We Study Billionaires - The Investor’s Podcast Network - BTC116: Bitcoin Ordinals and NFTs on Layer 1 of the Protocol w/ Pierre Rochard (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. Back by popular demand is Mr. Pierre Rochard. Pierre and I have been having conversations about Bitcoin for more than five years now, and he has an in-depth understanding of the code, how exchanges work, mining, and everything else in between. And that's why he's the perfect person to have for a deep dive into ordnals and the impact of people being able to put NFTs onto the base layer of the Bitcoin Protocol. Many people in the space are currently debating whether this is a good thing or bad thing, and there's no one better than Pierre to come on and provide a good, objective look at what it means,

Starting point is 00:00:39 and whether it potentially presents an attack vector to the protocol in the long term. So, without further delay, here's my chat with Mr. Pierre Rochard. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey everyone, welcome to the show. I'm here with Pierre. Pierre, welcome back. Thanks for having me back, Preston. All right. What the hell is going on here with this ordinal stuff? I, you know, on the face of it, I'm just looking at it. It's like, hey, it's a free and open market. Like, just let this be. But I think for most people, they might not even know what we're talking about right now with respect to ordnals. So just give people a really simple way for them to understand. understand this peer? Yeah, sure things. So the really simple way to understand it is that in 2021, we activated a

Starting point is 00:01:48 software called Taproot. Taproot completely changed how Bitcoin scripting, how smart contracts on Bitcoin are done. And one of the differences with past scripting systems in Bitcoin is that there's really no limit to how much data you can put in what is called an input. So an input is the piece of the transaction. In fact, most transactions have several inputs that allows you to unlock Bitcoin from what's called an unspent transaction output, a pre-existing output that came from another past transaction. So inputs are the unlocking mechanism.

Starting point is 00:02:31 Typically, they have a digital signature in them that is from the same private key that generated the address that's in the output. So the script says, whoever can prove that they control this address can unlock these Bitcoin in the future. And then the way you prove it is by putting a signature inside of an input. Ordinals and inscriptions, what they've done is because the input, in Taproot, the pay-to-taproot input does not have a limit on its size or the operations in it, they've pushed lots of data in there. And then they have a way of interpreting that data to essentially be able to store arbitrary files in Bitcoin's blockchain.

Starting point is 00:03:20 So, so far it's been images. So they've put like JPEGs and PNGs in there. But they've also put actual software in the sense that you can, put JavaScript in there, and then when you extract it, you can run that code and play minesweeper or whatever from JavaScript that was encoded inside of Bitcoin's blockchain. Okay. So I think for anybody hearing that, it sounds very concerning from on the surface without having any type of deep intellectual understanding of what all that means. So going back further than 2021, which you referenced, we had the Segwit update.

Starting point is 00:04:01 Prior to Segwit, and this was in what year are we talking, is 2017 or no? Yeah, so Seward activated at the end of 2017. Yeah, in August or something like that. Okay, so before Seguid, a transaction would have the input. It would have the scripts and the signature, and then it has the output. These were one megabit blocks prior to Seguet. Segwit comes along, and we increase this to four megabytes with three megabit. being the witness data and one megabyte being the input and the output. So in that one megabyte

Starting point is 00:04:38 input output portion of every block, you're saying that the input now has an unbound amount of data so you can exceed the one megabytes. Is that correct? At the block level, there's still the block size limit. And so meaning that in practice, a tap root input can take up a whole block, so up to four megabytes. And that's something that we actually saw yesterday was that it was almost, you know, just one input script that was taking up, you know, it was like 98% of the whole block size limit. But the block size limit is still there.

Starting point is 00:05:20 It's just that there's no limit at the input or transaction level, meaning that one of these JPEGs can crowd out any other kind of transaction from that lock if some way somehow they are paying a fee in order to take up that space. So you're talking about, and let's dig into the event that you're talking about yesterday because the picture of it is, I don't want to say concerning, but it just kind of makes your eyebrows go up, but kind of like, okay, well, that doesn't seem good, because it literally consumed that entire block, that four megabyte block. And this was a Luxor mining pool that mined this block.

Starting point is 00:06:04 They included the block and it had no fee attached to it because they mined the block and they can pick which transaction they want in the block. Now, if you're a minor part of that mining pool, you would think that they would be looking to reallocate their resources somewhere else because Luxor basically made the decision on behalf of everybody who was allocating resources to them to choose one transaction with no fee attached to it. So the amount of fees that were collected from mining that block and doing all the work for that block wasn't conducted.

Starting point is 00:06:37 They chose to have a lower fee in the block. So walk us through some of this. Yeah. So in this particular case with Luxor, because of how their payout is structured to those who are providing hash rate to their pool, it's actually Luxor that. absorbed that absence of fees. So they absorbed that cost themselves. I think though that... Which would have been about how much up here, sorry to interrupt you, but how much would that normally have been that they would have made it additionally for beyond the block reward?

Starting point is 00:07:09 Because there is excess capacity in block space right now, the estimate I've seen was $2,000 worth of fees. And I think that it was a mistake on their part. from the optics of it would have just put a transaction fee in there anyway even though they know they're going to collect it back at least it would have looked better than to just put it in a zero fee unless their intent is to troll

Starting point is 00:07:40 that might be another possibility but I think that their intent was a good faith view of it would be that they are excited about inscriptions because it's going to create more demand for block space and drive up transaction fees, which ultimately get paid out to miners, which they're a part of that ecosystem. Yeah. Does this, so this also gets into, when we talk about the ordinal piece,

Starting point is 00:08:10 it's about the ordering that the Satoshi's were mined. Talk to us about some of this, because I find this very confusing, and I think it's concerning from the standpoint of fungibility. And I know this isn't happening on the base layer. This is happening after this is somebody else on like with their own side chain, right? Or something like that. I wouldn't describe it as a side chain. I would describe it as kind of the Bitcoin equivalent of astrology, right?

Starting point is 00:08:40 Of looking at the moons and the stars and, you know, kind of fitting on some kind of story onto it. Yeah. And so basically saying that, look, there's going to be less than 2.1 quadrillion Satoshi's. So each Satoshi technically you could attach a serial number to that Satoshi. And then you can have a methodology by which that serial number follows that Satoshi through transactions. Despite the fact that with every transaction on a technical level,

Starting point is 00:09:17 there's no concept of like a Satoshi that was unlocked in this input went to Satoshi in this output. Rather, they get pooled together when they get unlocked and then they get locked back up into new outputs. And, you know, there's no concept of serial numbers or anything like that on chain. But they've, you know, created an arbitrary methodology of saying, okay, here's how the serial number follows. to Satoshi through transactions. Go ahead. No. What were you going to say? Oh, well, I mean, I think it's a, it's a harmless hobby, you know, like numerology or

Starting point is 00:09:57 anything like that. But, you know, I think a concern would be, well, I don't have to get into the concerns right now. We can continue the conversation. No, let's get it. Let's cover it. Let's hear it. Yeah, if this becomes a popular pastime, right, if this becomes like, you know, football World Cup, you know, and people really start to take this seriously, then it does make it just where fungibility could be impacted, but also that if then the inscriptions associated with these ordinals, with these serial numbers, if these inscriptions develop kind of a market value that is significant, then you could see a significant crowding out of Bitcoin transactions with inscriptions and, you know, somebody who wants to open a lightning channel

Starting point is 00:10:51 has to pay, you know, a hundred times more than they otherwise would have because society in general has decided to value, you know, issuing JPEGs on the Bitcoin blockchain, you know, a tremendous amount. And that's kind of a social layer type thing of, you know, people, we could talk about kind of the psychology of NFTs. Are they a status game of people, you know, trying to show off their art or their patronage of art or their art collection? And with a social phenomenon, it's, yeah,

Starting point is 00:11:28 I don't know, I don't know if it'll take off, right? If inscriptions and ordinals will become popular. But I think that it would be to the detriment of other use cases for Bitcoin, namely moving Bitcoin back and forth for payments of goods and services or for any other kind of really monetary transaction rather than symbolic, you know, inscription. It's interesting. So you work with a mining company, a riot platform as a vice president. And I would think that from the mining side of the house, they might actually be a little

Starting point is 00:12:05 excited about something like this. Yeah, so without a doubt, the fact that the transaction fees, you know, accrue to the miners, I think has created kind of some excitement in the mining community around ordinals and inscriptions. I think that from a business perspective, the main question is, will other sources of transaction fees, namely just normal transactions, let's call them. I don't want to describe them, you know, too normatively of like good transactions or bad transactions, but transactions that are monetary in nature where the script is really about unlocking the Satoshi's. It's not about putting data onto the blockchain.

Starting point is 00:12:52 You know, my expectation would be that demand for those monetary transactions would be so great in the future that it really does. price out JPEGs and that there's just JPEGs might be a fad, that fad NFTs on Solana and Ethereum. You know, they are down big time if you look at kind of the volumes and their value. But, you know, maybe in the next bill market they'll come back. Maybe not. Whereas I think that monetary transaction demand will continue to increase as Bitcoin, you know, as a store of value, as a medium of exchange, continues to increase an adoption. Further, I think that if there is, you know,

Starting point is 00:13:44 in Ryan's case, we're not just mining Bitcoin. We're also putting Bitcoin on our balance sheet. And so there's kind of the question of, how does this impact the accrual of value to BTC, the asset? If people are using block space to store JPEGs and it becomes really expensive to transact on chain to move BTC around, maybe that would actually decrease the value of BTC and decrease the adoption rate of Bitcoin as a monetary system because that is being crowded out by the adoption rate of Bitcoin as an art gallery. So, you know, there's kind of an open business question there.

Starting point is 00:14:35 I don't think that it's necessarily the case that every use of block space should be celebrated because ultimately there is kind of a cannibalism or a crowding out effect in the long term. In the short term, it is true that over the past 18 months, blocks have been at 75 to 80% utilization, meaning that any kind of marginal increase in block space demand from a JPEG is not actually impacting monetary transactions. The reason that we're at 75 to 80% utilization is because of Seguid adoption in 2021. And so my view is that we should be looking to use block space more and more efficient. in order to have kind of a margin of safety, where, meaning that, you know,

Starting point is 00:15:35 if Bitcoin goes to 100K this year, without a doubt, we go to 100% utilization of block space from monetary transactions. And then the only question is, how much do people want JPEGs, right? And if the answer is a lot, then we could see that even though

Starting point is 00:15:55 there's a massive backlog of monetary transactions, actions in the Mampool, that there might still be a significant amount of block space consumption coming from JPEGs. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:20:08 That's Shopify. dot com slash WSB. All right, back to the show. You know, for me, when I'm thinking about the JPEG thing, and I think everything you said, you also have to keep it in the back of your mind. You have these other, quote unquote, decentralized blockchains, and you and I kind of smart when we hear that, competing for the fee and the quote unquote minting of these JPEGs being on there.

Starting point is 00:20:38 And so maybe it's just a function of where we're at with the blocks being so empty right now at this exact moment in time. And people are just trying to demonstrate the technology and put it out there. But as those fees would potentially go higher with global use for monetary reasons, you would think that people that are quote unquote minting JPEGs are going to go find somewhere else to go do that because they clearly don't understand. the difference between truly decentralized protocols and ones that are not. So they're just going to go wherever. That's my hope. But if it really ingrains itself in kind of the culture at the social level, then that might not be the case.

Starting point is 00:21:28 And it might really be something that sticks around on Bitcoin for a while. It's where I would push back, Pierre. And I think you will totally agree with, The thing that's going to really set this thing off in the future is fixed income. The inability to handle the credit markets and them being inverted to inflation rates because supply chains are breaking down. So when that flood of interest for sound money eventually comes and it's coming, I just think that it just dwarfs the stupidity that's behind some of these actions and it just

Starting point is 00:22:05 withers away. Agreed. So ultimately, that's why, you know, my view is let's wait and see. And the other argument for let's wait and see is that there might actually be legitimate use cases for very large tap root inputs that would be monetary in nature, you know, in order to enable a very large monetary transaction. we don't know exactly what that use case is yet. But if we acted too soon and closed that off by limiting the size of taproot inputs,

Starting point is 00:22:43 then maybe we would never see that very useful and valuable use case emerge. But yeah, I think that when we think about the lines of defense for Bitcoin block space, I think the first line of defense is the social layer of, you know, When blockchain.com was dragging their feet on implementing Segwit for their wallets, they would constantly get ratioed on tweets from Bitcoiners saying, when Segwit. Today, with Coinbase, we always roast them about when Lightning. And so on and so forth, there was also transaction batching that was a big efficiency gain.

Starting point is 00:23:23 So I think on the social layer, it is good to be lobbying against inefficient use of blockspace. The second line of defense is the economic layer of the transaction fees. So ultimately, I think that's what got through to blockchain.com was during the 2021 bull market that their transaction fees for the users of their wallets became really high because they didn't have Segwit. And that pressured them into implementing Segwit. So I think economic pressure is the second line of defense and it is highly effective. The third is really the peer-to-peer node level of setting policies about the Mempool acceptance and relay.

Starting point is 00:24:09 You see this, for example, with, I believe the dust limit. So if you try to send like one Satoshi as a transaction, nodes just won't relay that because it's just a waste of block space. But I don't believe that's a consensus layer rule. That's the fourth line of defense is consensus layer rules. So there you see the block size limit is one of those. There's also a signature operations limit. I believe it's 20,000 signature operations per block. There are also per transaction limits.

Starting point is 00:24:44 So you're limited in the number of inputs, the number of outputs you can have in a transaction. And, you know, there's other limits that are all sorts of specifics related to scripts. and to other parts of the transaction and of the block. So I think right now, as far as ordinals and inscriptions are concerned, we're at that first layer, the social layer. And I agree that, you know, we don't need to immediately jump to the consensus layer to fix this problem. It probably is something that we could wait and watch for five years, 10 years,

Starting point is 00:25:22 see how things play out through a couple more bull markets and maybe hyper, Bitcoinization. What I didn't, what I reacted really strongly to in the dialogue around ordinals and inscriptions was this view that there's nothing we can do. There's nothing we can do about it because Bitcoin is censorship resistant and code is law and that there's no, yeah, there's, there's no opportunity here to change the rules. And I just think that's false. that actually is a misunderstanding of the Bitcoin protocol. The Bitcoin protocol does change over time. I mean, as we saw with the Taproot soft fork,

Starting point is 00:26:04 and there's also no reason to say, oh, we should not have done the Taproot soft fork. I think that's also a mistake, this kind of view that, oh, we have to have ossification. No, I think that we can look at data, we can use reason, and we can look at the code, and our knowledge of software engineering and protocol research to make amendments as needed in order to help Bitcoin.

Starting point is 00:26:34 Now, the other part of the dialogue that I reacted strongly to was this view that Bitcoin block space is a neutral data layer that we should be agnostic as to what data goes into block space and that we should let it be a free market. And I think that you iterated that view earlier in the episode. And I just think that's outright false. I think that Bitcoin block space should be and is currently already and has been for the entire existence of Bitcoin regulated, zoned for monetary transactions. Bitcoin as a system is ordered towards the end of being peer-to-peer. electronic cash. And the cash transactions are what this ledger is for, and that treating it as a neutral

Starting point is 00:27:33 data layer is like saying, oh, I should be able to go onto my bank website and upload JPEGs to my transaction history, J.P. Morgan. And that's like, sure, but that doesn't make any sense. that doesn't make any sense from a rational perspective of we have different systems that are oriented towards different ends and that we should optimize those systems to achieve those ends. And if we treat block space that way, then we should try to find ways to make space for monetary transactions and not subsidize or enable art galleries, medical records, supply chain management, all these things where people have said, like, oh, we need to use Bitcoin's blockchain technology for all of these different ends. I disagree with.

Starting point is 00:28:33 I think there are four monetary purposes. Well, it seems like when Segwit rolled out that that was kind of a general consensus thought that you just shared there because the sender, the input and the output was limited to one megabyte. and the witness data was at three megabytes. So you basically had this situation where, call it, three-fourths of the data that somebody would write into their transaction was for whatever they wanted to put in there, as far as the witness data.

Starting point is 00:29:05 And then the other part was reserved specifically for transactions so that you don't fuel the block with nonsense, right? Like the transactions are always going to be a core part of it, but it's only going to be a percentage of it. And it seems like with taproot, we get away from this because of maybe a lack of limitation that needs to be built into the input portion. So with Segwit, there was a limit on what you can put in the witness. And that limit was not part of the taproot proposal. So in the taproot proposal, all they have is a limit on the number of signatures you can have in the witness. It seems like that's the soft fork that's needed, is that you have to bound that.

Starting point is 00:29:52 Well, so they have to bound another operation, which is the push operation, which is what's pushing data into the witness stack. And so the problem with that, or one of the counter arguments against having a limit on pushes, is that there might be really great scripts that are monetary transactions that would use that push. a significant number of times. And so, you know, there's lots of... But if it's a soft fork, Pierre, sorry to interrupt you. If it's a soft fork, you can choose to run that or not run it, right? As a node operator? There's a lot of nuance there.

Starting point is 00:30:30 I mean, I think that you would not want to run a soft fork that is not rough consensus, meaning that the, you know, the wider ecosystem is on board with you. So if you try to fly solo, then you would start rejecting. blocks that others see as valid and that, you know, you're not in consensus there. So I definitely, but you could change your MMP pool policy, for example, to not relay transactions that have these big inputs. I don't know how much of an impact that would have because what we saw with Luxor is that they sent that transaction out of band. So it's not like they had to go through the peer-to-peer network and rely on third-party mempools to relay that. I think that there's,

Starting point is 00:31:15 There's lots of research work that could be done on specifically how we would structure a soft fork for countering these inscriptions. But again, I think that we're very far from having to get to that fourth layer of a consensus level change, given where we're at today. But what I wanted to push back on was this idea that there's nothing we can do. We have a wide range of tools at our disposal that we can use. Now, we have to use them very carefully. Some of them are very sharp. Some of them are blunt, for example, nagging people on Twitter. But the sharp ones of changing the consensus rules, we have to be extremely cautious around

Starting point is 00:32:03 that, right? We don't want to cause more problems than we're solving for sure. And there's an extensive process of review that goes into any soft work, including the Tappard soft fork, but it's on the table and that we shouldn't pretend otherwise. I think that folks who are pretending otherwise like inscriptions, right?

Starting point is 00:32:24 And that's fine, but I don't want any kind of gaslighting of like there's nothing we can do about it. The better argument would be inscriptions are good. We should not contemplate a soft fork to essentially put them as invalid. And then we can get into argument

Starting point is 00:32:42 about why. And that's fine as well. And I think to me, the most interesting argument is really about what are the other opportunities that we can use large tap root inputs for? And let's develop those, right? I think that that's a really great direction to go in rather than in saying, hey, let's do more research on how to do lots of inscriptions and build a whole economy of NFTs on top of the Bitcoin blockchain.

Starting point is 00:33:14 I think that that would be a bad outcome. A good outcome is, hey, let's figure out how to get zero knowledge proofs that are very large on in taproot inputs and things of that nature that are related to monetary transactions rather than really inefficient use of block space. So when we look at the block, the full block size of four megabytes and how one megabyte of that is supposed to be just the input and output, when we look at what recently happened with Luxor mining pool, whenever they wrote that block and it was completely full, almost the full four megabytes, was that all from just the input with the scripts that they are running from the input, almost all four. Because my understanding is that it's supposed to be bound to only one megabyte at that point. Right, because the, what's called the stripped size that does not include the witness, that just has to be less than one megabyte.

Starting point is 00:34:21 Okay. Then the witness can be up to four megabytes. Okay. Is kind of the- There are three. The witness data can be up to three and then- Be up to four. Because it can-

Starting point is 00:34:33 Oh, I see. Because the input was under the one. It barely used it. So then I guess the witness data can consume the remainder for less than four. Okay, I got you. You know, this is where I get a little frustrated with just the JPEG thing in general. And I just want to kind of paint an example for people. So anybody can mint a JPEG on whatever blockchain they, quote unquote blockchain they want to use. Obviously, Bitcoin, because it's truly decent. centralizes a place that a person would want to store whatever or memorializes, I think, a better word, an event that it actually took place. That makes sense to me that people want to do that. But to store the actual full data of a JPEG on the blockchain doesn't make sense to me from just a legal standpoint. So think about it.

Starting point is 00:35:28 So like, let's say BIPL, he's super famous for selling these JPEGs for $50 million or whatever. If he would sell you one of his JPEGs that you're now the owner of it and you can basically do whatever you want with it, you can license it or whatever, and you want to memorialize that event, that sale, that proof of sale into the Bitcoin blockchain, I guess I'm of the opinion that a person should be able to do that to memorialize that event. And it doesn't not take much data to do that because you could hash the contract or whatever and then stick that public key into the blockchain to prove that it took place. So at the end of the day, like when a person would,

Starting point is 00:36:11 let's say that I would, or another person would argue, well, he sold it to me versus the person that supposedly has this thing written into the blockchain. The way that's actually going to get adjudicated is in a court system, no matter what. That's how that gets adjudicated. Whether it's in the blockchain or not, the blockchain is just a really great way of prove it's, it's, oh, what do you go when you get the stamp from the government person? Oh, geez. Notarized. Getting it notarized, right? It's the best form of notarization that's ever existed.

Starting point is 00:36:46 So I guess when I see the current setup where people are completely jamming data into an entire block. with just one or five transactions in it. To me, there's a major inefficiency that's taking place in the existing setup because it's not accounting for the first principles thinking of the best thing that you can use it beyond money is for the notarization piece, which does not require a lot of data at all. Yeah, so I think that that's one way of conceiving of this data layer. Another, perhaps one that would make more sense than what you just described is, you know, there are 3D CAD designs for 3D printing firearms that are often difficult to download in foreign countries that have strict controls.

Starting point is 00:37:54 over that and that this is a way of creating a censorship-resistant way of disseminating information that, you know, the government wants to ban, essentially. And so that to me makes a lot more sense than the people, you know, intellectual property situation. And that, you know, I have a lot of sympathy for because I am pro-Second Amendment. And it's like, okay, well, on some, level, if you're willing to pay the transaction fee, then it is what it is. Because furthermore, even with the soft fork that I described of somehow limiting the number of op push or limiting the size of inputs, there would still be, all that would do is make it more expensive to put data on the blockchain. It would not stop people from doing it. There's no way to stop people from doing it. All we're talking about here is

Starting point is 00:38:54 How do we like, how do we tax it? How do we disincentivize it? And so people would still be able to put, you know, 3D gun diagrams on the Bitcoin blockchain. They would just have to pay a much higher transaction fee, total transaction fee. And also it would be less efficient because now they would have to say, let's say they would have to use up three megabytes instead of one megabyte

Starting point is 00:39:20 because we have created an artificial constraint on the, input size. Now they've got to create lots of inputs in lots of transactions to add up to that data. So there's lots of tradeoffs here to consider, but that was the use case that tug at my heartstrings. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why Vantza is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:43:02 Back to the show. Well, and I think that that's a great counter to what I was saying. I guess the response I have for you is why does it have to happen on layer one? Can't we push some of these activities up under the second layer or higher? Because it's Bitcoin being, layer one being, a global broadcast system means that it makes it censorship resistant

Starting point is 00:43:26 in a way that any other layer would not be. For example, with lightning, the data storage would happen on specific lightning nodes, not on all lightning nodes. So in order to use the lightning network,

Starting point is 00:43:44 you would not need to download this data, whereas in order to use the Bitcoin network, you have to download this data. And so that's really the difference between a global broadcast system and what you could describe as kind of a local point-to-point system. Yeah, it really seems like people, like, there needs to be a deep conversation at a global level on just use cases outside of money and basically notarization on layer one. And then really kind of get at the heart at what you're saying here, which is this op push within the input of each transaction.

Starting point is 00:44:26 I don't know that you're going to get consensus built because this is a highly technical conversation and it seems like the consensus could get really quite confused. Like the general population could get quite confused as to what to decide with or what, right? How do you see that kind of taking place moving forward? Yeah. So I think we're already there in terms of the confusion. There's lots of confusion. And I think that it will crystallize when if inscriptions continue to,

Starting point is 00:45:02 if it's not a fad that fizzles out, if they continue to be used and that they drive up transaction fees materially for other participants in the system, then I think that we'll see the, the conversation around it evolve beyond its current state. Now, whether that will evolve into a soft fork, I don't know. That will probably take decades of, you know,

Starting point is 00:45:32 evolution and maybe, you know, we'll see. But the, my hope is that we can just snuff this out at the first line of defense, which is the social layer of saying like, hey guys like not cool we're not into this stop doing it find something else to do i don't think that's going to i don't think that that's going to work pier i think that the thing that works is

Starting point is 00:45:59 just economic incentive and maybe we just maybe we just need the world and credit markets to start uh reflecting reality and more you know use on the base layer from you know all the all the pen-up fiat that's been stuffed into just worthless things around the world. I agree. I think ultimately it'll be a combination of that first and second line of the economic incentives of transaction fees going up combined with the social layer saying, hey, this isn't worth it. Like nobody's going to buy your worthless mint, so don't waste your money, you know,

Starting point is 00:46:37 on these high transaction fees. And then that combination, because, yeah, that's, I hope that that's an, enough and that we won't have to continue this debate that already is, I think, very, very muddled. And, you know, there's just a lot of conflicting incentives as well where really the developers, they don't want to do a soft fork that limits the size of inputs because they're interested in opportunities to use that for valid transactions, right? sorry, wrong terminology there, for legitimate monetary transactions. So they are opposed to having that conversation.

Starting point is 00:47:22 I totally get. Folks in the mining industry are opposed to such a software because they want to drive up transaction fees. Again, I totally understand where they're coming from. And then you have Bitcoin people who maybe see this as like, hey, let's get the NFT narrative going in Bitcoin and that that will bump, pump the Bitcoin price up and kind of reduced demand for Ethereum and Solana. Again, you know, that's a perspective.

Starting point is 00:47:51 And the only people that are really hurt in a way by this is, one, note operators who are resource constrained so that, you know, they have limited bandwidth. They have, you know, they're living in a country that does not have fiber optic internet, when not. That's not me. but I'm happy to be their representative. And people who are trying to send small value transactions that are monetary in nature over the Bitcoin network, whether it's open a channel or sending a payment.

Starting point is 00:48:26 But the block size as a whole is not larger. So you're just saying that the cost to rebalance channels is going up because you're cluttering the chain. Yep. Okay. I got you. And then it's like, well, if I wanted, if I want to, if I want. wanted to send $50 worth of Bitcoin as remittances from El Salvador to the U.S. or vice versa. You know, if there's no JPEGs, that might cost two cents.

Starting point is 00:48:54 If there are JPEGs, it might cost $5. Right? So you're talking about a 10% fee instead of a fraction of a percentage. And so, you know, the JPEG people would say, you know, so sad, too bad, you know, use lightning instead and then they go and use a custodial lightning wallet instead and you know pay. Yeah, that's where you really see it. The custodians, you're going to push people into a custodian situation where they're not holding their own keys because you're using their services that have been,

Starting point is 00:49:28 it's cheaper for them to consolidate it all, right? And so that's maybe where that pushes it. Interesting. That's one argument. And yeah, so I think there's so many. different people benefit from inscriptions and different people incur the cost of inscriptions. And it's hard to tell where that nets out of like, oh, on net, inscriptions are good for Bitcoin or bad for Bitcoin. And to prove that, I just, I have my gut instinct on it, but I think that

Starting point is 00:50:02 it's an open area of debate. I don't like that there's folks on social media who are trying to say that there is no debate or that, you know, it's bad to argue against inscriptions and like their morality policing the conversation around this. No, I think that let's, let's air out their arguments pro and con and it's good to talk about it even if we're not, you know, contemplating a soft fork to fix it immediately. That might be in the future in several years or decades, but in the meantime, I think it's good to have a conversation about it. People have raised the concern of illegal imagery being written into the blockchain. And then this potentially being an attack vector from the state is saying, hey, you're running

Starting point is 00:50:52 a full node and you have block whatever. And there is a very concerning picture that's been written into that block. And you're distributing that information and that data. What are your thoughts around this one? My understanding is that in the existing Bitcoin blockchain, in op returns, there's already illegal images. And so I think that that's already the case without inscriptions, that then I'll leave it to the lawyers on what the specifics are there.

Starting point is 00:51:28 But so far, it hasn't really been an issue, despite that imagery being on the Bitcoin blockchain for several years now. Now, then there might be a question of quantity, right? What happens if there's a lot of it on the Bitcoin blockchain? You know, and that's where that's an open question going forward. So my immediate thought on this is you could run a pruned node. You still have to download it to prove that you, that all your transactions are valid, bit. I could say, you could send me and let's say I trust you that this is, that if I start

Starting point is 00:52:07 my node right here, all the illicit images or whatever are after that block height, right? And I could just run a prune node. And then I'm running a node and I'm not, I'm not propagating. And I'm not suggesting that this is the solution. I'm just for maybe jurisdictions, let's say you're in a country and they are cracking down on node runners that people running nodes that because of this argument and it's it's a localized state level attack for whatever that jurisdiction is. Is that to work around for people in those types of jurisdictions? It could be. I don't know if software that exists that would enable or that has that built in yet,

Starting point is 00:52:50 maybe that that will get written. And I just think that it would be a shame. if we had to change kind of the average Bitcoin node trust model around, you know, assuming validity for certain outputs because of this problem. But there's, yeah, there's certainly ways that, you know, mitigate that, that issue. And most of it is just because the way that the blocks connect, you're effectively hashing. Get into some of the technical specs for people that would hear this and say, oh, no, I'm concerned. What are they talking about as far as like a pruned node? How does that

Starting point is 00:53:34 work from a more of a technical sense, if you can explain it, Pierre? Yeah, so currently how a pruned node works is that you download all of the blocks when you're doing initial block download. And every time you download one, you verify that the output, that is being spent and the input that is spending that output are valid. And so the, you know, the signature in there gets verified. And that way, you know, there's no risk of an invalid input spending money that is not theirs, essentially. And so that does mean that you have to download the input and you have to process it.

Starting point is 00:54:18 And then the pruning part is that the data after it has been verified gets deleted. And that's the pruning part. Now, one nuance here is that in the Bitcoin core software, there is a configuration parameter called Assume Valid that will not verify inputs and outputs, signatures and thus running the script before a certain height. And so this allows people to download Bitcoins and verify the blockchain more quickly than they otherwise would with a small tradeoff of, hey, you have to trust that the developers put in the valid hash at that height.

Starting point is 00:55:08 And historically, that hasn't been an issue because it's really easy to then verify that hash and to turn off. valid. Yeah. Like, I always turn off assume valid because I'm, you know, a psychopath, uh, purith. But in reality, it's a, it's a, it's a legitimate way of, uh, accelerating initial block download. Yeah.

Starting point is 00:55:29 Yeah. And it is. It's very simple to be able to, to validate that at whatever block height you want. Um, yeah. So, okay, let's just fast forward five years into the future. your highest probability conviction of what this conversation sounds like five years from now. Remember when we were freaking out about inscriptions and people were trying to shill them on social media? Yeah, it's the same thing with Satoshi Dice.

Starting point is 00:55:59 You know, now we say, oh, remember when you could gamble on the Bitcoin blockchain with Satoshi Dice? Or remember when colored coins were a thing or Omni? Omni is like Tethers. on the Bitcoin blockchain, USDT, that doesn't exist anymore. It got priced out and it migrated to other blockchains. And so I don't think this is going to have staying power at all. But that's actually,

Starting point is 00:56:25 I think that's a good thing because then for those situations where you do want to use an inscription, like your 3D gun file or whatever, like there won't be so much consternation about you doing that. And there won't be a limit on, you know, op push stuff. stopping you from doing that. So I hope that just that the social layer, people don't start

Starting point is 00:56:46 valuing inscriptions. And the, you know, in five years, we'll just be laughing about how, you know, we thought that it was a big problem. Or I did. Last question. Charlie Munger, he's added again. He was in the Wall Street Journal today. What are your thoughts? Tell people about the article and tell people your thoughts, Pierre? Yeah, so I started reading the article with an open mind, as I always read everything with an open mind. And it was interesting. I actually agreed with him on the initial kind of framing, which is that there are corporations that are issuing unregistered securities and calling them cryptocurrencies. And they're doing it in a way that avoids having

Starting point is 00:57:38 to disclose what they would normally have to disclose when raising financing from the general public through debt or equity. And then his conclusion is that we should ban all cryptocurrencies including Bitcoin, which to me does not follow from the arguments that he's making. So that was one. And, you know, we can talk about the merits of regulating token offering. and all that. But what I found to be really bizarre was his bringing up the Chinese Communist Party and praising the Chinese Communist Party for banning Bitcoin in China. And, you know,

Starting point is 00:58:25 that might work well for a certain audience. I don't see that working very well with the Wall Street Journal audience of, hey, let's emulate communism. And I don't see it working well. with the current House leadership, because in order for Charlie Munger to get his way within the next two years, he would have to get this bill through Congress. And the current House leadership is rather, the Republican majority is rather hawkish on China and opposed to communism. In fact, currently what they're working on is a statement that is a, you know,

Starting point is 00:59:07 very anti-communism is like this week's number one priority. So for Munger to try to persuade them by pointing to the Chinese Communist Party as a role model, I think that he's actually benefiting Bitcoin and severely undermining his cause. So I guess I'm happy that he got this published in the Wall Street Journal. And perhaps that's why the Wall Street Journal allowed him to publish this as a giant cell phone, self-sabotaging move for the anti-Bitcoin cause, where, you know, he's saying like, okay, let's have, you know, Elizabeth Warren and the Chinese Communist Party on one side. And then, you know, Kevin McCarthy and every honest American on the other side of this debate,

Starting point is 00:59:57 which I think is great framing. Pierre, I can't disagree with anything you just said. And I just find it so strange. This isn't the first time he's brought up the whole. the China thing and how he agrees with what they're doing. And it's just like, what in the world are you talking about right now? It just does. It does. It's totally, especially the irony is this guy became a billionaire through free and open markets or, you know, prior to them becoming completely manipulated here in the past decade. He's a total beneficiary of this capitalistic system and this

Starting point is 01:00:32 democracy. And for him on his final, you know, days to be out there trumpeting the idea of communism and socialism is just, I literally takes, I have no words for it other than disgust. So, and people who are listening to that, he has so many brilliant insights throughout his lifetime that it just seems completely incoherent with some of the other insights that he's had outside of Bitcoin, obviously, you know, on psychology and other things. It's just crazy to me. I agree. And, you know, I'm a fan of value investing.

Starting point is 01:01:10 Benjamin Graham was one of the first investing books, the intelligent investor that I read. And, you know, one way to look at it, very cynically, is that Berkshire Hathaway is lobbying the Texas legislature to enable them to subsidize them, to pay them to build natural gas peaker plants. that turn on when there's a deficit of electricity supply in ERCOT. And the Bitcoin miners who turn off when there's a deficit like this that are through demand response are directly competing with piker plants. And so from Berkshire Hathaway's perspective, Bitcoin mining in Texas is competing with their energy business.

Starting point is 01:01:57 And so any kind of policies that they can advance that are anti-Bitcoin are in the interest of Berkshire Hathaway's business. So that's kind of the cynical take on it. I don't know if they're connected or not, but that's one way to maybe couch this in more capitalist terms. Fascinating. Any other highlights and things that are going on right now that you wanted to bring up? Not right now. I think that we've covered a lot of ground in the past hour. There are things on the horizon, though, but I'll come back and we'll have.

Starting point is 01:02:35 Please do. Please do, sir. You are always welcome. Pierrochard Riot platforms. They got a name change, correct? That's right. We were leaving the blockchain behind because Riot is really approaching Bitcoin mining in a vertically integrated way.

Starting point is 01:02:52 We acquired an electrical equipment, designer and manufacturer, ESS Metron. And we build our own hosting facilities. We're a construction company. And that by vertically integrating, we can control our supply chain and really be the lowest cost producer of Bitcoin out there. So that's why we went with the name change, you know, platforms, not blockchain. Wow.

Starting point is 01:03:19 That's pretty exciting stuff. You guys moving upstream and I like it. Pierre, thank you so much for making time. I think we threw this together in just the last couple hours. And I was very excited to be able to have this conversation because like so many out there, I'm learning and you are an expert for sure in many of these areas. And it's just such a breath of fresh air to talk somebody that has so much common sense behind the way that they're looking at things.

Starting point is 01:03:43 So thanks for making time and coming on. Thanks for having me on, Preston. Looking forward to the next one. Cheers. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use, just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate

Starting point is 01:04:09 that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - BTC116: Bitcoin Ordinals and NFTs on Layer 1 of the Protocol w/ Pierre Rochard (Bitcoin Podcast)

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