Illegitimate bitcoin transactions
The longstanding compromise on transaction sizes, how Taproot and SegWit inadvertantly blew it up, and the nascent NFT protocol emerging in its wake
Special thanks to those who helped me get up to speed: Casey Rodarmor, Rijndael, an unnamed bitcoin developer
The purpose of bitcoin transactions has been a topic of longstanding debate since the formative days of bitcoin. Is bitcoin primarily for financial transactions, or should bitcoin instead be a secure, distributed data store for everything from app data to domain names? This controversy has been quiet for years based on a careful compromise that I will describe, however a design quirk of taproot has allowed a new NFT protocol called Ordinals to emerge that upends prior limits. Here, I will describe the early debate of what constitutes a “legitimate” bitcoin transaction, the negotiated limits established with OP_RETURN, and how SegWit and Taproot allowed Ordinals’ Inscriptions to end run these limits. This is an area of emerging controversy within bitcoin and my goal is to lay out the diverging points of view and put them in historic context.
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In 2010, there was a fierce debate on Bitcoin Talk over a proposal to support a DNS service on bitcoin called BitDNS. This proposal advocated for website domain names to be hosted on bitcoin and thereby benefit from its decentralized trustlessness and permissionlessness. However there was concern (including from Satoshi) that this would bloat the bitcoin blockchain, making it harder to do things like verify financial transactions, which were argued to be the primary (or only?) usecase for bitcoin:
“Piling every proof-of-work quorum system in the world into one dataset doesn’t scale. Bitcoin and BitDNS can be used separately. Users shouldn’t have to download all of both to use one or the other.” - Satoshi (Dec. 2010)
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