WEBVTT - What are Bitcoin NFTs?

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg I Hood podcast,

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<v Speaker 1>and I'm Philip Logger Crancer, Senior editor for Crypto at

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<v Speaker 1>Bloomberg News. In Today for Stacy Marie Ishmael. It is Monday,

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<v Speaker 1>February the twenty seventh. In a major twist to the

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<v Speaker 1>digital assets world, Bitcoin has added non fungible tokens or

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<v Speaker 1>NFTs to its blockchain. The new protocol that makes them

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<v Speaker 1>is called Ordinals, and just like anything in crypto these days,

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<v Speaker 1>fierce debate has ensued about this on social media. Bitcoin

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<v Speaker 1>NFT proponents called the move a game changer. Naysayers, however,

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<v Speaker 1>worry about potential pitfalls and bitcoin NFTs like rising transaction

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<v Speaker 1>costs an environmental concert. Joining me today to discuss the

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<v Speaker 1>ins and outs of bitcoin NFTs are Bloomberg reporters Emily

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<v Speaker 1>Cool and David Pan. Emily and David, Welcome to the show.

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<v Speaker 1>We're gonna talk about NFTs on bitcoin. And they've been

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<v Speaker 1>around for a while, the NFTs, but they really it

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<v Speaker 1>was really kind of mid twenty one something like that

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<v Speaker 1>that they started to really rise into the public consciousness,

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<v Speaker 1>wasn't it? That is correct? So the first NFT went

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<v Speaker 1>back as early as twenty fourteen, but I didn't really

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<v Speaker 1>start gaining any momentum until later in twenty twenty one.

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<v Speaker 1>I think that was one of the best moments for

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<v Speaker 1>NFTs and a lot of artists that got involved in it,

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<v Speaker 1>and there are new marketplaces like open Sea super super rare,

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<v Speaker 1>and a lot of investors started paying attention to it

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<v Speaker 1>at the time. And Emily, what would you say, So far,

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<v Speaker 1>are the most famous or infamous if you want to

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<v Speaker 1>use that word instir NFTs? Up to this point, there

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<v Speaker 1>have been quite a few collections out there. I mean,

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<v Speaker 1>probably the biggest ones are either crypto punks they came

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<v Speaker 1>a little bit before, and then board apes, the ones

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<v Speaker 1>that really hit the scene in twenty twenty one. Those

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<v Speaker 1>are probably the two biggest out there, the ones that

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<v Speaker 1>seemed to attract it own million dollar sales. But obviously

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<v Speaker 1>in the last year or so, along with the rest

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<v Speaker 1>of the crypto market, prices souring. NFTs were no stranger

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<v Speaker 1>to that, and if anything, actually they were probably hit

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<v Speaker 1>a little bit worse. But because of that kind of

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<v Speaker 1>collectible nature of them, they're not seen as vital to

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<v Speaker 1>the ecosystem as cryptos like bitcoin, U and ether. When

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<v Speaker 1>we go back to looking at the rising popularity of

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<v Speaker 1>NFTs in twenty one and early last year. It wasn't

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<v Speaker 1>without any impact that you know, when these things started

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<v Speaker 1>getting minted and traded on mass, there was some impact

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<v Speaker 1>on the Etherium blockchain, which is where most of these

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<v Speaker 1>things are minted and live. As it were, wasn't their enemy. Yeah,

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<v Speaker 1>So as collections got more popular, more people would be

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<v Speaker 1>coming onto the space wanting to buy more. And the

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<v Speaker 1>way NFT collections work is typically there's a bunch that

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<v Speaker 1>get dropped at once into the market, either either known

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<v Speaker 1>as something through an air drop or minting, and so

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<v Speaker 1>when these big name collections would do fresh mints, there

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<v Speaker 1>would be a whole bunch of people clamoring to get

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<v Speaker 1>into the space, eager to get their token, their NFT

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<v Speaker 1>into their wallet and then mint the corresponding token that

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<v Speaker 1>would prove that it was THEIRS on the Ethereum blockchain,

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<v Speaker 1>and that rush of demand would push up the transaction

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<v Speaker 1>fees on Ethereum because so many people were trying to

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<v Speaker 1>do everything at once, it would slow down transactions for

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<v Speaker 1>everybody else because there was too many people on the network,

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<v Speaker 1>and that led to very very big spikes way, if

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<v Speaker 1>a piece of digital land in the suburb of twenty

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<v Speaker 1>twenty two would cost I don't know, three thousand dollars,

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<v Speaker 1>you're probably paying more than that in just the transaction

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<v Speaker 1>fees to mint the token for your NFT And all

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<v Speaker 1>this was happening on Ethereum, and it wasn't happening on

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<v Speaker 1>the biggest blockchain. It wasn't happening on Bitcoin. Why was

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<v Speaker 1>Bitcoin left out about this? So? I think it all

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<v Speaker 1>goes back to the ethos of these too large as

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<v Speaker 1>the blockchains. For Bitcoin is mainly designed as a cryptocurrency

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<v Speaker 1>way of pay, is designed initially as the pure to

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<v Speaker 1>pure payment network. For ethereum, you know, it came into

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<v Speaker 1>being later than Bitcoin. One of the main points for

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<v Speaker 1>Ethereum is that, you know, it is way more scalable

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<v Speaker 1>at a certain expense of security. You know, you'll be

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<v Speaker 1>able to scale up the projects and you know, decentralized

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<v Speaker 1>the applications on ethereum, so that you know what, the

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<v Speaker 1>training of anovitis and the minting and the naughts are

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<v Speaker 1>much easier to achieve on Ethereum than Bitcoin, just because

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<v Speaker 1>Bitcoin is not as scalable as the etherorem and so

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<v Speaker 1>it remained up until fairly recently when this protocol called

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<v Speaker 1>Ordinals decided to launched on bitcoin, and basically there was

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<v Speaker 1>this decision that NFTs could also live on bitcoin. What

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<v Speaker 1>was behind that, David? The idea of having a sort

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<v Speaker 1>of like an FT like project on bitcoin actually isn't new.

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<v Speaker 1>There were previous projects like colored coins, and some of

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<v Speaker 1>these ant like projects happened a long time ago. They

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<v Speaker 1>just didn't get any momentum. Part of the reason is

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<v Speaker 1>just because of all its technical upgrades didn't take place

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<v Speaker 1>at a time. Nowadays, when we talk about Ordernos protocols,

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<v Speaker 1>they are mostly enabled by two major upgrades are tap

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<v Speaker 1>root and Seguid. The creator of the protocol Ordinals protocol, Casey,

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<v Speaker 1>he started thinking about the protocol in January twenty twenty two,

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<v Speaker 1>which is roughly like a year ago, and then he

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<v Speaker 1>officially launched the project on the Midnight, which is the

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<v Speaker 1>real blockchain, a real Bitcoin blockchain, in January twenty twenty three.

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<v Speaker 1>So that's basically the history of the protocol and why

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<v Speaker 1>it didn't actually happen, you know earlier than this. One

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<v Speaker 1>word I see in stories about NFTs on bitcoin is

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<v Speaker 1>the word inscriptions. Is there a difference conveyed by the

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<v Speaker 1>word inscriptions and how how does that work? David? So,

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<v Speaker 1>so for ordinals it is shorthand for ordinal numbers, which

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<v Speaker 1>expressed the position of an object in a nutshell. The

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<v Speaker 1>protocol allows users to stand and receive the setosis, which

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<v Speaker 1>are you know, the smallest measuring unit of bitcoin recorded

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<v Speaker 1>on the blockchain. You know, they can carry option extra data,

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<v Speaker 1>non financial data like digital representation in ordinal progression. This

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<v Speaker 1>is like what I get, you know, from the interview

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<v Speaker 1>with the creator. And so that's you know, essentially how

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<v Speaker 1>it works for the protocol. And Emily, was there a

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<v Speaker 1>reason why, like why wasn't in theorium enough? There issues

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<v Speaker 1>beyond obviously we talked about the gas fees, but Ei,

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<v Speaker 1>there are other considerations behind why somebody would want to

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<v Speaker 1>launch nft SA. Bitcoin. Ethereum in itself does present several

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<v Speaker 1>inefficiencies in terms of entities. So yes, we spoke about

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<v Speaker 1>the gas piece already, but also it's a very popular network.

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<v Speaker 1>Most derivative tokens in crypto tend to run on ethereum.

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<v Speaker 1>So if you think about most stable coins, for example,

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<v Speaker 1>are typically running on ethereum. They're all called arc twenty tokens,

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<v Speaker 1>and that makes it very, very busy. And not only that,

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<v Speaker 1>Ethereum is also undergoing its own little life change. It's

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<v Speaker 1>recently switched from being a proof of work network to

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<v Speaker 1>proof of stage, which means that tokens are now mind

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<v Speaker 1>differently on Ethereum, and as it continues to go through

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<v Speaker 1>these upgrades, it's got several more to come in the

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<v Speaker 1>next few years. That probably means that creators need to

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<v Speaker 1>start thinking about where else they can do things like

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<v Speaker 1>kind ftse if there's a future for it. And bitcoin

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<v Speaker 1>is the world's most valuable token still at the minute,

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<v Speaker 1>I mean, I'm sure there are always reasons for that

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<v Speaker 1>network to be improved upon. And the hype that was

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<v Speaker 1>generated around a Thereum in the last few years has

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<v Speaker 1>definitely made some Bitcoin maxis very envious, so definitely, And

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<v Speaker 1>this kind of segues into an area that David, you

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<v Speaker 1>are really specialized in and you know everything about, and

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<v Speaker 1>that's mining. Mining of bitcoins is something that you've covered extensively.

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<v Speaker 1>How does this all this kinnot if you want to

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<v Speaker 1>call it a transition towards using bitcoin for NFTs, how

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<v Speaker 1>would that affect miners and the mining industry? So minors.

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<v Speaker 1>The income for bitcoin miners, it essentially comes in two parts.

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<v Speaker 1>The first part is the fixed amount of bitcoin rewards

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<v Speaker 1>currently it is about six and a half bitcoins from

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<v Speaker 1>a mining a block on the blockchain. And the second

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<v Speaker 1>part is the transaction fees. So if you want to

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<v Speaker 1>do a transaction, for example, treating bitcoin, and now you

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<v Speaker 1>have minting the bitcoin NFTs and they have to pay

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<v Speaker 1>a certain amount of fees, you know as the compensation

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<v Speaker 1>for the miners to maintain the blockchain and also validate

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<v Speaker 1>the transactions in the blocks. If there's more training volume

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<v Speaker 1>for the new kind of NFTs, that means there will

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<v Speaker 1>be increased in transaction fees for miners, which could be

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<v Speaker 1>very significant. Because you know, there's this event that happens

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<v Speaker 1>every four years within the bitcoin blockchain, which is called happening.

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<v Speaker 1>The blockchain is pre programmed to cut the first part

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<v Speaker 1>of the block rewards, which is the fixed amount of

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<v Speaker 1>a bitcoin you can get as an in half. So

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<v Speaker 1>like every four years, the protocol is automatically cutting the reward,

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<v Speaker 1>the first part of the reward in half. So that

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<v Speaker 1>means bitcoin miners they will receive much less rewards over

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<v Speaker 1>the time, so they need other revenue streams to replace

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<v Speaker 1>that to make up to that. So that's when the

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<v Speaker 1>bitcoin NFTs come in. So it could be a very

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<v Speaker 1>sustainable way for miners to get a compensation, especially after

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<v Speaker 1>the next halvening, which is scheduled in twenty twenty four.

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<v Speaker 1>There's one caveat, which is, like the inscriptions that Bacon NFTs,

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<v Speaker 1>it is still in the early stage. If you look

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<v Speaker 1>at the data it is treating volume for the you know,

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<v Speaker 1>for the number of NFTs bitcoin NFTs, it's in the

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<v Speaker 1>range of tens of thousand dollars, whereas the same number

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<v Speaker 1>for ethereum is about one point three million NFTs minted

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<v Speaker 1>in just last month, in just January twenty twenty three.

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<v Speaker 1>But is it fair to say that the miners are

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<v Speaker 1>sort of cautiously happy with this development? I also from

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<v Speaker 1>an economic perspective, yes, But like we have to understand that,

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<v Speaker 1>you know, some of the miners they are bitcoin maxis themselves,

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<v Speaker 1>and so even if it's beneficial, it's financially beneficial for them.

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<v Speaker 1>Some of them they're just really really hotcore bitcoiners and

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<v Speaker 1>they just don't like the idea that, you know, introducing

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<v Speaker 1>anything other than financial transactions onto the bitcoin network coming

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<v Speaker 1>up right after the break more with Bloomberg reporters Emily

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<v Speaker 1>Nicole and David Pan on Bitcoin NFTs will be right back.

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<v Speaker 1>Bitcoin maxis are ambivalent to unhappy. I guess you could

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<v Speaker 1>call it what's being the reaction from the unhappy camp

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<v Speaker 1>and why you've already sort of alluded to it, but

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<v Speaker 1>please expand a little bit. So when the protocol came

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<v Speaker 1>out about a month ago, and then there are especially

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<v Speaker 1>like at the beginning of the project that there was

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<v Speaker 1>so much backclash from the hardcore bitcoiners. And one of

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<v Speaker 1>the examples is, you know, Adam Back from Blockstrain, which

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<v Speaker 1>is the crypto infrastructure company. He publicly commented on the

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<v Speaker 1>project on Twitter saying something like this is like not necessary,

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<v Speaker 1>this is just the waste of resources. You already got

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<v Speaker 1>an ftsn etherian while are introducing that to the bitcoin blockchain,

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<v Speaker 1>and and then you know, put something put like monkey

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<v Speaker 1>jpacks or images onto the blockchain permanently, and then you

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<v Speaker 1>know kind of like getting the chain beloated. That's generally

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<v Speaker 1>the reaction. But over time I feel like people there

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<v Speaker 1>are more people from that camp started getting more inclusive

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<v Speaker 1>and getting more accepting to the idea because it is

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<v Speaker 1>boosting utility for the Bitcoin blockchain. You know, other than

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<v Speaker 1>just processing Bitcoin transactions, the blockchain now can be used

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<v Speaker 1>to mint and treat an ft s from artists and

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<v Speaker 1>digital artifacts on the blockchain. So you are seeing increased

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<v Speaker 1>use cases on the blockchain. So that's generally the progression

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<v Speaker 1>of this thinking process for the community. And Emily, I

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<v Speaker 1>kind of have to also include you here because you

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<v Speaker 1>are our sort of resident expert at covering crypto controversies

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<v Speaker 1>and the war of the blockchains as it were. What

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<v Speaker 1>do you make of all this and where do you

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<v Speaker 1>see this traveling? I think it's a very interesting debate

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<v Speaker 1>because it's not just about bitcoin, right, it's about the

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<v Speaker 1>future of crypto. A lot of crypto is supposed to

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<v Speaker 1>be the payments network of the future. That's always the

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<v Speaker 1>argument that bitcoin is the solution for global remistances. It's

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<v Speaker 1>the way that we're all going to transact one day,

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<v Speaker 1>even if even beyond Bitcoin you've got stable coins ether

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<v Speaker 1>that you know, the whole bunch and what the Bitcoin

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<v Speaker 1>Maximus community is tapping on here is that very argument

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<v Speaker 1>whether or not Bitcoin should be open to allowing other

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<v Speaker 1>forms of tokens to be minted on its network and

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<v Speaker 1>potentially reduce the ability for it to be used as

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<v Speaker 1>a payment's network or to kind of state stick with

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<v Speaker 1>what it knows and keep with that vision. Not that

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<v Speaker 1>it's been super successful at it so far, And that's

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<v Speaker 1>where I think this becomes really interesting, because if they're

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<v Speaker 1>going to be able to get past this, it's going

0:14:39.040 --> 0:14:41.000
<v Speaker 1>to take a lot of banding together. I think the

0:14:41.040 --> 0:14:44.800
<v Speaker 1>crypto community itself is still very split. You know, it's

0:14:44.800 --> 0:14:47.040
<v Speaker 1>not going to commit to regulators any better that bitcoin

0:14:47.200 --> 0:14:49.520
<v Speaker 1>is a safe place for consumers to be using as

0:14:49.560 --> 0:14:53.080
<v Speaker 1>a means of payment if even its creators and people

0:14:53.160 --> 0:14:55.480
<v Speaker 1>running the network aren't able to agree on exactly how

0:14:55.560 --> 0:14:58.080
<v Speaker 1>it should be run. And at that note, I think

0:14:58.200 --> 0:15:01.560
<v Speaker 1>we can call it a rap. Guys, thank you so much.

0:15:01.840 --> 0:15:06.560
<v Speaker 1>That was great, Thank you, thanks for having us. That

0:15:06.840 --> 0:15:10.640
<v Speaker 1>was Bloomberg reporters Emily Nicole and David Pan. You can

0:15:10.760 --> 0:15:13.760
<v Speaker 1>find more of their reporting on the Bloomberg terminal and

0:15:13.920 --> 0:15:17.000
<v Speaker 1>on Bloomberg dot com. For more, be sure to check

0:15:17.040 --> 0:15:27.640
<v Speaker 1>out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto,

0:15:27.880 --> 0:15:31.720
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0:15:39.560 --> 0:15:42.520
<v Speaker 1>suggestions for the show to Crypto at Bloomberg dot net.

0:15:45.760 --> 0:15:49.480
<v Speaker 1>The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our

0:15:49.520 --> 0:15:53.360
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0:15:53.400 --> 0:15:56.760
<v Speaker 1>and Sharon Berriro. Our associate producers are Ty Butler and

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<v Speaker 1>Moses on Them. Desta wonder At is our original music

0:16:01.680 --> 0:16:06.520
<v Speaker 1>by Leo Sidron. I'm Stacy, Marie Ishmael. Have a great weekend.