Ordinals, BRC-20 and money as an information system — Bitvo

Knowledge is wealth.

This is the underlying philosophy of George Gilder, carried over into his new book Life After Capitalism.

In his previous book, Knowledge and Power, Gilder explored economics and money through the lens of information theory. In information theory, new information is a surprise, and the growth in wealth is a byproduct of this new information in the form of knowledge.

New information as a surprise is high risk because it can move thinking and markets both up and down. And it is through the accumulation of knowledge that we achieve growth in wealth.

Bitcoin was a surprise. So, too, were the elements that were developed using components of the Bitcoin blockchain.

And in spite of quiet market conditions and a volatile regulatory environment in crypto, new ideas, and concepts are still being explored and knowledge created.

More recent surprises from Bitcoin are ordinals and BRC-20 tokens.

The result of these two innovative insights may create a fundamental shift in the concept of money and what it means.

But first, a brief review of these innovations.

From Bitcoin to Ethereum and back

Bitcoin is the original cryptocurrency and the foundation of the entire industry. The new knowledge provided by Bitcoin led to an explosion of innovation in response to it.

Each response was an iteration. Developers took core principles of this unique decentralized, fully automated, peer-to-peer payment system and evolved them into new concepts. The results were numerous new bits of knowledge into what works and what doesn’t.

This process led to the development of Ethereum. Ethereum took the vision of the core concept and evolved it into a layer to support an ecosystem on top of it. Here, the payment system is converted into a fully automated, decentralized layer for additional fully decentralized and automated infrastructure based on various financial interactions.

On Ethereum, you got the evolution of Nick Szabo’s concept of the smart contract and the early vision of Larimer and Buterin’s Decentralized Autonomous Organization. These developments vastly expanded the vision of what the knowledge embedded in the original Bitcoin concept might be capable of.

The smart contract and DOA-enabled infrastructure facilitated additional leaps in knowledge through experimentation and new information.

The results were non-fungible tokens, stablecoins, and a wide range of other fungible and wrapped tokens. There were also decentralized exchanges (DEX), automated market makers (AMM), and numerous other products, including lending and synthetic digital assets.

Ethereum spurred more competition and exploration around various elements of the blockchain and token infrastructure. The result is a rapidly evolving crypto stack with thousands of projects creating new knowledge and discoveries.

Bitcoin’s focus remained on its core concept, the peer-to-peer decentralized payment system. To that came the addition of the Lightning sidechain until some upgrades created an opportunity in the message element..

Ordinals, NFTs and inscriptions

Ordinals take advantage of the numbering and messaging properties (witness signature field) of Bitcoin that are seldom used. In what is referred to as ordinal theory, the concept is a way of individually recognizing each individual satoshi. You will recall that a satoshi or “sat” is a subunit of the bitcoin token. One BTC can be subdivided into 100,000,000 sats, each with a unique number to identify and track it.

On the ordinals.com site, they go into detail about the rarity of just the numbering element of sats. As you look at the logic, it starts to look like the way that early NBA Top Shots were priced in the secondary market. The value of identical Top Shots in a limited run, earlier numbers were valued more highly. The value might also be higher if the Top Shot number in the series matched that of the player in it.

So, this is an interesting way of looking at what is a fungible token and utilizing the tracking element to recognize uniqueness and potential value.

From this came the idea of adding elements to the message section to create NFTs. The difference is that these NFTs are part of the Bitcoin Core infrastructure rather than using smart contracts for minting. As a result, they are part of the Bitcoin blockchain automatically. And because there are no smart contracts on Bitcoin, these are called inscriptions.

Here, each satoshi becomes a packet of potential future value.

Of course, this wasn’t entirely well received across all of Bitcoin. Transaction fees and a flood of transactions to the mempool have slowed down getting added to a block and increased the cost. And Bitcoin Maxi’s were less than enthusiastic.

Then there’s the BRC-20 tokens.

Bitcoin’s BRC-20 standard

BRC is a new concept for Bitcoin, which usually uses BIP for its changes. BRC borrows conceptually from the Ethereum ecosystem. The tokens, however, are built on the foundation provided by ordinals on Bitcoin.

The BRC-20 token standard allows for the creation of fungible tokens inside a sat using ordinal theory. So, in other words, the ability to create a fungible token ecosystem inside of Bitcoin using the benefits and advantages of the Bitcoin blockchain.

To date, over 200 BRC-20 tokens have been created using the BRC-20 token standard. These tokens have a meager market cap. And like ordinals themselves, the reception hasn’t been all horns, hats and whistles.

Two additional standards look like they are in the works, including SRC-20 using the stamps protocol and ORC-20.

These protocols are an alternative to the existing Liquid Network created by Blockstream. On Liquid, you convert your BTC into LBTC and use the Liquid network to develop NFTs, fungible tokens, and potentially other financial products.

The idea of building token economies within sats of a bitcoin adds layers of abstraction to the leading cryptocurrency. And it may be the kind of information that changes even more fundamentally how we see money.

Abundance of wealth through knowledge

George Gilder’s latest book attempts to bring together a lifetime of work into a new economic vision. This vision is based on the information theory of economics.

Gilder sees the accumulation of knowledge, rather than money, as wealth. To demonstrate this concept, he looks at the semiconductor, which is one of the driving forces behind our multi-trillion-dollar world economy. Semis are made from three of the most plentiful elements on earth. So, it is not the materials that are used to make a semi that creates value.

It is the knowledge of how to assemble these materials into a product where all the wealth comes from. It is the knowledge that is infused into the design, development, and deployment of the chip that confers the value. And as knowledge accumulates, it creates abundance and more wealth.

He goes on to talk about how if you measure the price of an item and divide it by the average hourly wage of a worker, you come up with time prices. The idea is to explore the amount of time worked relates to the same level of good over time.

The concept of time prices comes from Marian Tupy and Gale Pooley, who wrote the book Superabundance and contributed a chapter each in Gilder’s book. Time prices reflect the accumulation of knowledge in the form of increased abundance and modest increases in prices for a large number of goods relative to the growth of average wage of the worker.

Given the increase in world population over the last couple of decades, and despite apocalyptic warnings of scarcity, there is more, not less, of everything.

That’s because more minds creating more knowledge create and accumulate more wealth.

As we have argued previously, one of the great limiting factors of our economic worldview is that of scarcity rather than abundance.

And Gilder goes on to diagnose this same issue with money.

Is money tokenized time?

In his book, Gilder calls money tokenized time, and it is time itself that Gilder believes is the only limited resource. The problem is that money in the current system is again infused with the scarcity story. The scarcity story means centralization of control over money and the ability to weaponize it.

When we think of money, we are told that it’s a medium of exchange, a storehouse of value, and a portable unit of account. It can be many things depending on what you believe.

But also appears to be a form of derivative. Under the gold standard, the dollar was a derivative of gold. Today the dollar is a derivative of an abstraction, which is full faith and credit in a government. Or rather, in the productive capacity of the nation over which that government has the power to extract the fruits of productive capacity.

When you back a dollar by something fixed like gold or silver, you are creating a derivative. Just like a stablecoin, like, say, USDC is, in simple terms, a derivative of the dollar that it represents.

Even a bitcoin could be considered a form of derivative. BTC represents the underlying computer power and energy resources to maintain a network. And once issued, according to Jeff Tucker, it derives its value from the value of the peer-to-peer decentralized payment infrastructure.

Gilder takes a different tack on this. He believes a new gold standard is required by using the stable rate of gold production over time. Here, the rate of production becomes a measurement, like a meter is for distance. The natural growth of gold production reflects the assessment that wealth in the form of knowledge also grows over time along with population. There are no predefined limits beyond the long term natural rate of production.

In Gilder’s view the fixed monetary system, like the old gold standard, fails to take into account the natural growth in wealth resulting from the growth in knowledge.

And this limitation based on scarcity drives money into centralized control.

Which is why he is critical of Bitcoin.

The limiting nature of Bitcoin’s scarcity

Gilder’s criticism of Bitcoin is because it would appear to suffer from the same scarcity principle as the old gold standard. Which he says makes it the perfect characteristic of a speculative asset.

A point no trader will be complaining about.

In the book Capital Without Borders, Brooke Harrington describes in detail the history of trusts. The lineage of trusts was a byproduct of an age where land was the primary source of wealth. The Industrial Revolution created a change in how these structures were used because wealth now included capital assets. This was a perfect example of the new information, surprises and the accumulation of knowledge.

If capital grows as a byproduct of knowledge accumulation, so too must money to accommodate the change.

And in the modern world, that means the need for a decentralized approach where one entity cannot control a limited money supply to favor some or to punish others.

Now, getting back to Jeff Tucker’s piece on Bitcoin, we see the power of Bitcoin through a different lens, that of a powerful payment innovation based on the principles of decentralization. And the value of the tokens is a reflection of the value of that system.

This is where the idea of a hedge or an option makes a lot of sense. Holding BTC can be viewed as a hedge against disaster and access to a system if you get cut off from the traditional one.

Although some make the argument that the loss of electricity makes it useless.

Well, that’s true. But try getting some gas with cash when the power is down. Money can’t buy what won’t flow.

But Bitcoin is also an example of an expression and expansion of knowledge.

What happens if money becomes a source of accumulated surprises?

There are 21 million bitcoins, of which over 19 million have been rewarded. Some of these are gone for good, lost to garbage dumps. Others have been surrendered to wallets with passwords so good their owners couldn’t remember them.

The limited number of BTC is either an advantage or potentially a disadvantage, depending on your point of view. But when you add in ordinals, the capacity of the chain to embed knowledge inside a token might be a significant new innovation.

One of the great challenges of a changing world is moving from the thing we know to the thing which is different. Bitcoin as is, represents a different relationship in many ways. But it also draws on what we know to some extent.

And the criticisms of BTC and the crypto space, while frequently warranted, also reflect the origin of many of the ideas critiqued, which is the system we use today.

Bitcoin the blockchain is a form of accumulated knowledge, and hence wealth in Gilder’s view.

Now let’s imagine taking a token and infusing it with new information and knowledge. Like adding elements to sats as in ordinal theory or creating BRC-20 tokens.

If knowledge is wealth, as Gilder asserts, how does this change what a bitcoin could be?

Could money move from simply a vehicle or expression of time to an embedded base of knowledge?

Maybe ordinals will be the first step in evolving the concept of money from tokenized time to a form of accumulated tokenized knowledge.

Time will tell.

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Bitvo is a crypto trading platform regulated with FINTRAC as a Money Services Business and as a restricted dealer with the Canadian Securities Administrators.

Originally published at https://bitvo.com on August 16, 2023.