Inscriptions: Just a Fad, or Real Threat to Bitcoin Becoming Decentralized Money?
Even if Ordianals are not a short-lived fad, what’s the most likely outcome? Low-value inscriptions will likely be priced out by financial transactions over time as Bitcoin gets adopted by more people. Learn why below!
Stephan Livera
Feb 13, 2023February 13, 20237 min read7 minutes read
The surge of inscriptions raises old debates about Bitcoin’s "true" purpose and its ability to become the money of the Internet.
Ordinals are a made-up way of tracking sats (a fraction of a bitcoin) across transactions. Now, I stress it is a made-up way of tracking sats, as it does not meaningfully impact Bitcoin’s fungibility. As explained by creator Casey Rodarmor on my podcast, it’s a convention of numbering sats in the order they’re mined into existence and tracking them across transactions in a first in, first out (FIFO) method. So, as Bitcoin transactions are made up of inputs and outputs, the first satoshi in the first input is considered to be transferred to the first output of a transaction. There are conventions around which Ordinals are uncommon, rare, epic, etc.
WHAT’S AN INSCRIPTION?
An inscription is another made-up convention where sats can be inscribed with arbitrary content, a kind of Bitcoin-native digital artifact or NFT. Using the convention, they can be sent around and stored in a Bitcoin unspent transaction output (UTXO). Now, because they are coded in such a way that they are written into transaction witnesses, they never enter the UTXO set. The UTXO set is seen as having heightened consideration for the network because every node (even pruned nodes) must maintain this UTXO set. So, I guess it could have been worse…
WHAT’S THE BULL CASE FOR ORDINALS AND INSCRIPTIONS?
You could also agree with some of the critiques of shitcoin NFTs and see this as a way of arguing that "Bitcoin does it better," e.g., Bitcoin inscriptions are immutable, always on chain, simpler, and more secure than shitcoin NFTs.
CONCERNS RAISED WITH INSCRIPTIONS
The main concerns here are:
Reduced accessibility to transact on Bitcoin because of inscription/NFT degens creating a transaction backlog and paying a lower fee per real byte because of the witness discount
Reduced ability for users to run a full Bitcoin node because of the increased storage and bandwidth requirements
The possibility of illegal material being recorded into Bitcoin’s blockchain might discourage some users from running a Bitcoin node.
Of course, there are counterarguments also:
Bitcoin was eventually going to develop a fee/block space market anyway, which may help with the network’s long-term viability. Inscriptions may just form a "low-value backlog" of transactions.
Bandwidth and storage costs have come down over the years since 2017. However, arguably, bandwidth over Tor may still be problematic for those syncing a full node in a more private fashion. It could also be argued that it’s all still within conservative design limits that the network effectively accepted in 2017.
Illegal material on the chain was always possible because you can’t fully stop steganography on Bitcoin. Steganography is when you represent information within another message in such a manner that the presence of the information is not evident to normal human inspection.
REVISITING OLD DEBATES IN BITCOIN: PURPOSE, SCALING AND MORE
Some are arguing that "We shouldn’t have raised the block size with SegWit and the witness discount in 2017," and, to some extent, this latest Ordinals and inscriptions trend is raising similar questions as those in the OP_RETURN wars of 2014.
What is Bitcoin for? And should arbitrary data that doesn’t relate to financial transactions be encouraged or discouraged on Bitcoin’s blockchain?
TAPROOT IS NOT TO BLAME
Some commenters were initially blaming the Taproot soft fork for inscriptions. But Taproot seems to only save about 4% on the cost of inscriptions.
It’s also worthwhile to note that this kind of thing was possible with SegWit, and beforehand with OP_RETURN, and even before that, with fake signatures, as explained by Adam Back here:
CULTURAL ISSUES
Some ETH huffers and cRyPtO people are enjoying this moment because, in their eyes, they can "stick it to the maxis" and those of a more "Bitcoin fundamentalist" persuasion, i.e., the people who believe Bitcoin should be money.
I’m closer to the "fundamentalist" camp myself, seeing my mission as being about advancing Bitcoin as money. And surely, after all the effort of Bitcoin developers to optimize and use block space more efficiently, the inscriptions on the chain seem wasteful and unnecessarily decrease Bitcoin’s accessibility for use in financial transactions.
Some argue that taking action against Bitcoin inscriptions is "censorship" and that viewing these transactions as "spam" is wrong, given that they pay a Bitcoin transaction fee. But in the end, it comes to the purpose of the project. While yes, it’s true that Bitcoin is designed to be censorship-resistant and that NFTs arguably "started on Bitcoin" in years gone by, Bitcoin is arguably meant to be more about decentralized and peer-to-peer electronic cash.
It’s also the wrong play to be too reactive about inscriptions and to try to take some drastic action to softfork or make inscriptions unviable at a technical level. There are arguably bigger fish to fry, like helping improve Bitcoin adoption as money and helping encourage further decentralization in the custody of Bitcoin, the mining of Bitcoin, the scalability and verifiability of Bitcoin, etc.
OSSIFICATION? NOT YET
Some even go so far as to argue that, "Oh, this is a mistake, and we must ossify the Bitcoin protocol now to stop any further mistakes." I think this would also be an error. There are various soft fork ideas that are opt-in, do not harm nonusers, and could help scale Bitcoin self-custody. For example, ANYPREVOUT or OP_VAULT.
ANYPREVOUT, in particular, is interesting because someday, with global adoption, we may have approximately 80,000 times the transactional demand we have now. In that world, ANYPREVOUT enables an upgrade to "Eltoo" Lightning, allowing us to share the cost of on-chain transactions in a self-custodial way. If we want Bitcoin to be used in a way that’s more self-sovereign, we ideally want people to be able to afford to take self-custody on the chain. Without this, they may be confined to custodial platforms because the cost of self-custody is too prohibitive. Eltoo also has various benefits for Lightning, such as making backups easier.
Yes, we should be conservative, but we should also consider technologies that help Bitcoin be the best it can be at being digital hard money.
BOTTOM LINE
While I’m "against" inscriptions in a sense and would rather they be socially discouraged, I also don’t think it’s worth getting too worried about them for now. For all we know, they could be a short-lived fad.
But even if they are not a short-lived fad, what’s the most likely outcome? Low-value inscriptions will likely be priced out by financial transactions over time as Bitcoin gets adopted by more people. It’s just that adoption happens in a "lumpy" way. It’s concentrated into periods of high use (as seen in 2013, 2017 and 2021). Then, periods of relative doldrums as transaction volume subsides and new technology and scaling techniques are applied.
Or, as eloquently named here:
Over the medium to long term, financial transactions will come to dominate in Bitcoin. Other uses of Bitcoin will be subordinate to its use as decentralized money for the Internet.
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