically driven, look at data, evaluate whether things we're doing are working. and change accordingly. But we haven't. We've been so stubborn. We've been very, like, a priori-driven, like, non-imperical.

And that's, like, my main critique of Bitcoiners is they actually reject empiricism a lot of the time. They reject data because they view a lot of this data or these observations as, like, immoral things to say. Like, Stablecoin is another side of that debate. like for years now I've been saying hey stable coins of traction in 2020 I wrote a paper called crypto dollars and I said wow stable coins are doing 30% of all value settled on blockchains and that's growing linearly I refreshed out last year in 23 it's now 70 80% all value settled on blockchains is 70 80% of that is stable coins and so on that basis I said bitcoin is losing the medium of exchange war right which is true it's a true fact

right? Bitcoin has actually been displaced as sort of the crypto-native collateral. It's not the thing people use to collateralize on exchanges anymore. It's not the minimum exchange. It's certainly lost unit of account battle, right? You don't quote your positions in units of Bitcoin the way you used to, right? And I went and I said this to the Bitcoin community. I said, stablecoins are winning. What's our stablecoin strategy? Like, stablecoins are the killer app of crypto. Is Bitcoin going to benefit from this, or is Bitcoin usage going to be cannibalized by stable coins? And Bitcoiners said to me, they said, well, actually, you need to extend your time horizon. Like, this data is irrelevant. Ignore the data because, you know, decades from now, people will not use the dollar.

They'll use Bitcoin to transact with. And I said, well, I don't care about decades from now. You know, forgive me, but I care about today. I care about years from now. I don't care about some idealized future state that you think will happen, but is very indeterminate, in which dollars don't exist anymore, and everyone has to use Bitcoin because dollars have, you know, gone, they've like exploded or whatever, hyperinflated. So, like, that's in other conflict divisions, which is, like, I'm data driven. I have to be. It's my job. Like, we allocate for a living, we have to look at where, you know, the puck is going. We have to. We have to. to be data like reality driven but there's a lot of resistance to that in bitcoin which is the

same resistance to lightning like it you know lightning is a very telling example like the lightning throughput like there's a big debate on bitcoin twitter about lightning right now and the lightning throughput is like at most one to two billion dollars a year in terms of value settled right and you could say oh well you know it's a lot of individual transactions like it's you know useful for social media and content monetization applications, which is true. But the fact is, it's probably one to two billion. And Bitcoiners will say, oh, you're excluding private channels. That's fine, but that's not like orders of magnitude more than what's measurable. Stable coins, you probably know this. Stable coins in 22 settled around $10 trillion worth of value.

That's roughly the same as Visa. And they're probably going to do the same in 20. 24. It was a little bit down in 23. 10 trillion dollars versus one billion dollars is 10,000 times more. 10,000 times more. So like, how can you not look at that and think to yourself, maybe like we missed a trick here? Like maybe we need to figure out how to harmonize and synergize Bitcoin and stable coins. Like what's the strategy? But there's a general refusal and a rejection of that type. of reasoning because stable coins are like immoral or wrong or bad or whatever. I will say though some bitcorners are now coming around to the notion of stables and like there's attempts to like bring them onto Bitcoin in various ways.

But yeah, that's like another frustration I have is this like refusal to be data driven in the Bitcoin space. If I'll put on like my Bitcoin fundamentalist hat, which never, ever goes on. I don't think you own that hat. I don't own that hat, that's for sure. but like isn't there one perspective of like a slippery slope concept here we're like okay we we let ordinals in but then but then we're going to do layer twos and then if we do layer twos are going to put stable coins on the layer twos and then if we let if we do those things

and we'll do have to do even more things and then even more things will happen on bitcoin and all of a sudden like btc and btc transfers are just like a complete afterthought of the bitcoin blockchain and like why are we even here in the first place what would you say to this philosophy. Yeah, I mean, I think there's just like a general fact, which is that people prefer dollars for settling transactions, for collateralizing positions, and that applies to Bitcoin, that applies to every other crypto asset for that matter. Like, it applies to Ethereum, applies to Solana. I think that's just a fundamental challenge that all native crypto assets need to be able to deal with, which is dollars.

are cannibalizing L1 assets. There's like what, I mean, at a kind of a slow rate, I mean, there's $137 billion of stables and there's what, $1.5 trillion, $2 trillion of sort of like other stuff in crypto. But that's just like a fact. I mean, I think I wrote a piece for your newsletter a couple of years ago about this. Like, do stable coins threaten like L3? 1 tokens.

And I think they do. I think you've to rise the occasion. You have to find a way to make them actually benefit the protocol itself. Well, I'm less asking about specifically stable coins. And I'm more asking about, like, what happens if you let Bitcoin expressivity go too far. And it actually, like, pushes out the monetary maximalism, right? Like, it's like a slippery slope of, like, you know, you let the, you let the ordinals in, you let the call data in, you let the NFTC.

T's in, then you let the stable coins in, then you let the layer two's in, and then when does the shit coinery stop? Like, when do we actually start to enshrine and preserve the sanctity of BTC and BTC transfers? I think maybe if like a Bitcoin fundamentalist was here, maybe they would, this is like the perspective that they might have. Yeah. Yeah, I guess like to reframe the question, it's like, is it the SOV use case of Bitcoin

sufficient or like does it have to have MOE? Like, does it have to be a medium of exchange for it to when many bitcoins will say yes. I don't think it does. I don't think it does. Like, I think S-O-V is sufficient. And I think what you have to do is to find a way to, so like, first of all, none of the shit-coinery, et cetera, interferes with Bitcoin's monetary properties. We get none, no like random ordinal meme coin that you make makes Bitcoin have more than 21 million units. Doesn't change the monetary policy that's set in stone. My view is that that improves the monetary properties of Bitcoin because it creates this fee pressure, which is a source of revenue for the miners, albeit still a small one,

which then ultimately replaces the subsidy as the form of revenue for miners, which is necessary in the long term. So I think all activity types on Bitcoin benefit Bitcoin. Bitcoin. from a monetary perspective because they create vibrancy and fee revenue that enhances the security of Bitcoin. So I don't think you can complain about it too much. People might say, well, yeah, you are displacing Bitcoin as a medium of exchange. I think that's already happened, though. And I think I have a hard time imagining a world in which Bitcoin is like a very widely

employed medium of exchange, mainly because like sovereign nations privilege their own currencies over transactions and other currencies. So, like, for tax reasons, this is, like, basically the case everywhere. You don't want to be doing all this complex accounting when you're doing a Bitcoin transaction. You're, like, determining what your cost basis is and, like, doing your tax accounting there.

And, you know, there's a foreign exchange risk. Like, if I'm transacting with you, I don't want volatility to be, like, changing the value that I'm transacting in real time. So I think we actually need to sort of, like, concede defeat. on the medium of exchange front. And like, maybe it'll happen years from now, but I don't see it going that direction.

I see it going in the other direction. And I think we can acknowledge that the SOV use case is sufficient. Like, gold is not something that people routinely transact in, but it's something that people own a lot of, right? Like gold's market cap is like 11, 12 trillion, right? People don't habitually make gold transactions. Like, so Bitcoin can be. a very useful SUV, maybe you can issue stablecoins against Bitcoin and then unite the both camps.

That would be one way. I would see that, you know, we can have an SOV and an MOE that sort of like benefits Bitcoin while acknowledging that people aren't going to probably use Bitcoin for transactions that often. One thing I do appreciate about Bitcoin, the protocol is like how kind of like, I'm shooting from the hip here, just like how naked it is. It's just like, it's unlike like Apto Sui, Solana, like all these new layer ones, they're all, they're all like engineering and technology constructions. But Bitcoin is like, because it is what it is, it's just there's a lot more ideology conversations to be had around Bitcoin. It's like a surface area for like ideological conversations of this.

And this is something that I think is kind of like lost with these newer entrants that came in 2021 and beyond who went straight to the smart. contract platforms rather than the newer entrance that went to Bitcoin. It's like they were missing, like, I think a large part of these like big blocker, small blocker philosophy debates. And Bitcoin, I think really inspires a lot of that. It was always been like my biggest interest in the Bitcoin space. And definitely why I always enjoy bringing you on and having some of these conversations. Because I think like understanding some of the more philosophical reasons about like how these things are built,

why they're built and who they attract and where they're going, I think is like some of the most rich conversations there are to be had in this space. yeah the i mean look the ideology is a shield but it's also like an autoimmune disorder i think hossu coined that right so like it's an immune system and it protects bitcoin from being debased and changing into something totally radically different that's fine i totally accept that but at the same time it's also like very off-putting to a lot of people that are active in the bitcoin space and these days, like, people that are building on Bitcoin tend to try and ignore the, like, excesses of Bitcoin ideology.

And so I do think that, like, the more far-reaching, you know, claims made that are part of the, like, Bitcoin, you know, liturgy or whatever, I think they're not negative, but I do still acknowledge that there is a strong ideological grounding. and it's probably pretty useful in terms of like keeping those core considerations alive. Nick, that's been fantastic. Thanks for joining me today. Thanks, David. Cheers.