The Potential Dilemma of Bitcoin The Impact of Bitcoin Packaging and ETFs on Cybersecurity
Bitcoin has always supported miner income through block rewards and on-chain transaction fees, thereby maintaining network security. However, with the halving of block rewards and an increasing number of bitcoins being held by centralized institutions, the future of relying solely on transaction fees to replace block rewards seems pessimistic.
SEC Chairman’s comments on Bitcoin ETF: Centralized ETFs mock Satoshi Nakamoto’s decentralized vision
The Potential Challenges of Bitcoin
@DU09BTC analyzed the continuous dilution of Bitcoin mainnet fees, sparking extensive discussions within the crypto community.
Bitcoin is in trouble.
If nothing changes soon, things won’t be pretty.
I’m not talking about the halving schedule or block rewards, it’s much more serious than that.
A thread 1/17 ?pic.twitter.com/i1o9TZAlqX
– Duo Nine ⚡ YCC (@DU09BTC) October 27, 2024
1. Proliferation of Wrapped Bitcoins
Currently, there are numerous wrapped bitcoins in the market, such as wBTC, cbBTC, tBTC, etc. Each time bitcoins are wrapped, it means these native bitcoins will become dormant on the chain and no longer generate transaction fees.
These wrapped bitcoins are transferred to other blockchains like Ethereum, gradually diluting the value and liquidity of native bitcoins on the Bitcoin network. With the growth of DeFi, an increasing amount of bitcoin value is being exported and cannot function on the native chain.
@DU09BTC pointed out:
With the development of DeFi, more and more BTC will be idle on the native chain because their value has been exported through wrapped bitcoins. BitGo has wBTC, Coinbase has cbBTC, Kraken has kBTC, Threshold has tBTC. Do you think it ends here? What about in 10 years? There will be more!
2. Concerns about ETFs and Third-Party Custody
With the approval of multiple Bitcoin ETFs, asset management institutions like BlackRock and Coinbase hold a significant amount of bitcoin assets. However, these assets are not native bitcoins but are indirectly held through tokenized representations.
This means that even if ETF trading is active, the actual bitcoin transactions are not reflected on the native network. Such “value export” poses a potential threat to the security of the Bitcoin network.
3. Impact of Third-Party Custody on Network Security
When bitcoins are held in third-party custody, the ownership of assets becomes indirect. If these third parties fail to fulfill their commitments for specific reasons, asset holders will face risks. This further reduces transactions on the Bitcoin network, directly affecting miner income, weakening overall security, and contradicting the original purpose of Bitcoin.
The security of the Bitcoin network primarily relies on the significant computational power provided by miners, who depend on block rewards and transaction fees as income. When more and more bitcoins are held by third parties and external blockchains, it will compress the transaction fee income of Bitcoin (miners), ultimately leading to profit-driven miners leaving and impacting network security.
He asked:
If all the value of the Bitcoin mainnet is exported, who will pay for the network security of Bitcoin? Ethereum? Nasdaq? They won’t!
How to Respond?
@DU09BTC mentioned that these issues won’t immediately manifest, as Bitcoin’s block rewards will still be substantial in the next twenty years. However, the demand for Bitcoin from third-party institutions will continue to increase. In response, he suggests:
Avoid holding bitcoins through third parties: Hold bitcoins directly on the chain instead of relying on third parties.
Applications like Ordinals are beneficial for miner income and are part of Bitcoin’s future.
Earlier, Gavin Andresen, an early Bitcoin developer closely connected with Satoshi Nakamoto, also described a similar future. In 2021, he envisioned that by 2061, most Bitcoin transactions would not occur on the mainnet but would be locked in multisig outputs through multiparty computation and run on another chain through wrapping. By 2100, block rewards would approach zero, and high-value transactions on the Bitcoin mainnet would mostly occur between super whales (centralized exchanges, central banks, decentralized multisig addresses). Around 20 million bitcoins would still circulate on other chains, with value derived from their limited supply and being the world’s first scarce digital asset.
How to respond to Bitcoin’s potential challenges?
