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February 27, 2023 16 mins

In a major twist in the digital-assets world, Bitcoin has added nonfungible tokens (NFTs) to its blockchain. The new protocol that makes them is called “Ordinals.” And just like anything in crypto, fierce debate has ensued about this on social media.

Bitcoin NFT proponents call the move a game-changer. Naysayers worry about potential pitfalls of Bitcoin NFTs — like rising transaction costs and environmental concerns. Higher fees could push Bitcoin away from its primary use as a decentralized currency. Plus, some hard-core Bitcoiners are also concerned that these NFTs could clog up the blockchain. 

Bloomberg reporters Emily Nicolle & David Pan join this episode and consider how the integration of NFTs impacts the network, Bitcoin and the broader crypto ecosystem.

Subscribe to the Bloomberg Crypto Newsletter at https://bloom.bg/cryptonewsletter 

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Episode Transcript

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Speaker 1 (00:00):
This is Bloomberg Crypto, a daily Bloomberg I Hood podcast,
and I'm Philip Logger Crancer, Senior editor for Crypto at
Bloomberg News. In Today for Stacy Marie Ishmael. It is Monday,
February the twenty seventh. In a major twist to the

(00:30):
digital assets world, Bitcoin has added non fungible tokens or
NFTs to its blockchain. The new protocol that makes them
is called Ordinals, and just like anything in crypto these days,
fierce debate has ensued about this on social media. Bitcoin
NFT proponents called the move a game changer. Naysayers, however,

(00:52):
worry about potential pitfalls and bitcoin NFTs like rising transaction
costs an environmental concert. Joining me today to discuss the
ins and outs of bitcoin NFTs are Bloomberg reporters Emily
Cool and David Pan. Emily and David, Welcome to the show.

(01:18):
We're gonna talk about NFTs on bitcoin. And they've been
around for a while, the NFTs, but they really it
was really kind of mid twenty one something like that
that they started to really rise into the public consciousness,
wasn't it? That is correct? So the first NFT went
back as early as twenty fourteen, but I didn't really

(01:40):
start gaining any momentum until later in twenty twenty one.
I think that was one of the best moments for
NFTs and a lot of artists that got involved in it,
and there are new marketplaces like open Sea super super rare,
and a lot of investors started paying attention to it
at the time. And Emily, what would you say, So far,

(02:02):
are the most famous or infamous if you want to
use that word instir NFTs? Up to this point, there
have been quite a few collections out there. I mean,
probably the biggest ones are either crypto punks they came
a little bit before, and then board apes, the ones
that really hit the scene in twenty twenty one. Those
are probably the two biggest out there, the ones that

(02:23):
seemed to attract it own million dollar sales. But obviously
in the last year or so, along with the rest
of the crypto market, prices souring. NFTs were no stranger
to that, and if anything, actually they were probably hit
a little bit worse. But because of that kind of
collectible nature of them, they're not seen as vital to
the ecosystem as cryptos like bitcoin, U and ether. When

(02:44):
we go back to looking at the rising popularity of
NFTs in twenty one and early last year. It wasn't
without any impact that you know, when these things started
getting minted and traded on mass, there was some impact
on the Etherium blockchain, which is where most of these
things are minted and live. As it were, wasn't their enemy. Yeah,

(03:08):
So as collections got more popular, more people would be
coming onto the space wanting to buy more. And the
way NFT collections work is typically there's a bunch that
get dropped at once into the market, either either known
as something through an air drop or minting, and so
when these big name collections would do fresh mints, there
would be a whole bunch of people clamoring to get

(03:31):
into the space, eager to get their token, their NFT
into their wallet and then mint the corresponding token that
would prove that it was THEIRS on the Ethereum blockchain,
and that rush of demand would push up the transaction
fees on Ethereum because so many people were trying to
do everything at once, it would slow down transactions for
everybody else because there was too many people on the network,

(03:51):
and that led to very very big spikes way, if
a piece of digital land in the suburb of twenty
twenty two would cost I don't know, three thousand dollars,
you're probably paying more than that in just the transaction
fees to mint the token for your NFT And all
this was happening on Ethereum, and it wasn't happening on
the biggest blockchain. It wasn't happening on Bitcoin. Why was

(04:14):
Bitcoin left out about this? So? I think it all
goes back to the ethos of these too large as
the blockchains. For Bitcoin is mainly designed as a cryptocurrency
way of pay, is designed initially as the pure to
pure payment network. For ethereum, you know, it came into

(04:35):
being later than Bitcoin. One of the main points for
Ethereum is that, you know, it is way more scalable
at a certain expense of security. You know, you'll be
able to scale up the projects and you know, decentralized
the applications on ethereum, so that you know what, the
training of anovitis and the minting and the naughts are

(04:56):
much easier to achieve on Ethereum than Bitcoin, just because
Bitcoin is not as scalable as the etherorem and so
it remained up until fairly recently when this protocol called
Ordinals decided to launched on bitcoin, and basically there was
this decision that NFTs could also live on bitcoin. What

(05:19):
was behind that, David? The idea of having a sort
of like an FT like project on bitcoin actually isn't new.
There were previous projects like colored coins, and some of
these ant like projects happened a long time ago. They
just didn't get any momentum. Part of the reason is

(05:40):
just because of all its technical upgrades didn't take place
at a time. Nowadays, when we talk about Ordernos protocols,
they are mostly enabled by two major upgrades are tap
root and Seguid. The creator of the protocol Ordinals protocol, Casey,
he started thinking about the protocol in January twenty twenty two,

(06:02):
which is roughly like a year ago, and then he
officially launched the project on the Midnight, which is the
real blockchain, a real Bitcoin blockchain, in January twenty twenty three.
So that's basically the history of the protocol and why
it didn't actually happen, you know earlier than this. One

(06:24):
word I see in stories about NFTs on bitcoin is
the word inscriptions. Is there a difference conveyed by the
word inscriptions and how how does that work? David? So,
so for ordinals it is shorthand for ordinal numbers, which
expressed the position of an object in a nutshell. The

(06:48):
protocol allows users to stand and receive the setosis, which
are you know, the smallest measuring unit of bitcoin recorded
on the blockchain. You know, they can carry option extra data,
non financial data like digital representation in ordinal progression. This
is like what I get, you know, from the interview

(07:10):
with the creator. And so that's you know, essentially how
it works for the protocol. And Emily, was there a
reason why, like why wasn't in theorium enough? There issues
beyond obviously we talked about the gas fees, but Ei,
there are other considerations behind why somebody would want to
launch nft SA. Bitcoin. Ethereum in itself does present several

(07:33):
inefficiencies in terms of entities. So yes, we spoke about
the gas piece already, but also it's a very popular network.
Most derivative tokens in crypto tend to run on ethereum.
So if you think about most stable coins, for example,
are typically running on ethereum. They're all called arc twenty tokens,
and that makes it very, very busy. And not only that,

(07:53):
Ethereum is also undergoing its own little life change. It's
recently switched from being a proof of work network to
proof of stage, which means that tokens are now mind
differently on Ethereum, and as it continues to go through
these upgrades, it's got several more to come in the
next few years. That probably means that creators need to
start thinking about where else they can do things like
kind ftse if there's a future for it. And bitcoin

(08:15):
is the world's most valuable token still at the minute,
I mean, I'm sure there are always reasons for that
network to be improved upon. And the hype that was
generated around a Thereum in the last few years has
definitely made some Bitcoin maxis very envious, so definitely, And
this kind of segues into an area that David, you

(08:38):
are really specialized in and you know everything about, and
that's mining. Mining of bitcoins is something that you've covered extensively.
How does this all this kinnot if you want to
call it a transition towards using bitcoin for NFTs, how
would that affect miners and the mining industry? So minors.

(09:00):
The income for bitcoin miners, it essentially comes in two parts.
The first part is the fixed amount of bitcoin rewards
currently it is about six and a half bitcoins from
a mining a block on the blockchain. And the second
part is the transaction fees. So if you want to
do a transaction, for example, treating bitcoin, and now you

(09:21):
have minting the bitcoin NFTs and they have to pay
a certain amount of fees, you know as the compensation
for the miners to maintain the blockchain and also validate
the transactions in the blocks. If there's more training volume
for the new kind of NFTs, that means there will
be increased in transaction fees for miners, which could be

(09:42):
very significant. Because you know, there's this event that happens
every four years within the bitcoin blockchain, which is called happening.
The blockchain is pre programmed to cut the first part
of the block rewards, which is the fixed amount of
a bitcoin you can get as an in half. So
like every four years, the protocol is automatically cutting the reward,

(10:07):
the first part of the reward in half. So that
means bitcoin miners they will receive much less rewards over
the time, so they need other revenue streams to replace
that to make up to that. So that's when the
bitcoin NFTs come in. So it could be a very
sustainable way for miners to get a compensation, especially after

(10:29):
the next halvening, which is scheduled in twenty twenty four.
There's one caveat, which is, like the inscriptions that Bacon NFTs,
it is still in the early stage. If you look
at the data it is treating volume for the you know,
for the number of NFTs bitcoin NFTs, it's in the
range of tens of thousand dollars, whereas the same number

(10:51):
for ethereum is about one point three million NFTs minted
in just last month, in just January twenty twenty three.
But is it fair to say that the miners are
sort of cautiously happy with this development? I also from
an economic perspective, yes, But like we have to understand that,
you know, some of the miners they are bitcoin maxis themselves,

(11:15):
and so even if it's beneficial, it's financially beneficial for them.
Some of them they're just really really hotcore bitcoiners and
they just don't like the idea that, you know, introducing
anything other than financial transactions onto the bitcoin network coming
up right after the break more with Bloomberg reporters Emily

(11:37):
Nicole and David Pan on Bitcoin NFTs will be right back.
Bitcoin maxis are ambivalent to unhappy. I guess you could

(11:57):
call it what's being the reaction from the unhappy camp
and why you've already sort of alluded to it, but
please expand a little bit. So when the protocol came
out about a month ago, and then there are especially
like at the beginning of the project that there was
so much backclash from the hardcore bitcoiners. And one of

(12:20):
the examples is, you know, Adam Back from Blockstrain, which
is the crypto infrastructure company. He publicly commented on the
project on Twitter saying something like this is like not necessary,
this is just the waste of resources. You already got
an ftsn etherian while are introducing that to the bitcoin blockchain,

(12:42):
and and then you know, put something put like monkey
jpacks or images onto the blockchain permanently, and then you
know kind of like getting the chain beloated. That's generally
the reaction. But over time I feel like people there
are more people from that camp started getting more inclusive
and getting more accepting to the idea because it is

(13:06):
boosting utility for the Bitcoin blockchain. You know, other than
just processing Bitcoin transactions, the blockchain now can be used
to mint and treat an ft s from artists and
digital artifacts on the blockchain. So you are seeing increased
use cases on the blockchain. So that's generally the progression

(13:29):
of this thinking process for the community. And Emily, I
kind of have to also include you here because you
are our sort of resident expert at covering crypto controversies
and the war of the blockchains as it were. What
do you make of all this and where do you
see this traveling? I think it's a very interesting debate

(13:50):
because it's not just about bitcoin, right, it's about the
future of crypto. A lot of crypto is supposed to
be the payments network of the future. That's always the
argument that bitcoin is the solution for global remistances. It's
the way that we're all going to transact one day,
even if even beyond Bitcoin you've got stable coins ether
that you know, the whole bunch and what the Bitcoin

(14:12):
Maximus community is tapping on here is that very argument
whether or not Bitcoin should be open to allowing other
forms of tokens to be minted on its network and
potentially reduce the ability for it to be used as
a payment's network or to kind of state stick with
what it knows and keep with that vision. Not that
it's been super successful at it so far, And that's

(14:34):
where I think this becomes really interesting, because if they're
going to be able to get past this, it's going
to take a lot of banding together. I think the
crypto community itself is still very split. You know, it's
not going to commit to regulators any better that bitcoin
is a safe place for consumers to be using as
a means of payment if even its creators and people
running the network aren't able to agree on exactly how

(14:55):
it should be run. And at that note, I think
we can call it a rap. Guys, thank you so much.
That was great, Thank you, thanks for having us. That
was Bloomberg reporters Emily Nicole and David Pan. You can
find more of their reporting on the Bloomberg terminal and
on Bloomberg dot com. For more, be sure to check

(15:17):
out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto,
a daily podcast from Bloomberg and iHeartRadio for more shows
from iHeartRadio. Visit the iHeartRadio app, Apple Podcasts, or wherever
you get your podcasts. Send us your comments, questions, or

(15:39):
suggestions for the show to Crypto at Bloomberg dot net.
The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our
senior producer is Janet Babin. Our producers are Mohammed Farouk
and Sharon Berriro. Our associate producers are Ty Butler and
Moses on Them. Desta wonder At is our original music

(16:01):
by Leo Sidron. I'm Stacy, Marie Ishmael. Have a great weekend.
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