The Limitations Of Inscriptions

Limitations on inscriptions

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Throughout history, humanity has developed tools to make their life easier; when we come up with a new tool, we will look at every possible problem it can solve. That is the nature of the experimentation and how we progress and find solutions. 

For every solution we have today, there were a million missteps and failures that have long been forgotten. Bitcoin is yet another tool we have at our disposal, and as the world figures out what to do with it, you’ll see all sorts of weird and wonderful applications of the technology. 

As the saying goes, if all you have is a hammer, then everything looks like a nail, and I think this applies to the whole “blockchain” and “tokenisation” of everything. Bitcoin was able to use this technology to create a self-referencing system that works for money. 

The innovative technology of Bitcoin and its underlying blockchain is undoubtedly transformative, but it only works in a narrow band. The Bitcoin blockchain works as a form of truth because everything is maintained and audited in a contained system with an open protocol. These rules are maintained by nodes and audited every 10 minutes; the chain can only enforce rules stipulated within the protocol. 

The chain’s job is to maintain the UTXO set and validate transactions as funds move from wallet to wallet; that’s as far as it goes. 

Bitcoin has its limits.

Thinking Bitcoin does any more than that, you begin to move away from verification and introducing trust and start to see Bitcoin or its blockchain being applied to use cases where it is not as useful. 

The launching of Ordianls and inscriptions has seen a lot of the broken NFT narratives moving over to Bitcoin, repackaged and sold to an audience as a solution that is simply fiction. 

First, we had the NFT mania, then the unregistered securities trend of BRC-20 tokens, building speculative secondary markets for people to gamble on. This market severs a particular risk-tolerant cohort, and if people wish to gamble and use Bitcoin as a settlement layer, they are welcome to do so, but let’s be honest about it. 

It doesn’t take much to see the element of absurdity in this market, but as that niche market reaches its TAS (Total Amount of Suckers), a new narrative is required. 

One of the touted capabilities of the Bitcoin blockchain is the ability to add inscriptions or arbitrary data into transactions and that this has any meaning to the chain or outside. Inscriptions have been pitched to secure legal documents/agreements, verify asset ownership, and power it with Bitcoin’s unstoppable network.

While at first glance, this seems like a potential way to secure third-party agreements such as contracts or wills, this is a superficial argument at best and uses a shallow understanding of how Bitcoin works. Using a deeper understanding of how Bitcoin and its blockchain work, the inscription use case quickly unravels to reveal some fundamental flaws.

Since It’s important to separate the hype from reality, I thought I would do my best to arm you with arguments against Inscription use for real-world transactions, so let’s begin.

Arbitrary Data Isn’t Always True.

A blockchain is designed to be used as a distributed ledger; while there is no shortage of distributed ledgers available today, none have reached a point of decentralisation apart from Bitcoin. This is part of the reason why using Bitcoin block space as a storage method is so attractive versus using other blockchains; you have the security of knowing it cannot be tampered with by any one person.

A decentralised ledger like Bitcoin allows invidious to record transactions which are verified and stored across many computers known as nodes so that the record cannot be altered retroactively. While this makes it secure and tamper-proof, it doesn’t ensure the truthfulness of the inscribed data. 

Inscribed data is not part of Bitcoins consensus rules; the protocol doesn’t recognise it nor has the ability to verify the authenticity of the inscribed data. Just because something is inscribed on the Bitcoin blockchain does not make it true. The blockchain merely verifies that a transaction happened, not the validity of the data within the transaction.

If real contracts are embedded into the Bitcoin blockchain, so can fake ones, duplicates or incorrect ones due to user error, and the Bitcoin blockchain wouldn’t be able to tell the difference. 

The Oracle Problem

A fundamental issue is what’s known as the “Oracle problem.” This term refers to the need for a trusted source of information, or Oracle, for data that is used in smart contracts. While blockchain can provide a trustless way to capture and store an agreement, it is reliant on the data it uses being accurate. 

Blockchain does not have the capability to verify the truth or falsity of real-world information. Therefore, the Oracle problem creates an inherent level of trust necessary for inscriptions to work, which contradicts the trustless nature of blockchain.

Posting Updates and Corrections.

Another major issue arises when considering updates or corrections to existing inscriptions. If we’re using Bitcoin block space to secure contractual agreements, and agreements change, what happens? Does the original inscription remain valid for all time, so you can never make a mistake or change your mind?

If not, then you would need to broadcast an updated inscription that references the old one from a previous block and stating this is a newer version that needs to be honoured. 

But if you can update contracts, doesn’t that make the entire permanency of using the Bitcoin blockchain irrelevant? 

The process of posting an update or correction to an inscription would be both costly and potentially self-defeating, as every amendment would need a new transaction. It just seems like an unnecessary ceremonial transaction that could become costlier with time.

Moreover, the existence of conflicting versions could undermine the credibility and integrity of the inscribed information.

Burden of Proof and Due Diligence.

Another crucial aspect to consider is the burden of proof that accompanies any claim made via inscriptions. Without a third-party verifier, anyone can inscribe claims or data onto the blockchain, and this could be false, misleading, or fabricated. 

Verifying the truthfulness of these claims then becomes a huge challenge. This lack of accountability opens the door for misuse and even outright scams, making it a risky proposition for any serious use case.

Legal Enforcement Challenges.

Inscriptions on the Bitcoin blockchain do not have any inherent legal standing. While they may record an agreement or intent, they can’t compel compliance or provide a means of enforcement.

Legal systems around the world are based on centuries of precedent, legislation, and regulation, which cannot be easily replaced or bypassed by a technological solution, particularly one that operates across national boundaries like Bitcoin. 

In many cases, inscriptions may not even be recognised as valid by courts or regulators.

Enforcement of Laws or Rule of Law.

While Bitcoin’s blockchain can confirm that a transaction has occurred, it can’t enforce laws or rules beyond its own protocol. For example, it can’t legally bind parties to a contract inscribed within a transaction or enforce penalties if the terms of the contract are not met. Thus, third-party enforcement is still necessary, making inscriptions less useful for legal agreements.

If you have the deed to your home inscribed on the Bitcoin blockchain and you sell the home, you still need 3rd party registers to honour the fact that you want to seal the agreement in the Bitcoin blockchain and enforce it. If the real estate agent, municipality, or local government doesn’t recognise Bitcoin inscriptions as a valid land title, then it means nothing that you paid transaction fees to inscribe it. 

Any arbitrary data and agreements outside Bitcoins remit will always require rule of law and third parties to recognise and ensure the transfer of assets or agreement of terms between parties are honoured. 

The Risk of Fake Data and Duress Agreements

There’s no foolproof way to prevent the inscription of fake data or agreements made under duress on the blockchain. The immutable nature of blockchain could, paradoxically, make it an ideal medium for disinformation or coercion.

If we do live in a world where inscriptions are used to honour title deeds, wills, shareholder certificates etc, it would mean anyone who has access to your seed could sign and claim ownership of anything inscribed with that seed phrase, and you would have no claim over it, if private key signing is law.

It would mean anyone could either socially engineer access to all your legal documents and assets, malicious parties you deal with could purposefully inscribe a fraudulent file, or you could suffer a $5 wrench attack in person, and they claim ownership of your assets.

How would the blockchain solve these issues? It cannot; this is where the rule of law and law enforcement come into play.

Inscriptions and Key Loss.

The management of private keys in a system using inscriptions for third-party agreements poses a significant risk. The loss or compromise of private keys that control an inscription could lead to an irreversible loss of control over the inscription. 

In such cases, there would be no recourse or way to restore access, as Bitcoin’s design emphasises irreversibility and doesn’t inherently offer any recovery mechanism for lost keys. This risk is even more pronounced in the context of legal agreements or contracts where significant value might be at stake.

Centralised Recovery Management.

If the keys to a contract are lost, there needs to be a recovery mechanism in place. However, this means involving a centralised entity, which negates the decentralisation aspect of Bitcoin and its blockchain.

Inscriptions on the Bitcoin blockchain may seem attractive for securing information, but the limitations, costs, and potential pitfalls make it far from an ideal solution. To make it work, you would always need a centralised issuer to manage the contracts, assets and agreements to ensure their integrity. 

In the case of STOs on the Liquid Network, as an example, you can whitelist your wallet with KYC and then use it to hold your securities. If you were to lose your keys, the centralised issuer can declare the previous security tokens null and attribute your security tokens to your new whitelisted address. 

The Illusion of Decentralisation

The notion of using inscriptions for recording contracts, wills, and other legal agreements tends to give a false impression of decentralisation. While Bitcoin itself is decentralised, the process of creating and managing inscriptions is not necessarily so. 

You often need a trusted party to craft and post the inscription, another to interpret the inscriptions if they’re not readily understandable, and yet another entity to act when the inscriptions’ conditions are met or violated. This considerably centralises the otherwise decentralised nature of Bitcoin, contradicting the primary value proposition of the blockchain.

Scaling and Privacy Issues

Inscriptions inherently bloat the Bitcoin blockchain with data not related to Bitcoin transactions. This can lead to scaling issues, as every node in the network must store and process this additional data. Beyond the economic and performance considerations, this also raises privacy concerns. While Bitcoin transactions are pseudonymous, inscribing identifiable information could expose users to potential privacy breaches.

Do you honestly want to have your will and testament embedded on the blockchain for anyone to download? It’s not as if files downloaded off the chain have any additional security and can be opened, making this a major privacy issue for individuals or companies using inscriptions.

Technological and Human Errors.

The human component in the process of creating inscriptions is also a potential source of error. As with any system, the risk of mistakes in encoding information is a reality. If an individual were to post a contract with the incorrect names or terms, how would they go about broadcasting a retraction? What if certain data needs to be removed or redacted? How would that be conducted? 

There is also the risk of technological errors, such as bugs in the software used to create and manage inscriptions. These errors could result in permanent and uncorrectable mistakes inscribed on the Bitcoin blockchain.

Just because we can, doesn’t mean we should. 

Ordinals and Inscription is an interesting and notable feature of the Bitcoin blockchain, but their practical implementation presents numerous challenges and issues. 

While it might be tempting to envision a world where all agreements and contracts are secured on the blockchain, the reality is more complex and nuanced. Blockchain and Bitcoin hold tremendous potential in transforming various aspects of our societies and economies, how we transact, manage money and price goods and services, but it is vital to understand the inherent limitations and address them pragmatically. 

Just as we wouldn’t use a hammer to fix every problem, we shouldn’t view Bitcoin inscriptions as a universal solution. Each tool has its place, and we must use them wisely and appropriately.

Which side of the ordinals debate are you on?

Do you like the idea of bringing NFTs to the Bitcoin base chain, or is it a distraction? Does it bring additional utility or a new set of narrative attack vectors for Bitcoin? How do you think the incentive structure around transactions will change with this new form of transaction competing for on-chain block space?

Let us know in the comments below.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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