The Breakdown - A Primer on the Debate Around Ordinal Inscriptions, aka Bitcoin NFTs

Starting point is 00:00:00 I think that there's a Cambrian explosion of Bitcoin building right now. More engineers and developers than I've ever seen since I've been in this space are flowing back into Bitcoin. There are going to be more companies and projects and people building around the edges. And that will inevitably bring up debates around exactly these sorts of questions. How much design space in Bitcoin can be opened up without threatening the core. I think those debates are important to have, and it is, unfortunately, in some ways, but inevitably in others, a debate that needs to be constantly relitigated.

Starting point is 00:00:27 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, February 1st, and today we are talking ordinals and all the debates that surround these Bitcoin NFTs. A quick note before we dive in, there are two ways to listen to the breakdown. You can hear us on the CoinDenels. Podcast Network, which comes out every afternoon alongside other great Coin Desk shows, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you're listening, I would so appreciate it if you would take the time to leave a rating or review. It makes a huge

Starting point is 00:01:13 difference. All right, guys, so for the last week or so, the Bitcoin world has been totally wrapped up in a debate around ordinal inscriptions. It's a sort of NFT native to Bitcoin that is bringing up a huge number of questions and debates. Some of those questions related. Some of those questions relate to technical aspects of Bitcoin stemming from Taproot and Segwit updates. Some of those questions are about security in the fee market. Some of those questions are about decentralization and the

Starting point is 00:01:39 viability of running nodes. Some of those questions are cultural questions of legitimate versus illegitimate uses of the blockchain. It is, in short, extremely interesting, and what I'm going to try to do today is give you the primer and the broad strokes of these various debates. Now, inevitably, there

Starting point is 00:01:55 is going to be too much for one show, but we'll do the best we can. So let's start with what the hell we're talking about. On January 20th, Bitcoin developer Casey Rodimer tweeted, Inscriptions are finally ready for Bitcoin Mainnet. Inscriptions are like NFTs but are true digital artifacts, decentralized, immutable, always on chain, and native to Bitcoin. He expanded upon this in a blog post, writing, inscriptions are digital artifacts native to the Bitcoin blockchain. They are created by inscribing sats with content using ORD or ORD and can be viewed with the Ordinals explorer. They do not require a separate token, a side chain, or changing Bitcoin.

Starting point is 00:02:29 Incriptions are created by including content like an image, text, SVG, or HTML in an inscription transaction. The content is included in the transaction witness, which normally contain signatures and other data proving that a transaction is authorized. When mined, the inscription is made on the first SAT of the first output of the transaction, permanently and inexorably marking it, distinguishing it from its fellows. It is no longer just a SAT. It is an intertwined component of the long and confusing tale that is human art and culture. Inscriptions are digital artifacts, and digital artifacts are NFTs, but not all NFTs are digital artifacts. Digital artifacts are NFTs held to a higher standard, closer to their ideal. For an NFT to be a digital artifact,

Starting point is 00:03:10 it must be decentralized, immutable, on-chain, and unrestricted. The vast majority of NFTs are not digital artifacts. Their content is stored off-chain and can be lost. They are on centralized chains, and they have backdoor admin keys. What's worse, because they are smart contracts, they must be audited on a case-by-case basis to determine their properties. Inscriptions are unplagued by such flaws. Inscriptions are immutable and on-chain on the oldest, most decentralized, most secure blockchain in the world. They are not smart contracts and do not need to be examined individually to determine their properties. They are true digital artifacts. Now, as Casey explains all this, he also points out that there is another important concept to be

Starting point is 00:03:48 introduced, which is ordinals or the idea of assigning each Satoshi a unique serial number. In a separate post, he wrote, I've been working on a numbering scheme for Satoshis that allows tracking and transferring individual sats. These numbers are called ordinals and constitute a numeric namespace for Bitcoin. Satoshes are numbered in the order in which they're mined and transferred from transaction inputs to transaction outputs in first in, first in order. Now, initially, when Rodimer started thinking about ordinals, he was thinking about the properties of individual sats in their Bitcoin context as giving them rarities. For example, there are specific things that happen in the course of Bitcoin running, blocks being produced,

Starting point is 00:04:23 difficulty adjustments happening, havings happening, and more. He points out that this creates a natural rarity to ordinal sats. Common might be any sat that is not the first sat of its block. Uncommon might be the first sat of each block. Rare might be the first sat of each difficulty adjustment period. Epic might be the first sat of each having epic. Legendary is the first sat of each cycle and mythic is the first sat of the genesis block. However, later as he started thinking about applying this to inscriptions, the properties of SATs aren't just about where they fit in the Bitcoin system, but about what information has been encoded onto them, the digital artifacts, as he's calling them. Okay, so super simplifying. What we have here is first, using the transaction witness to embed

Starting point is 00:05:02 visual data like a meme JPEG, and two, using ordinal theory to associate that with a specific Satoshi. Knifeight explained it excellently in a post this morning on his something interesting blog. He called ordinal inscriptions, quote, a method of embedding arbitrary digital content into the witness input of a transaction and associating that content with a specific Satoshi. He then goes on to say while the idea of embedding arbitrary data on a Bitcoin transaction isn't new, ordinal's inscriptions have some important differences. Quote, first, the Satoshi associated with an ordinal inscription can move from

Starting point is 00:05:33 wallet to wallet and retain its association with the data. That means the data is tradable, effectively transforming the Satoshi into a Bitcoin native NFT. Another important difference is that inscriptions use Taproot. A loose but reasonable description of Taproot is that it enables a new class of cryptographic signature on Bitcoin that makes complicated signature schemes cheaper and more private. For reasons that are a bit too technical for this post, that means there is no limit to the size of the data in an inscription and the data is actually priced at a discount compared to normal transactions. So you can, for example, stick entire JPEGs into an inscription, which is mostly what people are using them to do. So that's the background, that's what's

Starting point is 00:06:08 happening. But let's now get to the controversy. TLDR, some Bitcoiners saw quote-unquote irrelevant JPEGs being attached to transactions, increasing their size and raising fees, and started talking about ways that Bitcoin could combat what they considered to be spam. Bitcoin core developer Luke Dash says, is anyone working on a spam filter for this garbage yet? Adam Back also tweeted it's fair game for miners to censor this crap as a form of discouragement. He then deleted that but posted the software, you can't stop them. Well, of course, Bitcoin is designed to be censor-resistant. Doesn't stop us mildly commenting on the sheer waste and stupidity of an encoding.

Starting point is 00:06:42 At least do something efficient. Otherwise, it's another proof of consumption of block space thingy. We can recognize we can't really stop them in its free world with anonymous miners. But we can also educate and encourage developers who care about Bitcoin's use case to either not do that or do it in a prunable space-efficient EGE timestamp way. So a couple notes about this controversy. First of all, the debate is more heightened than it might be because it's not just Twitter personalities fighting, it's actual Bitcoin core devs. Luke Dash, for example, had previously been an opponent of the Satoshi Dice gambling game,

Starting point is 00:07:12 a point which many longtime Bitcoiners referenced. Dan McArdle said, remember the Satoshi dice quote-unquote crisis? Don't give in to the authoritarian tendency to advocate for gatekeeping block space. Let free market dynamics do their thing. Now, a second point here is that while there are a lot of specific debates happening around ordinal inscriptions, which we'll get into, this is also very clearly another front in the Bitcoin maximalism wars. And frankly, one that suggests to me that the people who are against the hyper-conservatives are fairly emboldened and loud compared to, say, last year at this time. Udi Wertheimer retweeted that now deleted Adam Back tweet about it being fair game for minors to censor this crap as a form of discouragement,

Starting point is 00:07:49 and added, quote, Adam Back used to sell t-shirts with RSA code printed on them to fight the U.S. government's attempts to censor free speech. Now he's encouraging miners to censor JPEGs because he thinks they're crap. Eric Wall writes Bitcoin Maxi's rafflecoptered at Ethereum Validator censoring OFAC transactions and are now themselves deliberating ways of censoring Bitcoin NFTs. Nick Carter tweets, I've spent less than 30 seconds looking, but I'm guessing all the Bitcoin moderates think this is interesting and cool, and all the Max-ham fundamentalists think its absolute heresy. There is a rather deep divide within Bitcoin which is invisible to most,

Starting point is 00:08:22 which is monetarist versus technologists. Most of the technologists left. Nice to see that faction still exists. Shows hypocrisy of the fundamentalist camp. Bitcoin is for everyone to, no, don't use it like that. Free markets, not rulers, to please follow my rules, the market is wrong. ossification now to, um, hang on, might need to update something. Bitcoin has no culture, no leaders to pools, please listen. The fact that all of the usual suspects adopt the same talking points within 24 hours, and that these contradict their established doctrine shows they have no consistent ideology. Just think in terms of outgroup and in-group, purity and sacrilege. Suzuki at Dystopia Breaker writes, it's a very healthy community when the reaction from

Starting point is 00:09:00 OGs to someone trying something slightly innovative is, how can we block the spam? Bitcoin has had an anti-builder culture metastasize over the last four years. It sucks and I genuinely hope it changes. Aubrey Strabell writes, Bitcoiners used to buy drugs on the Silk Road. Now they cry because of JPEGs. Now, I actually don't want to delve too much into this aspect of the Maxi debate, as it is somewhat incidental to other more precise questions around Ordinals themselves. I only want to note that the anti-max voices are a lot louder than they used to be. Anyways, to my eyes, the average tweet about this was something along the lines of, of course don't censor transactions because you don't like them. And this came, frankly, from a lot of different types of voices. Kevin Loweck wrote,

Starting point is 00:09:40 people talking about forking Bitcoin because of this NFT thing, what is wrong with you? Bitcoin isn't a thing you fork because you don't like what people do with it. Any fork is dangerous for users and takes insane coordination. Don't want to pay for fees. Don't use Bitcoin. Dan Held writes, if you want to censor valid transactions on Bitcoin, you're definitely not a Bitcoiner. Jameson Lop, the CTO at Kasa said, if you don't like a project that someone is building on Bitcoin, your only option to stop them is to build something superior that drives so much demand that it out-competes them in the market for block space. Notably, after a couple days of fighting on Twitter, Lop ratcheted up his rhetoric pretty considerably, yesterday tweeting, there's a subset of Bitcoiners who would deign to impose

Starting point is 00:10:16 their morality upon how the protocol is used, even with the existing rules of validity. So let me be clear, fuck your slippery slope of subjectivity. Indeed, one of the underlying arguments for those against ordinals is that there is such a thing as legitimate versus illegitimate uses of Bitcoin. On the one side are folks like Pierre Rashard, who wrote, Bitcoin is not a free market where people do whatever they want. Bitcoin is highly regulated and censors transactions that abuse resources. This is good and right because Bitcoin is a system ordered towards being P2P electronic cash, not a general-purpose world computer.

Starting point is 00:10:48 On the other side are folks like Kesey Rodimer himself, who tweeted, I understand the argument that NFTs are lame and stupid, but I don't understand the argument that NFTs are somehow illegitimate. Bitcoin has transcended its original creator and purpose. Bitcoin is not for some things and not for, for other things. It just is. Nightfight again does a great job summing this up. Talking about adding JPEGs to the blockchain, he writes, to some Bitcoiners, this is sincerely offensive, like graffitiing a sacred monument, or filling up the seats on a lifeboat with stuffed animals because

Starting point is 00:11:15 you find it funny. I can appreciate why people are defensive about Bitcoin because I share the belief that it is profoundly sacred. But I also think it is robust, and I think it is harder than it might seem to sort legitimate use from illegitimate and impossible to assign that responsibility to anyone while preserving Bitcoin's unique properties. He basically says that there is a value judgment the anti-ordinals are making around what's a more valuable use of resources or not. Interestingly, he compares this to what anti-Bitcoin folks say about Bitcoin's use of energy. Quote, many bitcoins view NFTs is pointless, so their instinctive response to ordinal

Starting point is 00:11:46 inscriptions is to view them as a waste of valuable resources that could be spent on more, quote-unquote, valid use cases. To me, that sounds suspiciously like the argument that no-coiners make about Bitcoin's use of electricity. Bitcoin is pointless, so any use of electricity by Bitcoin is displacing other more valid use cases. Both groups are making the same mistake, assuming that they would allocate limited resources more effectively than a free market. In another tweet, Rochard again embodies this point of view that some uses of Bitcoin

Starting point is 00:12:12 are more valuable than others. He tweeted, Marginalized peoples in developing countries will have to pay more to run their Bitcoin nodes and send transactions because privileged wealthy whites want to put JPEG drawings on the blockchain as status symbols. Just because you can doesn't mean you should. Nightfight takes this on directly, saying, it is absolutely true that rich, frivolous assholes will clutter the network with garbage

Starting point is 00:12:31 because they think it is fun and that sympathetic, vulnerable users will be priced out of a priceless tool as a result. I'm not trying to defend that outcome as righteous or good, but it isn't a result of ordinal inscription specifically. It is a result of the fact that block space is sold at open auction to anyone who wants it. The only way to prevent quote-unquote undesirable use of the network is to take control of it and destroy the thing that made it valuable in the first place. John Sue also expanded this argument out, tweeting, if I really wanted to get all virtuous on block space usage, I'd accuse everyone that doesn't live under authoritarian regimes or monetary censorship of unnecessarily increasing transaction fees for those

Starting point is 00:13:04 that actually needed. Or, you know, I could just mind my own business. Okay, so the valid versus invalid usage of Bitcoin is one axis of this argument. Another is the way that ordinals might change minor incentives. To be honest, while there's been bluster about this, I haven't seen a ton of really good articulation. If you see any of the anti-ordinals folks sum this up well, I'd love to share it for completeness. In the absence of that, I'll just point to a couple tweets that I think get to the broader general issue. NVK writes, maybe now people see how fragile Bitcoin's incentives are. Making any change can add holes. Taproot added monkey jpegs to Bitcoin for cheaper than Bitcoin transactions. Even if you think your Bitcoin upgrade is bulletproof, dot dot, dot.

Starting point is 00:13:44 Haudelot says, I believe the biggest takeaway from the Ordinals drama is that it drives home that any change in Bitcoin will, with a high likelihood, have unintended consequences. Keep L1 simple. Don't get greedy. Indeed, a lot of the counter response to the anti-Ordinals folks has been about wanting to fight or at least expand slightly a Bitcoin culture of technical ossification. NVK again tweets, When I say ossification of Bitcoin is preferred, it doesn't mean no commits ever made again. That's not how software exists. Things will come up and software will need to upgrade.

Starting point is 00:14:14 What I mean is bonsai-like gardening, minimal maintenance changes, less slash no new features. James and Lopp responded, multiple years between new features already feels pretty less to me. Given that the design space is so huge, I'm quite sure there are potential changes that are broadly beneficial and don't compromise any of Bitcoin's inviolable properties. Now, for my part, I will say this. I think that there's a Cambrian explosion of Bitcoin building right now. More engineers and developers than I've ever seen since I've been in this space are flowing back into Bitcoin.

Starting point is 00:14:43 There are going to be more companies and projects and people building around the edges. And that will inevitably bring up debates around exactly these sorts of questions. How much design space in Bitcoin can be opened up without threatening the core. I think those debates are important to have, and it is, unfortunately, in some ways, but inevitably in others, a debate that needs to be constantly relitigated. However, if some of these fights feel like old fights being refought, I also have seen in this conversation some new debates emerging that I think are going to grow in importance over time. One of those is around Bitcoin fees. With every halving, inevitably the discussion of Bitcoin's

Starting point is 00:15:17 security model will get louder as mining rewards decline. Will the network be able to remain secure on fees alone? To some, fees going up around ordinals offers a glimmer of the types of things that could shape the fee-only world. Certainly Rotimer himself is thinking like this. He tweets, Bitcoin security model requires that blocks be full. I personally would be much less cavalier about inscriptions if this were not the case. But as the subsidy declines, which happens very quickly, due to the halving, fees must pay for chain security. I see inscriptions as essentially creating an infinite backlog of low-fee transactions that can boost the fees paid by non-inscription transactions in order to outbid inscriptions, and pay fees when they do wind up getting into a block.

Starting point is 00:15:56 Dan Held said something similar. Ordinals equal NFTs on Bitcoin. This is good for Bitcoin. Why it's good. Brings more financial use cases to Bitcoin, drives more demand for block space, aka fees. Join CoinDesk's ConsenSys 2030,

Starting point is 00:16:14 the most important conversation in crypto and Web3, happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that block blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths.

Starting point is 00:16:39 Visit consensus.coindex.com or check the link in the show notes. Now another one of these emergent conversations is around Bitcoin's fungibility. Fundability is the idea that every Bitcoin is equal in value to every other Bitcoin. Every Satoshi is equal to every other Satoshi. Now, given that, you might spot the issue with ordinals. Remember, the idea of ordinal numbering of Satoshi's is to give each sat a unique serial number. This gives them non-fungible properties right away. The first sat of the Genesis block is to those who value Bitcoin's history, likely worth

Starting point is 00:17:13 way, way more than other generic block sats. That was what Casey spotted even before thinking about inscriptions. However, inscriptions are another way that certain sats become valued more than others. However, it's not just ordinals and inscriptions that make this debate around fungibility notable. The properties of Bitcoin that allow you to trace the provenance of sats and and UTXOs means that one could theoretically discriminate based on that provenance. Remember when Kevin O'Leary was all over TV talking about how he didn't want Bitcoin mined in China? And of course,

Starting point is 00:17:40 the most obvious break of fungibility here that some would have a reason to try to apply is the discrimination against tainted Bitcoin that have been used in criminal activity of some sort or another. Yet, all of that said, it is undeniably true that for the vast majority of people interacting with Bitcoin, BTC is functionally fungible. If you're getting paid, one Bitcoin equals one Bitcoin. And this is sort of Rotimer's argument around it. He writes, As for fungibility, in some sense it does break fungibility, but not in any way that actually matters. People who care about inscriptions and ordinals will pay more for certain sats. Everyone else will ignore them. Nothing about Bitcoin privacy has changed. Not everyone agrees,

Starting point is 00:18:16 though. I asked people on Twitter whether Bitcoin was fungible or not, and 56.4% said fungible to 43.6% saying not fungible. A lot of folks also recognize that it was sort of both. Fungible in the applied context of how most people use it, but not fungible technically in ways that create some wonky potential. Zucco from Zcash responded saying, fungibility comes from people being unable to discriminate among units. The idea that you can have traceable units and then browbeat everyone in the world to treat them as equal value is insane. Now, the place where I think this debate is most relevant is in the context of government requests for censorship. Airy David Paul wrote a long threat about this, where he said the smartest folks in the room realized a while

Starting point is 00:18:54 ago that the easiest path for Bitcoin's global adoption and price appreciation is for it to become the state-friendly cryptocurrency. They want slash expect miners to start censoring transactions at government request within four years. Still, in general, the average response I got was sort of like, meh. Dan Held again responded to my question with a simple phrase that I think will resonate for many. When I asked, is Bitcoin fungible? He wrote, fungible enough. He went on saying, There's no secondary markets for tainted coins. CoinJoin and Lightning dramatically improved privacy without sacrificing auditability. And perfect privacy is not needed to preserve fungibility,

Starting point is 00:19:27 since perfect privacy is an impossible standard. All right, so at this point we're getting longer than a regular show. So let's try to wrap this up a little bit with how I feel about all of this. As you can probably guess, I have a lot of thoughts. First of all, I like an ecosystem where people do experiments, and some people yell at them and the market decides if they like the experiments or the yellers. That's a lot better than people just not. doing the experiments. Second, I find it encouraging that the pro-Bitcoin builder voices are getting louder.

Starting point is 00:19:54 That doesn't mean I think they're going to always be right versus the most conservative voices, and I think that the hyper-conservative arguments are an incredibly important guardrail for Bitcoin. I'm just sort of with Lop here that we've had a long period of default to do nothing, and I believe that as a community, Bitcoin is strong enough to prod at that just a bit. Third, I am pretty firmly in the camp that defining valid versus invalid usage is an intellectually and practically bankrupt proposition. I am pretty aggressive. against the idea of censorship. However, of course, I'd be a lot more open to those arguments to the extent that something like these ordinal inscriptions actually caused a problem.

Starting point is 00:20:27 Overall, I think that these debates are extremely healthy for Bitcoin. In fact, once the initial wave of Maxis versus non-maxis commentary was done, a lot of the discussions have had the net effect of Bitcoiners going deeper and thinking about topics like fee markets in a way that they just wouldn't normally have context to do. Lastly, you'll have noticed that this show was a lot more about the Bitcoin environment that ordinal inscriptions came into versus ordinal inscriptions themselves. That's, of course, the big picture debate side of me coming through. As to the merits of inscriptions themselves, I do think that there is something really interesting about fully on-chain digital artifacts. I'm compelled at least to pay attention when Rodermer writes,

Starting point is 00:21:03 I think that being able to not just do NFTs on Bitcoin, but to make them far and away better, for both technical and social reasons, is great for Bitcoin and will be great for adoption and goodwill, and get people into Bitcoin who like fun. We don't have enough fun. But maybe that debate and discussion is one for a different show. For now, I hope that those of you who have been paying attention to this conversation or who haven't had a chance to catch up on it feel like you have a better sense of all the things going on. As I mentioned, it is provoking so many different strands of debate and discussion that I think we'll be looking at it for some time.

Starting point is 00:21:35 As always, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - A Primer on the Debate Around Ordinal Inscriptions, aka Bitcoin NFTs

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