Only one month after being announced as Editor-in-Chief of Bitcoin Magazine, Mark Goodwin is releasing his premier book “The Bitcoin-Dollar.” The book takes readers on an illuminating journey through the intricate intersection of finance, technology and trust. This groundbreaking work delves deep into the essence of currency and commodity to offer a fresh perspective on the financial landscape of the digital age.
Goodwin posits that currency is not the only function of money; it’s a technology that acts as a conduit of trust across time and space. When looking at the history of monetary systems, the line between commodity and currency has been the defining linchpin. However, the dollar, long regarded as the emblem of stability, now finds itself facing an unprecedented challenger, thanks to Bitcoin. “The Bitcoin-Dollar” analyzes this inflection point in economic history, skillfully exploring the connection between the current world reserve currency and Bitcoin, delving into the profound shifts in money, settlement and economic policy of which the world is beginning to experience.
Mark Goodwin eloquently states, “Money is a language of trust, and Bitcoin is the latest dialect that humanity has created. This book explores the profound implications of this innovation.”
Ellen Sullivan, Publisher at Bitcoin Magazine Books, adds, “Mark Goodwin’s book is not only an invaluable addition to Bitcoin literature, it’s a reflection of the innovative spirit of Bitcoin Magazine Books. We aim to continue pushing the boundaries of financial discourse. With ‘The Bitcoin-Dollar,’ Mark is staking out new ground.”
For fans of Goodwin’s writing in both the online and print version of Bitcoin Magazine, the themes of this book will be familiar, but this book will be a treat for everyone, including readers who have yet to parse the well-rounded and thorough nature of his work. “The Bitcoin-Dollar” is essential reading for those seeking a deeper comprehension of the evolution of money in the digital era. Goodwin has an instinctive ability to break down topics into an easy-to-understand narrative and his book paints a picture of Bitcoin’s role in the current monetary transition. This book speaks to both Bitcoiners as well as a wider audience intrigued by the transformative potential of a decentralized, permissionless and trustless currency. “The Bitcoin-Dollar” serves as a compass to shed light on the way forward in the dynamic realm of digital currencies.
Mark Goodwin will be speaking and signing books at the Bitcoin Amsterdam conference, taking place at Westergas on October 12-13, 2023. This event is the perfect opportunity to meet the author and get a copy of his new book.
Erik Cason started his Bitcoin journey in 2012, setting in motion a trajectory that would lead him to working at Coinbase, where he spent four years democratizing access to Bitcoin. Cason’s time there inspired a path that meandered through the intellectual landscapes of cryptography, sovereignty and political implications surrounding this revolutionary technology. Today, Cason stands not only as an educator but also as a philosopher delving deep into the transformative potential of Bitcoin. It is with this expertise that Erik Cason announces the release of his first book “Cryptosovereignty” being published through Bitcoin Magazine Books.
This book is the culmination of Cason’s intellectual odyssey, and represents a profound exploration of Bitcoin’s role as a tool for personal empowerment and self-sovereignty. The collection of essays in this book dissects the fundamental ideals woven intricately into the fabric of Bitcoin. Cason’s writing unveils the immense potential for positive change enabled by Bitcoin’s invention and adoption. Yet, “Cryptosovereignty” transcends the conventional boundaries of financial discourse and propels us into the realm of philosophical contemplation.
Departing from the conventional narratives, Cason employs the lens of continental philosophy to offer a novel framework for comprehending Bitcoin. This framework extends beyond the realm of mere monetary value by examining the profound implications of cryptography and the establishment of an independent monetary system. At its core, “Cryptosovereignty” challenges the status quo, inviting readers to envision a world where the normative shackles of the past are broken, and individuals are bestowed with unprecedented control over their destinies.
“Bitcoin is not just about transactions and technology; it’s about personal freedom and empowerment. It’s about a new way of thinking that challenges conventional norms. Through this book, I aim to inspire readers to contemplate the deeper philosophical implications of Bitcoin and how it can pave the way for a more liberated future.” — Erik Cason
Ellen Sullivan, Publisher at Bitcoin Magazine Books, echoes Cason’s sentiments, expressing her enthusiasm for his work. She views “Cryptosovereignty” as an intellectual expedition that unravels the very heart of Bitcoin’s essence. Sullivan remarks, “Erik’s essays are a thought-provoking journey into the heart of Bitcoin’s essence. ‘Cryptosovereignty’ challenges us to envision a world where individuals have greater control over their destinies. I’m excited we can be a part of amplifying Erik’s important message with this book.”
“Cryptosovereignty” ponders Bitcoin’s philosophical journey beyond its cypherpunk origins, while staying true to the ethos of the sovereign currency. Erik Cason’s philosophical insights will resonate with Bitcoiners as well as any individual captivated by the societal changes happening throughout the world.
In a world where technology is often seen through the lens of utility and innovation, “Cryptosovereignty” reminds us of the profound philosophical currents coursing through the digital realm. It beckons us to question, to ponder and to envision a world where the individual’s sovereign power is not just a concept, but a lived reality empowered by the potential of Bitcoin.
A group of shareholders of the Grayscale Bitcoin Trust (GBTC) have banded together in the first-of-its-kind activist campaign organized through X (formerly Twitter). Their goal: bringing legal action against Grayscale in an attempt to force them to allow redemptions for customer cryptocurrency held within the trusts it operates and to repay “exorbitant” management fees.
Though initially a grassroots campaign, one of the largest GBTC and Grayscale Ethereum Trust (ETHE) shareholders, Alameda Research, has filed a lawsuit against Grayscale with numerous funds joining as plaintiffs: Fir Tree Partners, Saba Capital, Owl Creek Asset Management, UTXO Management and Aristides Capital. The complaint was filed in Delaware’s Chancery Court, with the assertion that Grayscale has breached its “contractual and fiduciary duties to Alameda and other trust investors.” The specific cause for complaint accuses Grayscale of charging excessive fees in addition to its refusal to allow for the redemption of bitcoin and ether. According to the court documents, Grayscale has charged over $1.3 billion in fees in the last two years alone. The plaintiffs are seeking to claw back those funds as well as renegotiate the fee structure of both GBTC and ETHE to “competitive rates.”
The participants in the Grayscale lawsuit created a website in order to gather additional shareholders to join their fight due to the trust documents which state that shareholders only have the right to bring a case like this one against the trust if unaffiliated parties collectively holding at least 10% of outstanding shares join together as co-plaintiffs.
The Grayscale Litigation website has additional details for those wishing to sign up to participate in the legal battle or for those wanting to find out more about the campaign. The initial deadline for joining the litigation is Sept. 1, with the last day by which Alameda is to respond to Grayscale’s motion to dismiss scheduled for Sept. 15.
The above is an overview of the case, but there are multiple related entities and nearly as many active lawsuits against the web of companies that operate and facilitate the trust, as well as one current case against the Securities and Exchange Commission (SEC) brought by Grayscale.
To fully understand the complexities, it’s helpful to step back and examine the structure and formation of GBTC as well as the events leading up to the lawsuits.
How Does GBTC Work?
Grayscale runs multiple cryptocurrency trusts with the most well known examples being GBTC and ETHE. These trusts operate similarly to each other, with Grayscale as the sponsor that manages the trust, including management fees and how they themselves can be replaced with a different sponsor. Shares of the respective trusts are issued by an authorized participant. In this case, the authorized participant of these trusts was for many years Genesis, an affiliate of Grayscale. Both companies are subsidiaries of the same parent company, Digital Currency Group (DCG).
In order for shares to be issued, interested parties had to deposit bitcoin (or ether) with Genesis, which then placed the assets into the trust and created shares that were locked up for a period of six months. After this six month period, the shares were considered seasoned and were able to be transferred to another party or sold in the secondary market.
These are currently one-directional trusts, meaning that the bitcoin (or ether) only goes into the trust and cannot currently be redeemed by surrendering shares. While Grayscale has claimed that they are not legally allowed to redeem shares, the legal complaint says that the firm has contradicted this by admitting that Regulation M under federal securities law does in fact provide approval for allowing redemptions so long as there is no ongoing share creation.
As the market grew, GBTC’s holdings peaked at roughly 650,000 bitcoin, the largest known single holdings of bitcoin in the world. The market value of that bitcoin is worth over $17 billion at the time of writing. Regardless of whether the shares are trading at a premium or at a discount, Grayscale receives 2% of the total bitcoin holdings on an annual basis as management fees. This equates to roughly 13,000 bitcoin, or nearly $350 million, in revenue from fees per year, making Grayscale extremely lucrative. These fees do not factor in the company’s other cryptocurrency trusts. Currently, there are approximately 624,366 bitcoin remaining in the trust.
In the past, the price of GBTC loosely followed the bitcoin price, but due to the six month lockup period, the share price became uncorrelated to the underlying bitcoin sitting within the trust. There were times when the trust traded at a premium of nearly 50%, meaning that the value of a share was being valued much higher than the equivalent bitcoin held in trust. This was positive for shareholders who could sell their shares at a price higher than the value of the underlying asset. However, in February 2021, shares no longer traded at a premium and instead traded at a discount below the net asset value (NAV). At their lowest point, shares were trading at nearly a 50% discount and continue to trade at a discount to this day, costing shareholders billions of dollars in lost share price value.
Why Would Someone Invest In GBTC?
Bitcoin is not often traded in traditional brokerage accounts, so investors who primarily trade through institutional exchanges, such as Charles Schwab or TD Ameritrade, would not be able to use their investment portfolio to purchase bitcoin. This includes those with 401(k) or individual retirement accounts.
Since there is not currently a spot bitcoin ETF for investors to get exposure to bitcoin, and especially during the times when GBTC was trading at a premium, buying shares in Grayscale’s trust was touted as a wise investment. If they wanted to invest directly in bitcoin, the only alternative option for investors with retirement accounts would be to liquidate their accounts and pay an early withdrawal penalty before being able to buy bitcoin on an exchange with the no longer tax-advantaged funds.
From its inception, Grayscale has always stated its intention to convert the trust into an ETF and is in active litigation against the SEC about this matter. An ETF product in the U.S. has to get approval from the SEC, whereas the company’s current trust structure does not require the same level of regulatory approval. Grayscale created this trust to allow people to buy bitcoin who otherwise wouldn’t be able to and it was considered a very innovative model at the time of its formation in 2013.
Grayscale was able to charge a relatively high annual fee of 2% for GBTC because this trust was a unique investment vehicle. Investors who were unable to gain bitcoin exposure in other ways were willing to pay this fee, especially if their shares could be traded at a premium to NAV. In recent years, these fees have become higher than competitive rates, as the lawsuit details.
A relevant part of the story is that Grayscale’s original authorized participant, Genesis, was lending millions of dollars to hedge funds, like Three Arrows Capital, allegedly on the condition that they parked the money in the Grayscale Trusts. In June 2023, after GBTC started trading at a discount, Three Arrows Capital blew up, sparking a wave of contagion events that bankrupted multiple cryptocurrency companies, such as Babel Finance, Voyager, BlockFi and FTX.
When Genesis filed for Chapter 11 bankruptcy in January 2023, it owed creditors over $3.5 billion. The graphic below demonstrates the convoluted chain of leverage among various cryptocurrency hedge funds, which allowed them to capitalize on the GBTC premium trade, thus creating an outsized Genesis lending book and ultimately leading to the crypto contagion in 2022.
The Grayscale Lawsuit
In addition to Alameda, there is a group of GBTC shareholders organizing in order to take action against Grayscale with the hopes of clawing back hundreds of millions in fees, renegotiating the fee structure moving forward and being granted the ability to redeem the customer bitcoin held in the trust. This lawsuit is a derivative action, meaning that it affects all shareholders and not just the shareholder filing the lawsuit.
To even be able to file a derivative action against the trust, multiple unaffiliated shareholders who jointly own at least 10% of shares outstanding need to join together as co-plaintiffs to bring the lawsuit, according to trust documents and Grayscale’s related arguments.
The shareholders accuse Grayscale of mismanagement and conflicts of interest. The conflicts of interest relate to all critical parties associated with the trust being subsidiaries of DCG: Grayscale as the sponsor, Genesis as the authorized participant and CoinDesk as the index provider for the bitcoin price. Other firms have offered to take over operation of the trust at a lower management fee that is more in line with industry standards, including Valkyrie Investments who published a letter offering to manage the trust with an annual fee of 0.75%.
In his end-of-year letter to investors, Grayscale Investments CEO Michael Sonnenshein stated, “We remain steadfast in our belief that the conversion of GBTC to an ETF is in the best interest of investors, and we remain 100% committed to that endeavor.” While he shared plans for a potential 20% tender offer, should that not be possible, the company “would instead continue to operate GBTC without an ongoing redemption program until we are successful in converting it to a spot bitcoin ETF.” This is in line with the company’s claims that they are unable to allow redemptions without express permission by the SEC and are only focused on their lawsuit against the SEC to allow the conversion of the trust into an ETF.
With shares trading at such a large discount and redemptions not allowed, shareholders are trapped unless they sell their shares at a considerable loss. Notable Bitcoin critic, Congressional Representative Brad Sherman, wrote a letter to SEC Chair Gary Gensler seeking clarification from the agency as to whether Grayscale is actually prevented from allowing redemptions. He also questions the company’s lack of an independent director on its board and its comparatively high fees, among other regulatory concerns.
The Alameda bankruptcy estate is leading a derivative action against Grayscale, claiming the sponsor has collected $1.3 billion in management fees in violation of its trust agreement. In a motion filed in the Delaware Chancery Court, Alameda said that it had assembled over 45 parties, including dozens of individuals, numerous funds and family offices, who indicated they were willing to participate as additional plaintiffs.
The motion details how the plaintiffs believed they reached the 10% threshold of shares, that is until a large shareholder who was expected to be a plaintiff dropped out without explanation, leaving Alameda below the necessary share count. The court granted the plaintiffs until Sept. 15 to gather the remaining support from shareholders.
The plaintiffs are putting out a call to any and all GBTC shareholders who are interested in joining the Grayscale lawsuit. Their website has more information and an intake process where shareholders can sign up before Sept. 1 to participate in the legal case against Grayscale.
Disclosure: David Bailey is the CEO of BTC Inc., the parent company of Bitcoin Magazine and UTXO Management. UTXO Management is a plaintiff in the Grayscale Litigation.
In April 2023, Bitcoin Magazine announced the launch of its new publishing branch, Bitcoin Magazine Books. The publishing arm of the company has already published five popular books by notable authors and is adding a well-known and prolific author to its lineup.
Jimmy Song is a seasoned Bitcoin developer, educator and entrepreneur with more than two decades of programming experience. In his new book, “Fiat Ruins Everything”, Song explores the ubiquitous debasement of money and how Bitcoin can fix the broken incentive structure of the financial system and society at large. The book leads readers to discover how Bitcoin offers the opportunity for a brighter future.
“As I delved into the intricacies of our modern systems’ decline, I realized that the erosion of value is not just monetary—it’s a pervasive force impacting every aspect of our lives. ‘Fiat Ruins Everything’ is an unflinching examination of this reality, but it’s also a beacon of hope. By exploring Bitcoin’s potential, we uncover a path towards restoring value, trust, and freedom in our world.” — Jimmy Song.
“Fiat Ruins Everything” offers a deep analysis into the various ways that almost all aspects of civilization have been debased thanks to fiat currency. Song presents this critique as a wakeup call for the average person to build awareness of the root issues of decaying culture, from eroding wages and diminishing quality of life to the erosion of community bonds and personal well-being. But the book does not stop with the negative aspects of society’s trajectory; Song offers a compelling argument for why Bitcoin holds the potential to reverse these trends.
“The modern world’s systems are showing cracks, and ‘Fiat Ruins Everything’ shines a spotlight on the underlying issues plaguing our society,” said Ellen Sullivan, Publisher of Bitcoin Magazine Books. “Jimmy Song’s analysis offers readers at all levels a way to understand why Bitcoin can be a catalyst for positive change.”
In addition to “Fiat Ruins Everything,” Song is the author of several other influential works, including “Programming Bitcoin”, “The Little Bitcoin Book”, “Thank God for Bitcoin”, and “Bitcoin and the American Dream”. He has served as a lecturer at the University of Texas, an expert witness in legal cases involving Bitcoin, and as an advisor to multiple companies. Through his weekly newsletter, “Bitcoin Tech Talk”, and his podcast, “Bitcoin Fixes This”, Song continues to share his expertise and insights with the broader community.
Jimmy Song will be signing books at the Bitcoin Amsterdam conference, taking place at Westergas on October 12-13, 2023. This gathering will be a perfect place for attendees to connect with the author and discuss the book’s themes.
Blockstream, a top-tier Bitcoin infrastructure firm, has joined forces with STOKR, a trailblazing digital platform for alternative assets based in Luxembourg. Their collaboration has birthed a new investment offering: The Blockstream ASIC (BASIC) Note.
During the latest bitcoin bull market, prices for bitcoin mining machines, otherwise known as ASICs, witnessed a significant surge. This was followed by a major crash, bottoming in December 2022. The value of ASICs tend to have a pattern: They seem to be undervalued during bear markets, while enjoying outperformance during bull runs. This pattern points to a potential profit shift when measured in bitcoin terms.
This new BASIC investment vehicle is seeking to raise $5 million through the sale of its Series 1 BASIC Notes, priced at $115,000 each. The aim? To acquire ASICs in bulk now, store them and then strategically sell them as the market rebounds, especially keeping the upcoming Bitcoin halving event in April-May 2024 in mind.
Considering the resounding success of the Blockstream Mining Note (BMN), which attracted $50 million from global investors through eight rounds between 2021 and 2022, the BASIC Note’s introduction has already garnered considerable market attention. This investment tool is designed to focus on a bitcoin-centric return strategy and fees are only charged when the product outperforms bitcoin.
Interestingly, the investment product will be pitched as an EU-compliant digital security on the Liquid Network.
The rationale behind the BASIC structure includes:
Market Forecasting: There’s a predicted surge in the bitcoin price, potentially from late 2023 to 2024. This is expected to couple with an increase in ASIC prices.
Supply/Demand Dynamics: With the imminent Bitcoin “halving” event on the horizon, miners are likely to update their machinery, pushing demand for modern, energy-efficient devices.
Liquidity and Access: As capital gradually becomes more available, miners will likely have better access to resources in order to procure ASICs.
Blockstream CEO and Co-founder Dr. Adam Back remarked, “Since our founding in 2014, Blockstream has continuously been a leader in Bitcoin mining, from providing world-class mining infrastructure to delivering innovative investment vehicles like the Blockstream Mining Note. The BASIC Note arrives at an opportune time in the market, presenting a unique and carefully timed investment opportunity for any bitcoin-focused portfolio.”
Arnab Naskar, STOKR’s Co-founder, envisions digital securities transforming capital markets and believes that products like the BASIC Note will play a significant role in bridging traditional finance with Bitcoin.
It’s worth noting that the BASIC Note won’t be accessible in every jurisdiction. Each Series will feature its own distinct set of BASIC Notes, issued via the Liquid Network.
After only four months since the protocol was launched, ord has its first contentious debate about what are known as “cursed” inscriptions.
The simplest definition of a cursed inscription is any inscription that does not currently get indexed and identified by ord. This term came about as a catchall when some people incorrectly used or purposefully misused opcodes to create inscriptions that were not able to be indexed by ord and would therefore be unrecognized and not given an inscription number.
This issue was first mentioned on April 25 in the ord github and the interim fix proposed by then lead developer Casey Rodarmor was to, “Modify ord to recognize the above currently invalid inscriptions, including retroactively in old blocks, but consider these new inscriptions ‘cursed’ and assign them negative inscription numbers.”
Funnily enough, the example inscription code on the Ordinals docs website would have been a cursed inscription.
There are many ways cursed inscriptions can be created. Any inscription with multiple inputs/outputs would be considered cursed. As shown above, certain misuse of opcodes such as OP_1 can lead to cursed inscriptions. Alternatively, the introduction of OP_66 using a value of “cursed” intentionally made these types of inscriptions by having an even numbered opcode which is not indexed by ord. Unless already defined in the spec, even numbered opcodes are not recognized because they are reserved for future protocol development. The full list of ways to create cursed inscriptions from issue #2045 is as follows:
Multiple inscriptions per transaction, for efficient batching.
Inscriptions on inputs after the first, which is useful for collections.
Multiple inscriptions on the same sat, so that the entire history of a sat doesn’t need to be checked to determine if a new inscription is valid.
Inscriptions with unrecognized even headers, so that new even headers don’t cause upgraded clients to disagree about inscription numbers.
There are a couple specific debates around cursed inscriptions. One of the disputes comes from the way that these inscriptions are currently numbered. Cursed inscriptions are numbered negatively in the order of their creation. Because of this numbering system and naming convention, some people purposefully chose to create inscriptions and collections that appear “cursed” whether by flipping the image of a positively numbered inscription or using a more sinister image theme when inscribing. The question is: Should these be appended to the index of positively numbered inscriptions or should they keep their negative inscription number when the code is updated?
Additionally, another contentious conversation is what to do about the certain type of cursed inscriptions that used the OP_66 opcode in their creation. Because this opcode is not recognized by ord and even numbered opcodes are intentionally left out for future development use, it is debatable whether inscriptions using this opcode should be included in the cursed set or if they should be rejected.
At the present time, the issue around the even number opcode is listed in the ord github. There are many comments in support of including these inscriptions in the index, but the lead maintainers of the protocol seem to be against it. As of now, the current stance by the developers is that these inscriptions would be unbound, meaning that they would not be assigned to a specific satoshi.
Remember, ordinal theory works based on a first in, first out tracking system for satoshis. Each inscription is assigned to the first satoshi in the genesis transaction when the inscription is created. This type of lens for looking at bitcoin allows images, files, text, etc. to be tracked and transferred. If a cursed inscription is unbound, it would not be associated with a specific satoshi and therefore would be unable to be transferred to another address. Many people who are inscribing are hoping to be able to sell or transfer their inscription to another person. While the inscriptions using this opcode will live forever on the Bitcoin blockchain, if these inscriptions are classified as unbound and unassigned to a specific satoshi, users who minted cursed inscriptions using this opcode would be unable to sell or transfer them.
Herein lies one of the bigger concerns for people who are spending money on transaction fees to create cursed inscriptions. If they are unable to sell them in the future, significant funds would have been wasted on fees. Many users have responded to the github issue, expressing support for including these inscriptions, but the code’s maintainers are not in favor of recognizing cursed inscriptions using the OP_66 even numbered opcode.
On May 30, the new lead maintainer of ord, Raphjaph, wrote, “As the protocol currently stands inscriptions are not valid if they use an unrecognized even tag, so this change already makes a concession by recognizing them. For now they are unbound but we might reconsider this and bind them in the future if there are strong reasons.”
This response is not what many inscribers were hoping to hear. Similar to Bitcoin, ord is open-source software so users can fork the code if they wish to recognize these specific types of cursed inscriptions. This contentious debate is ongoing and the path forward for ord remains to be seen. Users who spent significant sums on transaction fees may be willing to switch to a new version of ord that will recognize their cursed inscriptions, but this is only a theoretical path forward at this time.
Regardless, Ordinals are a new technology being built on Bitcoin. Whether inscriptions are a flash in the pan or if they have lasting power may depend on how this issue gets resolved.
After a public hearing, Buncombe County voted to approve a moratorium on bitcoin mining in order to craft zoning standards and regulations for special land use.
As first covered in Bitcoin Magazine on April 6, Buncombe County, North Carolina proposed a one-year moratorium on bitcoin mining and held a public hearing on May 2.
The text of the proposal stated that the moratorium, if approved, would go into effect the same day as the hearing, so it was readily apparent that the County Commission was simply following procedure when taking comments from the public.
Unlike other moratoriums in the state where no objections were voiced, Bitcoiners throughout the region spoke out in opposition. There were four speakers who spoke to various concerns about the one-year ban on commercial bitcoin mines.
Comments in support of Bitcoin ranged from safeguarding financial freedom, strengthening the grid through demand response programs, investment and use of sustainable energy, protecting first amendment rights, encouraging innovation and more.
There were three people in attendance that expressed their approval of the ban, citing concerns about noise and a desire to conserve energy usage in order to meet Governor Roy Cooper’s climate goals.
The moratorium passed unanimously.
From the Buncombe County website:
“The Buncombe County Board of Commissioners is moving forward with a moratorium on cryptocurrency mining. Commissioners approved the one-year ban after holding a public hearing during their meeting on May 2. The County’s current ordinances do not define cryptocurrency mining as a specific use. Cryptocurrency mining operations can negatively affect surrounding neighborhoods due to excessive energy use, e-waste, pollution, and noise. The temporary pause will help protect the public interest until regulations regarding cryptocurrency mining are adopted. The one-year ban is effective immediately through May 1, 2024.”
Bitcoin inscriptions have been out for a few more weeks, so we follow up on the fee market and block usage to observe what’s changed after 100,000 inscriptions.
The below is an excerpt from a recent edition of Bitcoin Magazine PRO, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
Addressing Bitcoin Decentralization & Block Space Concerns
New users have been flocking to Bitcoin to create what are known as inscriptions — often called NFTs (non-fungible tokens) on other blockchains. These mostly image files were increasing demand for Bitcoin block space, which caused some network participants to worry about Bitcoin’s future decentralization. If the cost to run a full node increases substantially due to users needing the storage space and bandwidth to download all this data that is unrelated to monetary transactions, fewer people might run full archival nodes, centralizing Bitcoin’s ledger.
The amount of cumulative storage used by inscriptions continues to climb with almost 3 GB of storage specifically related to inscriptions at the time of writing.
Should the block space consistently be used to its full extent of 4 MB, it will add approximately 210.24 GB of data to the chain each year, which isn’t a major cost hindrance for running a full node but can still be considered pricey in places where technology isn’t as cheaply available. There is the ability to run a pruned node which does not require storage of any of this witness data and only keeps track of Bitcoin’s monetary transaction data. However, in order to create a pruned node, users still must download all of the data initially. This is where the concerns for insufficient bandwidth come into play. In areas of the world where there isn’t access to high-speed internet, the initial block download might take so long that it won’t be possible to sync to the chaintip.
That being said, the expectation for Bitcoin’s block space was always that it would be full at some point, which is partially why there is a cap on the block size. This cap was raised during the SegWit soft fork and included the fee discount for witness data — like inscriptions — that is unrelated to Bitcoin’s financial ledger and its unspent transaction output (UTXO) set.
Bitcoin has been compared to a decentralized clock because of the way it keeps track of the order of transactions as they happen around the world. The nature of inscriptions on Bitcoin uses this ordering to number the inscriptions as they are written onto the blockchain, aka timechain. As the inscription count approached 100,000, people rushed to get their inscriptions confirmed before or exactly at that number. We saw the largest increase in fees around this time, which is shown above in dark green. By quickly glancing at the fee rate chart, it’s clear when the 100,000th inscription was made because of the most amount of fees greater than 25 sat/vByte.
After this monumental inscription number, the rush to create NFTs on Bitcoin has drastically decreased. While there is still a backlog of transactions in the mempool, the fees required to get a transaction confirmed in the next block have dropped considerably and the daily total fees spent on creating inscriptions is “down only.”
Even though the fees are down along with the total amount of money being spent on inscriptions per day, the number of pending transactions in the mempool remain high and constant, with no signs of letting up in the short term.
In this past mining epoch, blocks are being mined so quickly that there is an expected difficulty adjustment of nearly +11%.
“The expected ratchet upward in mining difficulty will take away some of the relief that operations were feeling in recent weeks, due to the increase in USD-denominated revenue. Miner revenue denominated in bitcoin terms will once again head to new lows.” — State Of The Mining Industry: Public Miners Outperform Bitcoin
This rapid rate of mining blocks has allowed for some of the inscription transactions with lower fee rates to be mined because blocks were getting mined faster than new transactions were being broadcast to the network.
Now that the initial rush to be an early inscriber is likely over, one theory for inscriptions is that they will become a buyer of last resort for block space in times when fees are low and fewer people are transacting on chain.
We will see if this thesis plays out. It’s possible that times of lower fees will be used by people opening up Lightning channels as well, which is one of the arguments against inscriptions as they potentially crowd out Bitcoin’s financial use cases.
There are unanswered questions about the bandwidth requirements for downloading an archival full node as well as the cultural questions of whether these non-monetary transactions should be happening on Bitcoin’s base layer or if it’s even possible to move them to a Layer 2.
Like this content? Subscribe now to receive PRO articles directly in your inbox.