“Bitcoin is about incentives and aiming for incentive compatibility.”
The following commentary about Bitcoin, the blockchain, and the hotly debated OP_Return limit removal is by our venture partner Jonathan Bier from Farside Investors.
We have republished it here in it’s entirety, without any editing.
The OP_Return Limit
The Bitcoin Core software repository recently removed the policy limit on the size of an OP_Return output. This is an output type designed to store arbitrary (non-transaction) data in Bitcoin’s blockchain. With the limit in place, Bitcoin Core nodes would not relay transactions which breached this limit. However, it is not a consensus rule and Bitcoin Core nodes would always accept a block containing such a transaction as a valid block.
The removal of this limit proved somewhat controversial, with some arguing that the limit is necessary to deter or prevent spam. Many advocates of keeping the limit in place, want Bitcoin to be used only for “financial transactions” and want to keep things like image related data as non-standard transactions.
The Ordinals Boom
However, there has already been a boom in storing images on Bitcoin’s blockchain. This boom happened at the start of 2023 and was called Ordinals. Instead of using OP_Return outputs, the images are stored in the input script for Taproot spends. The majority of these Ordinals transactions are already standard, they are relayed by Bitcoin Core nodes. In some circumstances this Taproot method is cheaper than OP_Return, because they benefit from the 75% witness discount from the SegWit upgrade.
Ordinals usage has been strong, according to a dashboard on Dune.com, there have been over 88 million inscriptions, paying over 7,000 bitcoin in transaction fees. Based on the current Bitcoin price, this is over $660 million. Businesses have been set up in the Ordinals space, hoping to capitalise on the growth and millions have been invested into Ordinals related tools, such as wallets, inscription trading systems and methods of creating Ordinals and submitting them to the network.
Many regard these images as spam. In our view, in this context, we like to think about spam from the perspective of the intent of the person creating the transactions. Are they trying to deliberately cause harm to others or are they trying to benefit personally? With this in mind, we do not think storing images in the blockchain is spam, as the people doing this seem to mostly be doing it for their personal enjoyment or to speculate and to try to profit. However, to the extent that people are putting images on the blockchain to troll others, which is happening to some extent, then yes it is spam.
While images on the blockchain may seem spammy to many, we agree with the Subjective Theory of Value:
The value of various consumer goods and services does not reside objectively and intrinsically in the things themselves, apart from the individual who is making an evaluation. His valuation is a subjective matter that even he cannot reduce to objective terms or measurement.https://mises.org/articles-interest/subjective-theory-value
Some people seem to like images on the blockchain and have spent over $600 million in fees on them. Who are we to question that, when the value of these goods is subjective? All we can say is that we do not value these images and that we won’t be paying for them. In our view, it’s highly likely that businesses and people investing in this area with the hopes of profiting, will end up losing their money. But let the market decide!
Our point is that the horse has bolted, people already do use the blockchain for images on a mass scale and keeping the OP_Return limit won’t change that. The systems are already in place to use part of the Taproot input script for images, which is 4x cheaper per byte than OP_Return anyway.
Bitcoin Mining
At Farside, we have been investing in the Bitcoin mining space for over 10 years. We have seen Bitcoin mining transition from a hobbyist endeavour to an industry of listed companies. There are 10 of these public companies we follow closely and we read pretty much all of their public disclosure documents. These miners all report their financial statements each quarter and update the market each month on their monthly production figures. We regularly speak to the investment relations officials and the management teams of these companies. These management teams love Ordinals, they see them as a potential revenue driver. A critical revenue driver in a tough competitive industry. The idea that Ordinals are spam and should be filtered, does not and will not resonate with these professional management teams. Some may not like it, but this is the business reality. This is the reality some of us always expected. Bitcoin has grown, it’s a business and businesses need to maximise earnings and return on equity.
Bitcoin is about incentives and aiming for incentive compatibility. Bitcoin doesn’t work because the space consists of a group of altruistic and well meaning people, with common goals. The Bitcoin space consists of a wide diversity of people, with different perspectives and philosophies. Bitcoin doesn’t work because we are all on the same team, it works because it is robust and incentives are aligned. In our view, it’s time to remove the paternalistic guardrail of the OP_Return limit and embrace the economic reality of blockspace markets.
If larger OP_Return outputs are kept non-standard but people still want to use them anyway, miners will just launch businesses which receive these transactions directly, bypassing the public memory pool. The largest listed miner, Marathon [MARA US] has already done this. However, our understanding is the service Marathon provides is currently not popular. Nevertheless, if miners start to receive transactions out of band, this has many negative consequences for Bitcoin. This would mean that the differences between the transactions in the blocks miners produce and what users expect to see, will increase. This could break technologies like Compact blocks, which helps blocks propagate across the network faster, by removing the need for nodes to download transactions twice (once for the mempool and again once it’s in a block). It is probably sensible for Bitcoin Core to preemptively remove the limit to make sure Compact blocks do not break. If it does break and block propagation delays increase, then this could benefit larger miners and larger pools, at the expense of smaller miners, increasing mining centralisation.
Miners and pools launching businesses to accept non-standard transactions also has other negative consequences. There are costs in setting up such businesses, technical costs and marketing costs for instance. This business model is also potentially monopolistic, with users wanting to use one simple platform to submit their non-standard transactions. This increases the barrier to entry in mining and mining pools, making mining more difficult for smaller players. Which again, causes more centralisation pressure. Once these systems gain traction, it could be challenging to stop these businesses, even if Bitcoin Core policies are later relaxed. For example once the infrastructure is built, lazy customers could continue using these services instead of the public mempool.
In our view, it is desirable for Bitcoin developers to try and remain competitive. To make the open source transaction selection algorithm competitive at maximising revenue, to stop miners building their own proprietary algorithms and also to make the public mempool competitive, to stop miners building private mempool businesses. We appreciate that not everyone sees it that way, but this is the economic reality of the mining space now.
Node Runners
If one assumes that the blockchain is full, then increased usage of OP_Return actually makes it easier to run a full node. Remember, OP_Return doesn’t benefit from the witness discount, therefore the maximum size of a block consisting of OP_Return outputs is 1MB, far smaller than the 4MB maximum. At the same time, the OP_Return outputs can be pruned and they do not bloat the UTXO set. OP_Return is just data that does not require verification and can then be disregarded. Those concerned about cheaper node operating costs have nothing to worry about from the removal of the OP_Return limit.
Conclusion
Therefore, in our view, the technical downsides of removing the OP_Return limit are low, while there are some benefits. We also consider this a minor change to the software. We are therefore supportive of the removal of the limit and do not agree that its removal should be considered especially controversial. It is time to face up to the economic realities and be competitive, we want the public mempool to be the winner.
Cadenza Chronicle 