In a recent tweet, Crypto Educator and Analyst Duo Nine raised concerns about the current trajectory of Bitcoin, warning that while Bitcoin remains secure today, certain trends pose long-term risks.
Duo Nine’s analysis centers on the issue of “value siphoning” from Bitcoin’s native network. According to his viewpoint, a growing trend toward storing Bitcoin in custodial services and wrapping it into other networks could ultimately threaten Bitcoin’s foundational security and decentralization.
The Security Model of Bitcoin’s Network
Bitcoin’s network security is largely funded by block rewards and transaction fees. Miners, who validate transactions and secure the network, earn revenue from these block rewards, but as block rewards diminish over time, transaction fees are expected to become the primary revenue source.
Duo Nine highlights that as Bitcoin becomes more mainstream, transaction fees will increasingly replace block rewards as a revenue source for miners. This shift is expected to be gradual and take over decades, but it is essential for Bitcoin’s security in the long run.
However, as more Bitcoin is held off-chain, fewer transactions occur directly on the Bitcoin blockchain. In Duo Nine’s view, this reduces the fees earned by miners and could, over time, impact the overall security of the Bitcoin network.
The Problem with Wrapped Bitcoin and Custodial Holdings
A significant issue Duo Nine identifies is the impact of “wrapped” Bitcoin, such as wBTC, cbBTC, tBTC, and kBTC. When Bitcoin is wrapped, it is essentially “exported” to another network, such as Ethereum, allowing it to participate in decentralized finance (DeFi) activities on that network.
Each unit of wrapped Bitcoin represents an equivalent amount of Bitcoin held by a custodian on the Bitcoin network. However, these coins are not actively transacted on the Bitcoin network, implying that they generate no fees for miners.
Duo Nine argues that the increasing adoption of wrapped Bitcoin could weaken Bitcoin’s native ecosystem. As more BTC is transferred to other networks, fewer transactions are conducted on the Bitcoin blockchain.
Consequently, miners lose potential revenue, which could reduce incentives to secure the network as block rewards diminish. This gradual but impactful “vampire attack,” as he describes it, siphons liquidity away from Bitcoin’s native chain, posing a challenge to its long-term security.
Bitcoin in Custodial Services and ETFs
Duo Nine points out that large custodians like Coinbase and BitGo control substantial amounts of Bitcoin held in trust for institutional investors or as collateral for wrapped tokens.
In addition to these custodians, Bitcoin ETFs have been increasingly approved by financial authorities, resulting in large volumes of Bitcoin being held by custodians. Although this Bitcoin is represented in ETF tokens, the actual Bitcoin remains immobile, generating no transaction fees on its native chain.
Furthermore, Duo Nine explains that when Bitcoin is held in these custodial arrangements, its ownership is effectively an IOU (a promissory note) from the custodian. This setup reintroduces the problem Bitcoin was designed to avoid—trust in third-party intermediaries.
The centralized control these custodians have over large volumes of Bitcoin undermines the decentralized, peer-to-peer nature of Bitcoin, he argues and presents an additional risk if custodians break their promises or mismanage these assets.
Implications for Bitcoin’s Decentralization and Network Security
The underlying issue, according to Duo Nine, is that Bitcoin’s security model relies on transaction fees from active users on its native blockchain.
With a growing portion of Bitcoin moving to custodians or alternative networks, the Bitcoin blockchain risks becoming less active, reducing the transaction fees necessary for network security. Duo Nine warns that without sufficient native chain activity, the transition from block rewards to fee-based security will not be as smooth as anticipated.
Duo Nine is particularly concerned about the long-term implications of this shift. While current block rewards remain substantial, they will halve approximately every four years. This ongoing reduction in block rewards, coupled with the shift of Bitcoin’s value to custodial services or other chains, could lead to insufficient fees to maintain network security in the long term.
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Recommendations to Preserve Bitcoin’s Security and Integrity
To mitigate these concerns, Duo Nine suggests that Bitcoin holders consider managing their Bitcoin directly rather than relying on third-party custodians.
Self-custody, where individuals hold Bitcoin in personal wallets, preserves the decentralized ethos of Bitcoin and reduces reliance on custodians. Additionally, it prevents custodians from abstracting away the value of Bitcoin into alternative financial products.
Duo Nine also encourages active use of the Bitcoin network, emphasizing that even small-scale, regular transactions help maintain Bitcoin’s security. As transaction fees become more critical to network security, supporting the Bitcoin blockchain through usage can contribute to sustainable miner incentives and help maintain a decentralized network.
Future of Bitcoin’s Security Amid Third-Party Influence
Although the immediate effects of custodial control and wrapped Bitcoin may not threaten Bitcoin’s network security, Duo Nine urges caution, warning against complacency.
If left unchecked, he argues, these trends could ultimately reduce transaction volume on the Bitcoin network, with corresponding decreases in miner fees and incentives. This could weaken Bitcoin’s resilience, making it more vulnerable to potential security issues as the reliance on transaction fees becomes the main security mechanism.
Disclaimer: This content is meant to inform and should not be considered financial advice. The views expressed in this article may include the author’s personal opinions and do not represent Times Tabloid’s opinion. Readers are urged to do in-depth research before making any investment decisions. Any action taken by the reader is strictly at their own risk. Times Tabloid is not responsible for any financial losses.
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