Scaling, Inscriptions, and Hierarchy in Bitcoin

Soaring transaction fees have reignited furore in the Bitcoin space, forcing Bitcoiners to consider which values are the most important

Over the past few months, transaction fees on Bitcoin have rocketed thanks to the proliferation of Ordinals, inscriptions and BRC-20s. Since January, transaction fees have risen from lows beneath 1 sat/vbyte to over 200. Transaction under 5 sats/vbyte are currently being purged and at the time of writing there are over 390,000 unconfirmed transactions in the mempool, which doesn’t look likely to clear any time soon.

What are Ordinals?

Casey Rodarmor, a former Bitcoin core developer, is the founder of a new protocol called Ordinals, which makes it easier than ever to inscribe messages into the Bitcoin blockchain.

This has spurred a proliferation of alt coins launching atop Bitcoin, which has naturally drawn the ire from those who believe that block space isn’t something that ought to be spammed with what many perceive to be irrelevant nonsense.

Since inception in January, the number of projects launching on Bitcoin has exploded. Since these inscriptions are taking up far more block space than traditional transactions, particularly those in which JPEGs are inscribed to the chain, this has catapulted transaction fees.

Scathing about scaling

The furore has meant that many in the space have demanded that the block size debate be revisited.

On the big block side there are those who argue that we need larger blocks in order to allow lower transaction costs (and thus make Bitcoin’s base layer open to as many people as possible), whilst on the other side there are those who believe that the fee market ought not be interfered with as this could cause an exogenous shock such as disincentivising miners.

There are figures in the space such as Benjamin Armstrong who command no respect whatsoever and constantly voice their ill-informed views on the subject, but there are also more respected voices such as Ivan Liljeqvist who take the view that larger blocks would be more of a boon than a bane, especially if we want to live in a world where the majority of people can feasibly engage with Bitcoin on the protocol layer.

The original block size war was settled after a multi-year dispute in which the “large blockers” felt disenfranchised with Bitcoin’s conservative values. Anyone who adopted BCH over BTC saw their holdings decline over 95%, ditto BSV (a load of shite still inconceivably being peddled by the likes of Coinbase).

A small conglomerate of major exchanges and miners decided to enforce their will on others, and learned that despite having garnered significant support amongst some of the leading companies in the space, they were unable to effect the changes that they wanted because to do so would compromise core Bitcoin values of immutability and long term security.

The “Father of Bitcoin Maximalism”, widely regarded as one of the most toxic maximalists and largest holders of BTC ever to have lived, was at the forefront of the block size debate. Mircea Popescu notably declined to accept any Bitcoin sent to his exchange MPEx that was not backward-compatible with the original Bitcoin client. He made the case that his company was simply following the protocol rules and that none of the large corporations (such as Coinbase) had any right to tell him which version of Bitcoin’s software was appropriate.

“What's left is the nude reality of the matter: if you, either misguided by some scammer's malice, or simply through ignorance, actually modify your Bitcoin client to accept the non-conformant transactions, the result will be that any Bitcoin you hold will be slowly (or perhaps not so slowly, depending on your use habits) replaced by worthless scam-Bitcoins, that will not be accepted by the main players in Bitcoin anymore than they'd accept something you've drawn yourself.”

Proposed censorship

One of the proposed solutions from those who believe that BRC-20s and Ordinals are damaging Bitcoin has been censorship of the Bitcoin network.

The controversial Bitcoin core developer Luke Dashjr has stated many times that he believes Ordinals should be censored (although he prefers the term “filter” to “censor”). Dashjr’s hypocrisy in this regard is notable given that in 2011 he spent significant resources to inscribe Bible verses into the Bitcoin blockchain using P2Pool.

Those who believe that Bitcoin ought to usher in free markets are starkly opposed to such a position. Thought leaders such as Michael Saylor have responded to such criticisms of inscriptions by explaining that as the most secure digital network that the world has ever conceived, there are a variety of unexplored use cases that could proliferate. On Patrick Bet-David’s podcast, he made the case that the nexus of digital signatures and immutable inscriptions are a service that people would be willing to pay extraordinarily high fees for in the future, and gives the example of his last will and testament — if such a thing could be inscribed into the most immutable database in history, there are individuals who would be willing to pay thousands (or even tens of thousands) of dollars for the service. Inscriptions on Bitcoin in this regard are far more reliable as a historical point of reference than entrusting a notary with a stamp.

Fortunately, such censorship seems to be an almost completely futile gesture given that miners will act in their own best interests and validate the blocks with the highest fees attached to them.

Inequality and hierarchy in Bitcoin

In Fiat World, opportunity cost is completely warped by the monetisation of debt. Berkshire Hathaway has historically maintained a debt/equity ratio between 0.5 and 0.8, taking on debt in a devaluing currency to acquire further assets. There is no asset class in which this manipulation is more evident than the housing market, which has been inflated beyond belief thanks to the fact that the overwhelming majority of people buy their homes with debt and treat them as assets.

When a currency is programmatically designed to lose value forever, every other asset that is scarcer becomes monetised. In other words, when the money itself isn’t scarce, everything else becomes scarce.

By contrast, those who don’t, for whatever reason, feel enfranchised by the status quo will look for alternatives such as Bitcoin. By virtue of having achieved digital scarcity, Bitcoin brings opportunity cost back to money on the base layer, kneecapping the privileges of central banks to spend without recourse. The above graphic demonstrates the number of 1 BTC+ wallets has been increasing, and has recently eclipsed one million. By contrast, the number of wallets holding 10k+ and 100k+ has been steadily declining since Bitcoin’s inception — without the ability to print Bitcoin, those at the upper echelons of the supposed hierarchy have no advantage over those lower down. In fact, it is the opposite: less wealthy entities will find it easier to provide a service and increase their Bitcoin stacks by single digit percentages annually than those with 100k+ BTC, because the opportunity cost of selling is so high, the yield on lending is so low (and fraught with counterparty risk) and outperforming the Bitcoin price itself by investing elsewhere hasn’t historically proven fruitful.

This process of change inevitably leads to a dramatic wealth redistribution. On a recent night out in Tbilisi I found myself embroiled in an unusually frustrating conversation about Bitcoin with two recent Economics graduates from the University of St Andrews. I was surprised to discover that not only did they not have the faintest idea what Austrian economics was, but they had no understanding of gold’s utility other than industrial use cases. After about an hour of calmly explaining Bitcoin in the least patronising tone I could muster, one of them asked me if CumRocket was a good investment. I ordered a taxi home.

There are many different theories pertaining to the rise and fall of different segments of society. In Principles for a Changing World Order, Ray Dalio explains the phenomenon of why nation states rise and fall from an economic perspective. In Breaking the Code of History, David Murrin explains the phenomenon from a sociological perspective in which he differentiates between the types of individuals and societies that are more liable to adapt, and those who are more likely to rest on their laurels. Jesse Myers marries these two concepts insofar as it pertains to Bitcoin with his article Why The Yuppie Elite Dismiss Bitcoin.

One of the most consistent themes through all of their work is that once a society is past its peak, the social, moral and political declines are all represented in the shameful rise of corruption at the upper echelons of society. The vigour and vim with which central banks will bend to the knee to governments in pursuit of their (often well-intentioned) plans to do something, is the last nail in the coffin. Throughout history, all societies that lose control of their monetary policy are eventually superseded since they cannot conserve their economic energy when hitherto successful ideologies give way to the kleptocracy of central planners.

What does this have to do with scaling Bitcoin? Bitcoin is the hardest asset in the world to steal value from given the lack of dilution.

Whilst it may not be so possible for the Cantillionaires to exert such dramatic influence over society as in the past, Bitcoin is not a panacea: the playing field is more even, but those with more capital will always pay less as a % in transaction fees. This may be meaningless at the moment for Westerners interested in sovereignty-preserving software, but vast swathes of society won’t be able to afford the high transaction fees, particularly as they continue to rise in the coming decades.

The overwhelming majority of humanity will never use Bitcoin’s layer one as they will be priced out. With this, they forego many of the advantages that come with it in terms of removing third parties — using Lightning in a non-custodial manner isn’t trivial. We shouldn’t expect people to run their own Lightning nodes and learn all the semantics of xPubs in the same way that we don’t expect everyone to run their own Email client.

There are many who believe that Bitcoin will usher in a meritocratic utopia, and that there needn’t be any nuance, caveats, stipulations or provisos. This is not only a naive perspective, but an irresponsible one when advocating for greater adoption. There will always be winners and losers, and those less-capitalised ought to at least have the resources available to them to be forewarned about the caveats of their presumed emancipation. The spike in transaction fees (which were ridiculously low for far too long) caught many El Salvadorans using Bitcoin’s layer one by surprise. Those who simply wish to use Bitcoin for small transactions, or only have a small amount of savings that they wish to allocate to Bitcoin, should not use the layer one.

Layer 2s and 3s

Of course, none of this means that Bitcoin can’t be used by everyone — it absolutely can be. But with $30 transaction fees (not even mentioning the 10 minute block time), it appears wholly inappropriate to suggest that someone ought to buy coffee with their Bitcoin.

Nevertheless, when one can pay fractions of a cent for near-instant settlement on the Lightning Network (much faster and cheaper than existing payment rails), Bitcoin flourishes. During my time in El Salvador it was trivial to spend Bitcoin in this way, and the ~0.3% fee for using Lightning is significantly better than Visa’s 2.5% (Lightning ought to scale further from here, too).

The rising prices on Bitcoin’s base layer have meant that large centralised exchanges such as Kraken, Binance and Coinbase are now finally being forced to embrace the Lightning Network. The Lightning Network still has plenty of room to scale and become more efficient from here, but for those who want free transactions, “layer threes” such as exchanges themselves may offer a better solution. Again, one is sacrificing self-custody, but applications such as Binance Pay now have millions of users around the world and make the process trivial.

Alea iacta est

As the most indestructible computer network the world has ever known, it seems highly unlikely that contentious hard forks will successfully come to fruition. In fact, the community hasn’t even been able to make a reasonable challenge to Ethereum’s leadership by hardforking without becoming a laughing stock.

“The nature of Bitcoin is such that when version 0.1 was released, the core design was set in stone for the rest of its lifetime.”

— Satoshi Nakomoto

As we move from a world where money is an asset rather than a debt-based liability, the playing field becomes more egalitarian for all, even if not everyone takes full self custody.

Some will make the case that Bitcoin is apolitical, and to a certain extent this is true: protocols by their very nature are not sentient. There is no “Mr Bitcoin” lobbying politicians, and Satoshi doesn’t throw molotovs at central banks (as far as we know). Bitcoin doesn’t vote and doesn’t make back room deals with Matt Hancock. Bitcoin doesn’t tell politicians whether VAT ought to be adjusted or which prison transgenders should go to.

However, the desire to limit entrenched state power and the ability for the state to perpetuate itself through theft is an ideology. Austrian economics may be marginalised in the mainstream, but this is simply because the ideology of Keynesianism has been so successful in its ability to enforce its will on others throughout much of the 20th century and the 21st century thus far.

Most people never question the fact that prices always seem to rise. In many cases, those who benefit from the system (such as homeowners) are largely in favour of such manipulation/theft since they directly benefit from the impoverishment of those without scarce assets. Nevertheless, in all but highly manipulated industries, the cost of goods and services falls towards the marginal cost of production over time (as brilliantly demonstrated by Jeff Booth in The Price of Tomorrow). The fact that most people don’t experience the benefits of such developments is symptomatic of a society that has been corrupted at its core in favour of a tiny minority of rent-seekers.

Bitcoin should be embraced by society because it is a liberating force, but objectivity in terms of supporting the base layer above all else is misguided. Ordinals using up a shedload of block space doesn’t diminish Bitcoin’s value proposition. In fact, higher transaction fees foster greater long term certainty amongst the mining industry because miners can be confident that they’ll still be able to generate revenue — this, in turn, means that the security of the network won’t be compromised long term despite diminishing block rewards from halvenings.

Self custody and the Bitcoin ethos

It is my contention that the most important aspect of Bitcoin is to limit the Cantillon Effect. Self custody is a technical feature that people can use to ensure that their Bitcoin is more secure, but the economic imperative of having a decentralised digital commodity without an issuer is more significant.

There are many ways to define Bitcoin maximalism, and it’s worth considering what it means to be a maximalist in 2023 — being a maximalist in 2013 was a completely different thing. Is a maximalist today someone who only buys Bitcoin? Is a maximalist someone who only buys Bitcoin and vehemently opposes all other financial experiments? Is a maximalist someone who bulk buys bongos to jam out to Ievan Polkka whilst the world collapses around him? It certainly isn’t some twat dressed up as a wizard claiming he’s “broken Bitcoin”. The extremity of maximalists may have diminished somewhat since Popescu’s calls for genocide of those he deemed beneath him and assassination of Core Devs, but maximalists remain an important part of Bitcoin, because they protect the protocol’s most important values.

The ideals that underly Bitcoin’s roots: those of decentralisation and self-sovereignty, of meritocracy and separation of money from state, remain important. These values are not as well-expressed in other cryptocurrencies, whose communities adopt more of a “move fast and break things” attitude. Bitcoin maximalists, although often brash and taking pride in their toxicity, are extremely important for Bitcoin’s longevity and keeping the project true to its foundations.

Dominic Frisby has written some cracking books about the history of taxes and the various ways in which states and governments around the world have tried to fleece their citizens. Sometimes, as in the case of Louis XIV, excessive taxation was levied against his people to fund wars and his lavish lifestyle. His excesses became so pronounced that many of the French people became disenfranchised with the wealthy King and his long reign, which fomented the economic conditions for the French Revolution (1788-1789). Louis XIV wasn’t alone in his raising taxes and excessive seigniorage. When one looks at history, it becomes comical to watch the number of empires that have fallen because their leaders were given the obscene privilege of commanding the money supply. From the Pharaohs of Ancient Egypt to the Roman Emperors Nero and Caligula, the Chinese Emperors (particularly in the Ming Dynasty), Suleiman the Magnificent and Peter the Great. In more recent times, we have the example of almost every country on Earth doing this (notable exceptions include the 14 colonies of France that have the French conduct the theft on their behalf). Some of the most egregious examples in modern history include those of Zimbabwe, Venezuela, Argentina, the Weimar Republic, Zaire, Peru, Bolivia, Brazil and Yugoslavia (which reached an inflation rate of 300,000,000% in 1994). During the coronavirus sham, governments decided that the world was under so much threat that the only plausible solution was to print 40% more currency than had ever existed in a span of 12 months. Keynesian economists will do all sorts of mental gymnastics to justify this redistribution of wealth from the productive class to the rent seekers. Fortunately, Bitcoin is available for adoption regardless of whichever corrupt plutocracy opposes it.

Bitcoin is not only the foundation, but the sine qua non of many of the aforementioned values: liberty, self-sovereignty and meritocracy need Bitcoin as a prerequisite to survive in the digital age. Proof of stake blockchains may hold a lot of promise for their relatively decentralised application layers, but without Bitcoin as a foundation the entirety of the cryptocurrency space is building a castle on lacklustre foundations. Insofar as offering the strongest possible alternatives to fiat currencies, the trick isn’t to decentralise the role of governance (or to play a game of decentralisation charades), but to minimise the role of any governance at all.

Herein lies the promise of Bitcoin: rules without rulers, consensus without a central arbiter, and immutability regardless of politics in the physical world. Bitcoin allows trade without coercion and manipulation. Bitcoin isn’t a democracy, it is much better than that. By virtue of being so open and transparent, Bitcoin can be used by anyone in the world with an Internet connection, and although the degree of sovereignty each entity has varies depending on how and where coins are custodied, FTX-style “hard theft” is much less of a problem in the wider world than the “soft theft” of monetary dilution. The main principle that underlies Bitcoin shouldn’t be to create the perfect digital cash, but to create the perfect store of value and best technology for sovereignty the world has seen since bipedal perambulation.