The digital asset insights firm Chainalysis is analyzing how Bitcoin will retain its dominance in an increasingly crowded marketplace filled with crypto contenders.
In a new blog post, the firm’s chief economist Phillip Gradwell says BTC doesn’t need to adopt smart contracts and compete with Ethereum (ETH) and Layer-1 crypto assets.
Instead, he says BTC should focus on being a scarce, decentralized and fungible asset.
“Bitcoin can still have a very high long-term value, but it has become clear in the last six months that it competes for investor demand, and does not always win.
However, I don’t think that BTC should compete on innovative use cases. Bitcoin is highly unlikely to be upgraded to have the functionality of Ethereum and other Layer-1 assets.
It just isn’t designed for that, technologically or philosophically. And such a change would likely undermine its unique selling point: that it is a scarce fungible asset.”
Gradwell says that although the competition is fierce, Bitcoin can remain dominant if used as a form of capital in Web 3.0 and decentralized finance (DeFi) applications.
He notes that wrapped Bitcoin, which are crypto assets that run on blockchains such as Ethereum and represent a 1:1 peg with the top cryptocurrency, are already bringing BTC into the decentralized finance (DeFi) movement.
He says a fully decentralized and widely adopted form of Bitcoin wrapping emerges would go a long way towards cementing BTC’s status as the dominant form of crypto capital.
“230,000 Bitcoin is currently wrapped. However, this requires Bitcoin to be deposited with a centralized third party. That is a fine model – millions of Bitcoin are currently held by centralized custodians. But this may prevent the programmatic wrapping of bitcoin that DeFi would likely require.
I believe that a decentralized way of wrapping bitcoin is needed to unlock the use of Bitcoin as high quality capital in DeFi.”
Bitcoin is exchanging hands at $62,408 at time of writing, according to CoinGecko.
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