The Breakdown - Are Ordinals Sneakily a Boon to Bitcoin Security?

Starting point is 00:00:00 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 Sunday, February 12th, and that means it's time for Long Read Sunday. Before we dive into that, if you were enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, today on Longreed Sunday, we are playing buzzword bingo. Yes, we are talking ordinals.

Starting point is 00:00:49 We are talking Bitcoin NFTs. We are talking AI. And at the end of it, I guess it will be on you to decide whether it's buzzword bingo or, in fact, bullshit bingo. Where we're going to start is a piece on ordinal inscriptions by, George Kulutis from CoinDesk, and it's called how Bitcoin NFTs might accidentally fix Bitcoin's security budget. George writes, Casey Rotimer tweeted that inscriptions are finally ready for Bitcoin Mainnet on January 20th, and the use of inscriptions the last two weeks sparked a big

Starting point is 00:01:23 hullaboo on Twitter between some of Bitcoin's partisan factions. The hullaboo included a number of different claims. One, that Bitcoin's security budget problem was accidentally solved, so we wouldn't have to worry that there would be no financial incentive to mine Bitcoin in the future once the fixed supply runs out. Maybe transaction fees would be enough to incentivize miners. Two, inscriptions would lead to blockchain spam and graffiti so uncontrollable that we are eventually engulfed by gray goo. Three, all these non-fungible tokens or NFTs and such on Bitcoin is just another silly fad like colored coins. Rortimer's Flint Rock tweet referred to the Ordiner Protocol, which introduced inscriptions to Bitcoin. The Ordinal Protocol assigns each Satoshi or

Starting point is 00:02:03 that, the smallest unit of Bitcoin, a sequential number. It's a little bit more complicated than that, but only a little. Once these sats are numbered and identified, users can inscribe the sat with arbitrary data, as long as the transaction doesn't exceed the 4-Magabyte block size limit. That arbitrary data can be anything. A fully playable version of the first-person shooter Doom? Sure. A picture of a board ape cross-pollinated with a crypto punk? Fine. A bald sunglasses donning taproot wizard recreation of the famous MS Paint spawned Magic Internet Money Wizard that once served as an advertisement for the R-slash Bitcoin subreddit that takes up almost the entirety of the Bitcoin block? Sure, fine. But why? Well, why not? If you're thinking, that sounds a lot like

Starting point is 00:02:42 NFTs, you're right. They do sound a lot like NFTs. Ordinal NFTs is a good term, and it's the term I'll stick with. But out of respect for the sensitivities of hardline bitcoins and in the interest of being as technically correct as possible, these are probably better characterized as artifacts. To be sure, external links to arbitrary data have been shared in the data field of Bitcoin transactions many times. Inscriptions take it a step further so that the link data actually exists on the blockchain. Bitcoin NFTs, initial reactions and potential consequences. For those lucky enough to be unfamiliar with the politics of crypto-Twitter, you should know that this has stirred up a fiery controversy. There are many Bitcoin influencer types who have staked

Starting point is 00:03:22 a meaningful part of their reputations on hating NFTs, as there are a distraction and technologically unsound. So ordinal NFTs haven't been a hit with them. To their credit, no matter how much crypto-pluralists have bashed Bitcoin for being a pet rock project that does only peer-to-peer, borderless censorship-resistant transactions in a decentralized manner, being very good at that is, in fact, very good. Expanding too far a field from that use case, which ordinal NFTs certainly should be characterized as, could be detrimental to that use case. But that argument's central point is more philosophical than practical. Practically, the strictest interpretation of the Bitcoin ethos would be that it doesn't matter what someone does with their Bitcoin so long as it abides

Starting point is 00:04:01 by the rules of Bitcoin software. If I want to waste my Bitcoin on coffee, then some other user is free to waste it on an ordinal NFT. The conversation should end almost immediately thereafter. That said, there are at least two small areas of potential concern. One, illegal data, and two, chain bloat. On the first, inscriptions could allow illegal data to become part of the Bitcoin blockchain, like the links to illegal pornography that already exist on the blockchain, but in a more permanent way. This is an obviously terrible potential consequence of ordinal NFTs, but there is some comfort in that there's a technical requirement requiring a special off-chain agreement with a minor to inscribe data in excess of one megabyte. Furthermore, the Bitcoin blockchain is transparent,

Starting point is 00:04:40 so the inclusion of this type of media would be met with swift investigation and punishment. On the second, inscriptions have led to almost completely full 4-Mabyte Bitcoin blocks. This is abnormal. Most Bitcoin blocks have not been close to the size limit. Some worry that the influx of large blocks will make it more difficult for new node participants to start up due to the immense amount of data that will accumulate over time and bloat the chain with superfluous data. This was the central battle in 2017 during the block-sized wars that led to the creation of Bitcoin cash, which has higher block-sized limits than Bitcoin, and consequently segregated witness for Segwit on Bitcoin, which, in combination with 2021's Taproot upgrade, made inscriptions possible.

Starting point is 00:05:18 Along with separating signatures from transactions in a witness data field that can include other arbitrary data if desired, Segwit introduced the block weight, which allows more transactions to be included in the 4 megabyte block by theoretically discounting the size of witness data. And Taproot made it easier to include even more data in the witness. Everything is delicately tied together, and this is one of the reasons I think the risk of chain bloat is overblown. Since inscription data is witness data, it can be pruned, in that it's technically possible to run Bitcoin software without downloading all the historical witness data. In non-technical speak, this is good because users are putting a bigger proportion of new data

Starting point is 00:05:51 into a Bitcoin transaction in a spot where it slows everyone down as little as possible. The other is that hardware gets better and cheaper over time, so even though Bitcoin's blockchain will continue to grow in size as long as it is used, the nodes will simply capture more processing power, such as life as a transparent, decentralized ledger. But where the discussion of ordinal consequences becomes far more interesting is how these now mostly full blocks might affect Bitcoin's transaction fee market for block space. Bitcoin miners make money by validating transactions in exchange for transaction fees

Starting point is 00:06:20 and a block subsidy, which is the new Bitcoin mined after each block is mined. Transaction fee rates are quoted in SAT over VB, which means the more data a transaction includes, the larger the fee fee. There is interesting game theory at play, as users are the ones who propose the fee rate to minors and block space is scarce due to the 4 megabyte size limit. Some users opt to only propose transactions at one sat per VB, the lowest fee rate. For those users, it could take a while for their transactions if there are lots of other users trying to do transactions, and they could theoretically never be completed since miners tend to validate transactions with higher fee rates. With this mechanism in mind, and the fact that Bitcoin blocks weren't really ever full

Starting point is 00:06:56 until inscriptions came along, it's probably unsurprising to read that making an ordinal NFT is usually more expensive than a regular Bitcoin transaction. Pictures take up a lot of space, especially compared to plain text. Here's how it could be good for Bitcoin and its security budget. More transactions should mean more fees. Blocks full of transactions are better than blocks not full of transactions, not to mention the empty blocks, which does happen. It almost goes without saying, but a more robust transaction fee market is good for the Bitcoin network. It's good for any financial network. Right now, miners make almost all of their money from the block subsidy, but the subsidy will go away eventually leaving only transaction fees.

Starting point is 00:07:32 So for Bitcoin to survive in the long term, a robust transaction fee market needs to take hold. To that, a potential best case scenario for the longevity of ordinal NFTs is that they act as a buyer of last resort for block space. Since ordinal NFTs are unusually large transactions, they will almost always be more expensive than normal peer-to-peer Bitcoin transactions on a per-transaction basis, even if they have low fee rates. As such, there's a chance a user who wants an ordinal NFT might be willing to wait longer to save money by paying a lower fee rate. Then these transactions will only be included in blocks when market fee rates are comparatively low, and block space is abundant. Where that may fall apart is the potential that users don't actually start paying a higher

Starting point is 00:08:10 fee rate for peer-to-peer Bitcoin financial transactions than ordinal NFT transactions. Maybe then, almost all blocks will include only ordinal NFTs and no other type of transactions forever. I think that's unlikely, but it could happen. As for what that means for the direction of transaction fees, Luxor's head of content Colin Harper, a former coin desker, put it well in a recent article. Quote, there's a good chance that ordinal NFTs alone do not increase transaction fees. Well, they could increase fees, but not the way you might think. After all, they benefit from the Segwit data discount, so theoretically a blockful of digital artifacts would actually carry fewer fees than one filled entirely with ordinary Bitcoin transactions. But if enough users

Starting point is 00:08:47 start inscribing ordinal NFTs so that they seriously compete for block space with ordinary transactions, the users broadcasting ordinary transactions would need to increase their own fees for inclusion. In this case, miners would likely prioritize as many ordinary transactions as possible, because they have a higher fee-perbite of data, and they can fit more of them onto the block, thus maximizing fees. So if ordinary NFTs create transaction fee pressure, miners will likely optimized for higher fees by including as many ordinary economic transactions as possible." End quote. I think this is spot on, and it's how I'm thinking about this until we have more empirical

Starting point is 00:09:19 evidence to consider. Sure, ordinal NFTs are fun-ish, but at the risk of sounding pompous, they are so much less consequential than Bitcoin's best use case of peer-to-peer, borderless, censorship-resistant money. In all, my take is that ordinal NFTs will be at its very best, a means to strengthen the Bitcoin transaction fee market, and at worst, a spectacular fad that fades away with no wider negative consequences for Bitcoin. It will, at the very least, be interesting to see where this takes us. Never a dull day. I think this is a great article to include in LRS, and I appreciate

Starting point is 00:09:49 George for writing it, because this is one of the big discussions that people are having. It's very like Bitcoiners to zoom out to 2140 and be thinking about things like the security budget already. And so this sort of debate around whether Ordinals can be valuable in that context is, while still theoretical, pretty interesting. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 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 blockchain technology has to offer creators, builders, founders,

Starting point is 00:10:30 founders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit Consensus.com. coin desk.com or check the link in the show notes. Now let's jump over to a piece that relates to AI. The piece is by Jesus Rodriguez, the CEO of Into the Block, and is called a pragmatic view of chat GPT in a Web3 world. ChatGPT has stolen the headlines as one of the most impressive technology releases of 2022.

Starting point is 00:11:05 Initially unveiled to highlight the capabilities of the upcoming GPT4, chat GPT quickly transcended the boundaries of the artificial intelligence or AI space. to become a pop culture phenomenon. For the first time in history, we are seeing AI actively discussed all the way from mainstream media outlets to dinner conversations. The fact that an obscure area of AI was going to cause this revolution was unfathomable just a year ago. ChatGPT is the latest in a family of large generative language models, LLM, that are clearly transforming the nature of content creation, application development, and user experience. The speculations of how chat GPT and the upcoming GPT4-type technologies might impact different industries have run high and wild,

Starting point is 00:11:45 and Web3 is not the exception. The hype about the possibilities of ChatGPT have certainly found its way into the Web3 space. In recent weeks, CryptoMedia outlets have openly discussed the role that ChatGPT can play in ending Google's dominance, completely automating smart contract development, and making Web3 the dominant architecture paradigm. A different perspective becomes apparent once you look at the specific capabilities and limitations of ChatGPT and match to the current state of Web3 technologies. Inside ChatGPT. For all the hype around ChatGPT, there has been very little discussion about the specific capabilities and differentiators of the model. ChatGPT represents a major evolution in OpenAI's GPT family of models, but that evolution

Starting point is 00:12:26 is materialized in a very specific dimension. The main difference between Chat GPT and its predecessors is that the former is key at following instructions. Models like GPT3 were able to perform a handful of language tasks such as summarization, question answering, or text-competes. completion based on carefully curated prompts. However, GPT3 exhibited major limitations following more generic instructions. In early 2022, OpenAI quietly unveiled Instruct GPT, a fine-tuned version of GPT3 that used a technique called reinforcement learning with human feedback, RLHF, to better follow human intents. OpenAI had published the research behind RLHF back in 2017 and went mostly unnoticed until Instruct GPD was created. Instruct GPT is the crown jewel at the center

Starting point is 00:13:09 of ChatGPT and one of the key differentiators with its predecessors. These days when you are using the OpenAI API by default, it uses Instruct GPT. The AI community recently started referring to models such as ChatGPT with the term foundation models. Quoted by Stanford University, this term refers to the unique characteristic of these models to be fine-tuned for specific scenarios. For instance, OpenAI created Codex, a new fine-tuned version of GPT3 to generate programming language code that is powering programs such as GitHub copilot.

Starting point is 00:13:39 Codex is also integrated into chat GPT. Now that we understand the core capabilities and differentiators of chat TPT, we can extrapolate those to our Web3 universe and start dreaming about the potential. ChatGPT in a Web3 world. The foundation model revolution with platforms such as ChatGPT is going to deeply influence how software is created and experienced across the entire technology market. Web3 also represents a new paradigm for distributed computing, so the combination with foundational models like ChatGPT offers a blank canvas

Starting point is 00:14:09 full of opportunities. Some of those opportunities are already possible with today's technologies. Language-based explorers. Explorers are the search experience in Web3 and the core building block for human interactions with blockchains. However, the user experience of blockchain explorers is designed for domain experts. Imagine an explorer powered by a fine-tuned version of chat GPT for blockchain activity. In that experience, a normal user could ask questions such as any large institutions transferring funds to finance? When was the last time something similar happened? Or, are there any interesting patterns in the recent transaction activity? Search is one of the experiences that might be reimagined with technologies like chat GPT,

Starting point is 00:14:46 and explorers could be a perfect candidate. Smart Contract Development Assistance Programming smart contracts remains a highly sophisticated task for developers. ChatGPT components such as Codex are able to generate solidity code from language descriptions. Imagine a smart contract assistant in which a developer can type something like, what's the solidity code to request a flash loan in AVE? and it will generate the corresponding smart contract code snippet. Smart contract security testing.

Starting point is 00:15:13 Smart contract audits are slow, expensive, and tedious processes that are nonetheless necessary. A large majority of the auditing processes rely on executing tests that are quite often not obvious to smart contract developers. Imagine having a fine-tuned version of chat CPT for smart contract audits that could take a language input and run a battery of tests in a given smart contract. Intelligence NFTs Arguably one of the most obvious applications of models such as chat GPUs, is to enable a new generation of non-fungible tokens that incorporate conversational intelligence.

Starting point is 00:15:42 Imagine a version of your favorite NFT collection that allows you to ask questions about the creator's inspiration or specific artistic details. Conversational wallets. Wallets are the main entry point for interactions with decentralized applications in the Web3 world. Just as the user experience in Web2 applications is being reimagined with foundational models such as chat GPT as a fundamental construct, we can think of a similar trend for crypto wallets. Imagine a wallet experience in which a user can simply express its intentions to perform a transaction, request information, or execute specific tasks simply using natural language. Conversation is going to be one of the most interesting trends in Web3 user experience in the next few years. Web3 in a chat GPT world. Foundational models such as chat GPT will, undoubtedly, enable a new generation of capabilities

Starting point is 00:16:28 and decentralized applications. But Web3 can play an interesting role in the infrastructure powering these models. Auditability is one of the key concerns around the emergence of models like ChatGBTGPT. Understanding the causes of harmful, fake, unbiased, or unfair content has been at the center of the debate for the mainstream adoption of ChatGPT and similar models. Distributed ledgers are the perfect technology to enable trustless transparency and auditability for models such as ChatGBT. Pre-training and fine-tuning is another aspect in which Web3 platforms can contribute to models like

Starting point is 00:16:58 chat-GBT. The computational requirements for pre-training or fine-tuning foundation models' results are prohibited for most organizations. Decentralized computation networks such as blockchains can enable scalable computation economies that can facilitate the pre-training or fine-tuning of models like chat GPT. Not just chat GPT. Chat GPT and the upcoming GPT4 release represent some of the most over-hyped technologies of the last few decades. While it might be easy to get caught up in the hype, the transformational impact of these models is real, and it definitely applies to Web3. One thing to understand is that Chat-GPT won't stand alone in this arena much longer.

Starting point is 00:17:33 Companies such as Google with its model Lambda, DeepMind with Sparrow, Anthropic with Clod and stability AI with an open-source version of ChatGPT are likely to become relevant players in this market in the next few months. In the Web3 world, these models will power new experiences for how to author and interact with smart contracts, DAPs, wallets, DFI protocols, NFTs, and pretty much every area of the ecosystem. The era of language models in Web3 is here, and ChatGPT is just the beginning. All right, guys, back to NLW.

Starting point is 00:18:02 So that one was obviously very technically dense, but what I liked about it, relative to a lot of the discourse of AI and Web3 overlaps right now, is that it wasn't about some silly AI token surging 70% over the last week, although that has happened quite a bit. Instead, it's about how the underlying build processes and what these new categories of technologies represent for one another, how they might inform one another, and what that might mean for the way that applications are built on the internet going forward. Rather than thinking just about tokens that cash in on the hype, I think it's a lot more interesting to look at how these new types of AI models might actually impact what whatever we're calling Web3 gets to actually do next. Anyways, I will leave you there. Lots of food for fodder. Let me know what you think.

Starting point is 00:18:47 Buzzword bingo or bullshit bingo or just brain explosion bingo. Anyways, guys, I hope you're having a great weekend. I appreciate you listening as always. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Are Ordinals Sneakily a Boon to Bitcoin Security?

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