Jan 2, 2024

Platform Vs Cash: Battle for the Soul of Bitcoin

Steel-manning both sides of the Ordinals Debate. A look at the philosophical, technical, and moral arguments shaping this Bitcoin use case.

Platform Vs Cash: Battle for the Soul of Bitcoin

On-chain transactions are expensive in Bitcoin. Very expensive, and we know why. In December alone, over 6 Million Ordinal inscriptions have taken place in Bitcoin.

The high fee environment has been a complete regime shift from what we’ve seen in Bitcoin for years preceding the advent of Ordinals. Which if you’re not familiar, are a means developed by Casey Rodarmor for the creation of tokens on Bitcoin.

As you would expect, when big change happens, it becomes a highly contentious topic among Bitcoiners. Some people think it’s an attack on Bitcoin, while others are celebrating it as a great development.

I’m writing this piece to clarify in my own mind my views on Ordinals and to help people at least consider both sides of the debate. Let’s take a look at the strongest argument for and against Ordinals and then I’ll give my opinion on the relative merits of the arguments.

As Charlie Munger once said, “I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition.”

Arguments Against Ordinals

The debate around using Bitcoin as a foundation for inscriptions, whether they are images or fungible tokens, centers on three main arguments: philosophical, technical, and moral.

Philosophical Perspective: Staying True to Bitcoin's Original Vision

At the heart of the philosophical argument is the debate over Bitcoin's fundamental purpose. There are many Bitcoin is X analogies as there are Bitcoin blocks, with everybody having a right to an opinion. 

Nonetheless, we can look to the Bitcoin white paper's clear definition "Peer to Peer Electronic Cash". There is no doubt that Bitcoin was created to facilitate financial transactions. In essence, Bitcoin's primary function is to serve as digital cash. 

The logical extension of this line of thinking is that anything which crowds out or inhibits the ability of Bitcoin to operate as a monetary network is therefore inherently bad / an attack on Bitcoin. This view point is core to the 'inscriptions are spam' argument.

The Technical Argument: The Illusion of Ownership in Inscriptions

Nobody can truly own inscriptions.

In Bitcoin, there is no concept of on-chain “ownership” of a transaction. Ownership in Bitcoin is distinguished by having private keys to the unspent transaction output (UTXOs).

The importance of this distinction comes from the actual location of these Bitcoin inscriptions. The inscriptions are made within the witness data of a transaction, which is freely visible to anybody in the network.

Which is to say, nobody owns the transaction. The only thing unique you have as “owner” of that which is inscribed in the witness data of the transaction is the ability to move the inscription from one transaction output to another.

This argument is analogous to those who say you don’t really own an image when you buy an NFT on Ethereum; you simply have a receipt of the ownership.

The Moral Argument: The Ethical Implications of Ordinal Inscriptions

Ordinal inscriptions are not scarce and thus in the long run are incredibly unlikely to retain or grow in value. Thus their primary purpose is enabling greater fool trading which ultimately ends in massive loss for the last person holding the bag. For people who see gambling as unethical, and Bitcoin as a tool for positive change within the world, it’s uncomfortable to see Bitcoin used in this way.

I’ll return to give my views on the relative strengths of these arguments but before I do, let’s lay out the alternative point of view.

The Pro-Ordinals Case

The three primary arguments supporting ordinals are the Security Budget Hypothesis, the Ordinals Kills Ethereum hypothesis, and the Ordinals is Fun Case. Let’s dig in.

The Security Budget Hypothesis

As we know, Bitcoin’s supply is capped at 21M and thus the miner subsidy for mining Bitcoin is diminishing over time, halving every 4 years until it is zero.

In order for Bitcoin to operate over the long run, it’s necessary that a sufficient fee market arise to compensate miners for their operations even as the block subsidy heads towards zero.

As we know the market for inscriptions is driving transactions on Bitcoin, thus increasing miner revenue. Thus it is said Ordinals are a solution to Bitcoin’s long run security problem.

Ordinals Kills Ethereum Hypothesis

The proliferation of crypto tokens over the last decade is proof in some sense of an underlying demand for the creation and trading of digital tokens in a general sense and not limited to simply demand for the Bitcoin token in the Bitcoin network.

The existence of crypto makes sense when you consider Nick Szabo’s famous essay Shelling Out, where he articulates the human instinct for collectibles that’s been observed across all societies over the centuries. In his conclusion he summarizes:

“The desires to explore, collect, make, display, appraise, carefully store, and trade collectibles are human universals – to some extent instincts. This constellation of human desires might be called the collecting instinct."

If you accept Nick Szabo’s conclusion, you recognize that we’re destined for the creation and trading of digital collectibles.

At least through Ordinals Bitcoin has the opportunity to benefit from the underlying demand for these extraneous digital collectibles by having the trade occur on the network.

In the last half decade, Ethereum has predominantly been the source of the creation and trade of digital tokens. Ordinals enable Bitcoin to capture the primary use-case of Ethereum thus helping it outcompete its primary competition.

Ordinals is Fun

There is of course, another argument for ordinals which is simply that people enjoy it.

Bitcoin is by design a permissionless network. Follow the rules, and you makea transaction. Nobody can stop you. That’s a fundamental principle of Bitcoin.Some people just get inherent utility from gambling, and it’s their right to use Bitcoin as much as it’s anybody else’s right to use Bitcoin.

Assessing the Case

Frankly, I think both sides make valid arguments.

On the anti-ordinals side, I’m least persuaded by the technical ‘witness data’ arguments. This is not to say the technical arguments are incorrect, but rather, it’s the market that decides whether something is valuable / can be traded.

This is a concept of property that isn’t unique to this situation.

What does it mean to own a plot of land, in a foreign country? If you’re not on the land can you really say you ‘own’ it? Ownership is a concept within the minds of people, and if people are willing to trade it, then that’s satisfactory to me.

To my ears, the moral arguments also fall flat. Humans spend money in plenty of ways which other people consider unethical. This argument has a strong whiff of Elizabeth Warren crying because Bitcoin may or not have been at some point in time to fund a terrorist attack. A properly designed cash is neutral, it neither knows nor cares how it is used. If you want moral money, there are alternative networks such a government CBDC which will have political actors decide how and where you can spend your money.

On the Pro-Ordinals side of the debate, I’m least persuaded by the security budget hypothesis.

In my view, if Bitcoin is unable to generate demand for blockspace through financial transactions, then it is necessarily a failed project, and won’t be valuable as a data storage network either. With that said, I’m very confident there will be high demand for financial transactions, and that is not going to be an issue. For this reason, I don’t think Bitcoin has a security issue that needs saving, and so I’m not persuaded ordinals are solving a problem here.

I do like that Ordinals is boosting Demand for Bitcoin at the expense of competing networks such as Etherum, but I also recognise in myself that this is high time preference thinking. In the long run, Ethereum’s relative success or failure is actually of little consequence to Bitcoin’s mission. The ETH / BTC ratio should not be an important factor in determining the way the Bitcoin network operates.

Conclusion: The Future of Bitcoin and Ordinals

So what’s left?

We have philosophical arguments against the way Bitcoin ought to be used.

Some want it to be exclusively financial transactions, while others get utility from other use cases.

Here I believe we’re left with a situation where there is no objective ‘truth’, it's merely an opinion.

The foundation of Bitcoin is social consensus. Right now the pro-ordinals crowd are in the pole position, because in a world where it’s unclear who’s right and wrong, the default stance of most Bitcoin users is do nothing. And I think that’s usually the right way to operate.

Bitcoin has an inscriptions market because it can have an inscriptions market and it’s as simple as that. My prediction is that inscription cycles will be a part of our future going forward. Operating in hype cycles, similar to the way demand for Bitcoin’s own token operates in hype cycles. Will any of these ordinals hold long term value? Probably not but it doesn’t matter.

Ordinals are here, and I won’t be changing my node. At least, for now.