Ordinals Upend BTC Mining, pushing transaction fees above mining rewards for the first time in years

For the first time since 2017, some bitcoin (BTC) miners are being paid more for processing transactions on the blockchain than they are being rewarded for creating new BTC, a potentially welcome development after the violence the industry has faced recently.

Bitcoin miners make money in two main ways: creating new BTC by crunching numbers and processing transactions on the network. Over time, the first – by design – has become less profitable; occasionally the reward is halved. That payment is currently 6.25 BTC, and will go down again next year.

So it creates a potential, existential threat to the profitability of mining in the long term: eventually, the mining reward may become quite small, and will eventually disappear (probably more than 100 years from now) when all BTC have been mined.

The big recent jump in profits from processing transactions could therefore be a welcome development, especially given the intense pain – including multiple bankruptcies – that has hit the mining industry during this crypto winter. The trend has gained so much momentum that on several occasions on Monday, mining pools such as Luxor Technologies and AntPool were paid higher transaction fees from recently added blocks than the 6.25 BTC mining reward.

Ordinals appear to at least partially explain the shift. This new project inscribes non-fungible tokens (NFTs) onto Bitcoin’s blockchain.

Their rise in recent months is a “cool example of how just when you think Bitcoin has gotten boring, there’s something waiting around the corner that surprises everyone,” said Colin Harper, chief content officer for mining pool Luxor Technologies that didn’t. Expect transaction fees to exceed the block reward between now and when the 6.25 BTC grant is halved.

Many people, according to Harper, are thinking about whether they can “envision a future where we completely replace the subsidy with the transaction fees, and many thought that was impossible before such a thing.”

Harper added, “Some people questioned whether Bitcoin blockspace could have use cases outside of settlement value,” but now “there are new uses for blockspace and any use of blockspace where people pay fees is good for Bitcoin in the long term.” The question for Harper is whether inscriptions and Ordinals have persistence or not.

The average transaction fee for Bitcoin has increased by more than 560% in May to $19.20, data from BitInfoCharts shows.