Casey Rodarmor, the creator of a new “Bitcoin NFT” protocol, may have accidentally solved Bitcoin’s security budget problem – the worry that there would be no financial incentive to mine bitcoin in the future because there is a fixed supply and transaction fees might not be enough – and kick-started a hullabaloo on Twitter between some of Bitcoin’s partisan factions. While Rodarmor’s Ordinals project has rejuvenated Bitcoin’s lackluster fee economy, many think putting non-fungible tokens (NFT) on the blockchain is more like adding spam. At risk of oversimplifying, Ordinals assigns each satoshi (the smallest unit of BTC) a sequential number, opening the door to inscribing sats with arbitrary data. That data can mean anything, as long as the transaction doesn’t exceed the 4 MB block size limit, including a playable version of the first-person shooter DOOM, a picture of a Bored Ape cross-pollinated with a CryptoPunk and a homage to the famous MSPaint-spawned Magic Internet Money Wizard (which almost took up an entire Bitcoin block). More transactions should mean more fees. Blocks full of transactions are better than blocks not full of transactions – not to mention the empty blocks (which does happen). Right now, miners make almost all of their money from the block subsidy in the form of newly minted bitcoins, but the subsidy will go away eventually leaving only transaction fees. A best-case scenario for Ordinal NFT’s longevity is they act as a buyer of last resort for blockspace. Since Ordinal NFTs are unusually large transactions, they will almost always be more expensive than normal peer-to-peer bitcoin transactions on a per-transaction basis even if they have low fee rates. That doesn’t necessarily mean Ordinals has solved Bitcoin’s long-term security budget problem: Users may be willing to wait longer to save money by paying a lower fee rate for Ordinals transactions, so that they are only included in blocks when market fee rates are comparatively low and blockspace is abundant. But there’s a risk that users would be unwilling to pay higher fees for Bitcoin’s original (and arguably only) use case: peer-to-peer financial transactions. Maybe then, almost all blocks will only include Ordinal NFTs and no other types of transactions forever. I think that’s unlikely, but it could happen. Sure Ordinal NFTs are fun-ish, but at the risk of sounding pompous, they are so much less consequential than bitcoin’s best use case of peer-to-peer, borderless, censorship resistant money. In all, my take is that Ordinal NFTs will be at its very best a means to strengthen the bitcoin transaction fee market and at worst a spectacular fad that fades away with no wider negative consequences for Bitcoin. – George Kaloudis @gckaloudis [email protected] | 