The siphoning of Bitcoin liquidity into DeFi protocols, exchange-traded products, and custodial services constitutes a ‘vampire attack’ on the network, threatening its security, according to researcher Duo Nine.
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
“Bitcoin is in trouble. If nothing changes soon, the situation will be unpleasant. I’m not talking about the halving schedule or block rewards, it’s much more serious,” the expert stated.
He noted that the network’s security is maintained by miners, whose income from fees should increase over time. However, trends within the cryptocurrency ecosystem are leading to a decline in real on-chain activity.
One such trend, according to Duo Nine, is the increasing prevalence of ‘wrapped’ bitcoins in the decentralized finance sector. The native coins backing these tokens remain largely immobile within their own network, while liquidity and fees flow into DeFi projects on Ethereum and other blockchains.
“BitGo has wBTC, Coinbase has cbBTC. Kraken launched kBTC, and Threshold has tBTC. Do you think this will just stop? What will happen in 10 years?” the researcher questioned.
This issue also pertains to the spot Bitcoin ETFs approved in the US earlier this year. Eleven exchange-traded structures have collectively amassed over $20 billion worth of the cryptocurrency.
All these coins remain inactive with custodians, as traders buy and sell ETF tokens, with their value “exported and abstracted from the native network.”
6/ This year, Bitcoin got 11 ETFs approved. Together, they bought over $20 bil worth of BTC so far.
Where is all that BTC? Sitting in a wallet with some custodians, DOING NOTHING!
Plus, the ETFs on NASDAQ are selling and buying ETF tokens, NOT native BTC coins! pic.twitter.com/sUbvK1DeCq
— Duo Nine ⚡ YCC (@DU09BTC) October 27, 2024
This aspect also affects the storage of bitcoins accumulated by corporations like MicroStrategy in their reserves.
According to Duo Nine, the involvement of third-party custodians in these schemes threatens the loss of digital gold’s advantages as trustless money.
“BlackRock, Coinbase, wBTC, or cbBTC sell you an IOU, which literally means: ‘I owe you,’ providing in return a useless token,” the expert noted.
To maintain network security, he recommended self-custody of bitcoins and maximizing blockchain usage, including “edge cases” like Ordinals or Runes.
Duo Nine acknowledged that the issues he identified do not pose an immediate threat to the network—block rewards will sustain miners’ income for the next two decades.
In comments, some argued that the real threat lies in storing cryptocurrency with third-party custodians. The appeal of mining is largely regulated by the mining difficulty mechanism.
Regarding the decline in on-chain activity, users noted that in the described scenario, “native bitcoins” would become scarcer, leading to a price increase.
Interesting read! But couldn’t tools like Runes and Ordinals evolve to the point where DeFi, DePIN, and other functionalities could run natively on the L1 chain?
Taproot was a big step, and now OP_CAT is promosing even more momentum to the network if approved.
— Tanssi (@TanssiNetwork) October 28, 2024
“Interesting! But couldn’t tools like Runes and Ordinals evolve to the point where DeFi, DePIN, and other functionalities could run natively on the L1 chain? Taproot was a big step, and now OP_CAT promises even more momentum to the network if approved,” wrote developers from Tanssi Network.
Duo Nine agreed, suggesting that “in about 10 years, the problems will resolve themselves” as Bitcoin adoption and blockchain usage expand.
Back in April, MicroStrategy founder Michael Saylor expressed support for self-custody of cryptocurrency. Prior to this, the entrepreneur, contrary to his previous opinion, recommended using large banks as custodians.