Bankless - Nic Carter Discusses The Second Bitcoin Civil War

In this episode of Bankless which took place on February 27, 2024, David Hoffman hosted Nic Carter to discuss the complex interplay between technological advancements, financial integration, ideological evolution within the Bitcoin community, and more! Read our notes below to learn more.

Background

David Hoffman (Host) – Host of Bankless

Nic Carter (Guest) – General Partner at Castle Island Ventures

Bitcoin’s Civil War: Ideological Divides and Technological Evolution

Nic says the technology and financialization of Bitcoin are intertwined, and as ETFs and other financial products become more prevalent, there’s a need to show technological developments in Bitcoin to remain relevant.
David talks about a brewing civil war in Bitcoin, highlighting two camps: the filtering camp versus the Bitcoin rationalist camp. This division is based on differing views of Bitcoin’s utility beyond $BTC transfers.
The filtering camp advocates for Bitcoin to only support simple $BTC transfers, while the Bitcoin rationalist camp supports Bitcoin’s expressivity, including Ordinals, BRC-20s, and layer-2s. There are political fights over what gets merged into Bitcoin core, reflecting a divide in the Bitcoin community.
Nick Carter discusses his rejection of Bitcoin fundamentalism and his support for Bitcoin’s utility and expressivity.
David asks Nic if he considers himself a Bitcoiner, to which Nic responds by asking if owning Bitcoin is a prerequisite.
Nic describes the ongoing civil war in Bitcoin as a divide between fundamentalists or purists and moderates or integrationists, highlighting the longstanding nature of these internal conflicts.
David discusses the natural incentives of blockchain expressivity, using Bitcoin media’s engagement with Ordinals as an example. He says that media companies benefit from the drama and content generated by Bitcoin’s expressivity, such as NFTs, viewing it as a complement to their business model.
David contrasts the ideological opposition from Bitcoin fundamentalists with the economic rationality of media companies and VCs who appreciate the expressivity of its investible opportunities.
Nic appreciates Bitcoin media’s bold move into Ordinals, signaling a shift in the purist camp’s stance. He reflects on the Bitcoin civil war and observes the fracturing of the purist camp amid debates and the realization that ordinals are here to stay.
Nic sees the purists as less organized and says that the more adaptive Bitcoin participants are winning the ideological battle.
Nic explains Bitcoin Season Two as a move beyond the focus on lightning and scalability that marked Season One. He discusses the reinvigoration of Bitcoin development due to interest in ordinals and disillusionment with lightning, proposing that Bitcoin should explore alternatives to lightning and adopt successful technologies from other blockchains.
Nic says that the Bitcoin community gave Lightning a comprehensive trial, but it has fundamental limitations, such as UX complexity and capital inefficiency, that cannot be designed away. He says that most lightning transactions are now custodial, indicating a shift towards a more centralized model.
David categorizes lightning as a form of Bitcoin expression focused on payments, contrasting it with season two innovations like ordinals for data and NFTs, and explores potential layer-2 solutions for payments and smart contracts. He questions the reality of layer-2 solutions compared to the tangible success of ordinals.
Nic agrees, highlighting the real impact of NFTs on Bitcoin and the theoretical nature of new layer-2 solutions. He expresses excitement for the potential of BitVM and optimistic roll-ups, acknowledging their current theoretical status but anticipating significant advancements.

Bitcoin’s Future: BitVM, L2 Projects, and the Covenant Debate

David says that those building on BitVM are either seen as overly ambitious for building on something not fully realized or visionary for anticipating future developments.
Nic explains that they funded Bitcoin L2 and alternative L2 projects before knowing about BitVM, which is significant as it allows the creation of L2s without needing a soft fork amid a power vacuum in core development due to high turnover and inactive champions.
David asks about the implications of these developments for Bitcoin’s core direction, considering the shift from a lightning-centric approach amidst new ecosystem incentives.
Nic describes steering Bitcoin core as extremely slow, with glacial progress, highlighting the challenges in advancing soft forks and the stagnation around covenant proposals due to a lack of consensus and championing.
David notes the broad agreement among Bitcoiners on the value of covenants, except for a minor group, and presses for an explanation of covenants.
Nic defines covenants as transactions with predefined conditions, facilitating more complex transaction types. He addresses the debate on covenants’ role in scaling Bitcoin for the global south and dismisses the argument against covenants as classists, advocating for alternative scaling solutions.
David characterizes covenants as expressive transactions, broadening transaction capabilities within Bitcoin.
Nic mentions his role as a VC, not limited to Bitcoin, despite others’ misconceptions. He highlights the expanding opportunities for investment in Bitcoin-related projects, contrasting current prospects with the historically limited scope of Bitcoin VC investments.
Nic shares his excitement about the influx of high-quality founders and innovative projects in the Bitcoin space, including L2s and other infrastructure developments, marking it as an optimal time for VC investment in Bitcoin.
David contrasts Bitcoin’s external ecosystem with Ethereum‘s internal, endogenous systems like DeFi and NFTs.
Nic points out the ripe conditions for developing new infrastructure on Bitcoin, driven by the success of optimistic roll-ups on Ethereum, the influx of capital, and general excitement around Bitcoin. Disillusionment with lightning and other catalysts is fostering a perfect environment for Bitcoin infrastructure investments.
David discusses Bitcoin’s evolving utility, contrasting the traditional Rootstock, Sovryn approach with the emerging playful engagement in Ordinals. He suggests a cultural shift towards more active Bitcoin use is necessary to fully realize its endogenous potential.
Nic optimistically notes the improving user experience for Bitcoin-based activities, catalyzed by ordinals. This progress, supported by major exchanges developing dedicated wallets and tools, indicates a promising direction for Bitcoin infrastructure and utility.

Insights on BitVM, Layered Scaling, and Bitcoin’s Stability Challenges

Nic says that the key thing exciting him is BitVM, which enables optimistic roll-ups on Bitcoin, under certain security assumptions. He talks about the concerns about miners censoring fraud proofs are far-fetched and optimistically notes that BitVM could be out as early as mid-year.
Nic discusses the importance of technological development and financialization in Bitcoin, stressing the need to demonstrate progress to maintain investor interest, especially with ETF flows.
Nic explains his view on the internal, expressive, endogenous side of Bitcoin, considering it possibly a spiritual successor to the big blocker spirit, despite his own small blocker stance.
He critiques the big blocker approach for focusing solely on increasing block space and highlights the need for interesting use cases and the adoption of stablecoins within the Bitcoin community.
David says that while big blockers were wrong in their implementation, their spirit of wanting to do more with Bitcoin’s block space is correct.
He says that a harmony between the small and big blocker philosophies is emerging with innovations like BitVM and layer-2 solutions, leading to a vibrant and dynamic Bitcoin ecosystem.
Nic acknowledges the growing consensus around layered scaling and side chains as opposed to monolithic approaches to blockchain scalability.
He says that Bitcoin’s realization of the need for multiple scaling solutions marks a significant shift in its development strategy, moving away from an overreliance on a single approach.
Nic considers the hypothetical focus of ETH core developers on Raiden or other plasma technologies in 2024, suggesting the importance of adaptability in tech development.
Nic critiques Bitcoiners for their rejection of empirical data and resistance to adapt based on changing realities, particularly highlighting the rise of stablecoins as a dominant medium of exchange on blockchains.
He points out the dramatic increase in blockchain value settled through stablecoins, arguing that Bitcoin is losing its utility as a medium of exchange and collateral.
Nic recounts his efforts to prompt the Bitcoin community to develop a stablecoin strategy, only to be met with resistance and dismissal of current data in favor of a distant, speculative future.
He highlights the necessity of being data-driven in investment and asset allocation, lamenting the Bitcoin community’s reluctance to accept the significant role of stablecoins.
Nic compares the throughput of the Lightning Network and stablecoins, illustrating the vast difference in value settled and arguing for a reassessment of Bitcoin’s strategy regarding stablecoins.
Nic acknowledges the preference for using dollars over native crypto assets for transactions and collateral, framing it as a universal challenge rather than one exclusive to Bitcoin, and advocates for finding ways to synergize stablecoins with Bitcoin to benefit the protocol.

Bitcoin’s Role Debate: SOV vs. MOE, Displacement, and Ideological Challenges

David questions what happens if Bitcoin’s expressivity is overly expanded, leading to the displacement of $BTC by various technologies like ordinals, stablecoins, and layer-2s, wondering when the dilution of $BTC’s core value will end.
Nic reframes the question, discussing whether Bitcoin needs to be a medium of exchange (MOE) to succeed or if being a store of value (SOV) is sufficient. He says that Bitcoin’s SOV role is adequate and that its monetary properties are not compromised by additional features, which instead enhance its security through increased fee revenue.
Nic says that Bitcoin has already been displaced as a medium of exchange due to the preference of sovereign currencies and the impracticalities of Bitcoin transactions for everyday use. He suggests conceding defeat on the MOE front, noting that gold, similar to Bitcoin, is not commonly used for transactions despite its high market cap.
Nic proposes uniting the SOV and MOE aspects by possibly issuing stablecoins against Bitcoin, acknowledging the limitations of Bitcoin as a transactional currency while highlighting its value as a store of wealth.
Nic says that Bitcoin’s ideology acts both as a protective shield and a potential deterrent. He acknowledges the importance of ideological foundations in maintaining Bitcoin’s core values but also recognizes the challenges they present to those building on Bitcoin.

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Show Information

Medium: YouTube (Video)

Show: Bankless

Show Title: Nic Carter: The Second Bitcoin Civil War

Show Date: February 27, 2023