Key Takeaways
- Analyst Duo Nine warns that the shift of bitcoin to wrapped tokens and ETFs drains value from its native chain, and that this introduces risks long-term network security.
- Additionally, custodians and third parties are seen as attack vectors as they control a significant portion of Bitcoin.
- Bitcoin users are being encouraged to hold and transact directly on the native network to support network security,
Wrapped Bitcoin and ETFs
Duo Nine's X thread rgues that Bitcoin’s value is increasingly being moved off its native network through wrapped tokens like wBTC, cbBTC, and others.
These wrapped tokens cause Bitcoin’s value to sit idle, leading to a loss of transaction fees that fund network security.
DeFi’s rise exacerbates the problem according to Duo Nine, as more Bitcoin is locked in Ethereum and other networks, reducing native BTC transactions.
ETFs add to the issue, as they store Bitcoin with custodians who simply trade ETF shares without utilizing the BTC network.
Third Parties and Custodians
Duo Nine also highlights that third parties like BlackRock and Coinbase collectively hold millions of bitcoin.
As Bitcoin is increasingly controlled by custodians, users risk holding IOUs rather than real BTC, undermining self-custody. These custodians strip bitcoin of its intended use as a decentralized, secure currency.
Bitcoin holders are encouraged to transact on the native network, as fees support miners and ensure long-term security. Engaging directly with Bitcoin’s blockchain reinforces its value and prevents third parties from draining its liquidity.
Addressing the Author's Claims
While it is true that users themselves face a lot of threats and risks when they use third-party solutions like ETFs, exchanges, wrapped token contracts, and other custodians to store their bitcoin, it remains debatable whether this is a looming threat to the Bitcoin network.
The activity that the author highlights does not violate the Bitcoin network's consensus rules. It is perfectly legitimate and within the network's rules for a user to give up control of their coins to a third party.
The network does not differentiate between different addresses. By design, it is agnostic towards the identity and intent of those who use it, no matter the amount of bitcoin they possess.
Historically, there have been many such services and protocols on the network that have required users to give up control of their bitcoin, allowing it to sit idle on-chain while activity is moved off-chain. In fact, Chaumian ecash systems like Fedimint and Cashu are examples. Even self-custodial Lightning makes users' on-chain bitcoin sit idle.
None of this means that the value of Bitcoin will be affected in any way. The value of one Bitcoin is determined through a market discovery process based on the subjective valuations of individuals who decide to buy or sell it at particular prices in exchange for other forms of money or goods and services in the open market.
There are hundreds of millions of individuals and hundreds of thousands of entities that use Bitcoin in unknowable ways, and there will be many more who will use it in the future, also in unknowable ways. This means that demand for Bitcoin's blockspace cannot be predicted.
Looking at Bitcoin's blockchain, we can see that blocks are always filled by transactions despite the existence of third-party services that make Bitcoin sit idle on-chain, indicating persistent demand for blockspace.
In the end, there is no evidence that points towards a future where blocks will stop being filled.
