If the SEC Recognizes ETH as a Security, Then There Is Already an Alternative in the DeFi Market — Opinion of Vladimir Okhotnikov

Bitcoin, which does not support complex programming languages, could not support the blockchain evolution. Today, cryptocurrency supporters are eagerly awaiting the development of DeFi applications based on this ecosystem. However, the question arises: what is the reason why Bitcoin is not ready to scale?

Without Vitalik Buterin, we would not have known that it is possible to build decentralized finance on the blockchain. Or rather, we would have found out about it later. It took the young guy only 4 years to describe the work of the future blockchain, which would solve several issues at once: scaling, launching DApps, automated and trouble-free execution of algorithms. And another two years were needed to launch the blockchain itself.

“Buterin, along with his colleagues Gavin Wood, Charles Hoskins, Anthony Di Lorio and Joseph Lubin, successfully realized their vision and exceeded the expectations of many. Today, decentralized applications (DApps), decentralized finance services (DeFi), non-fungible tokens (NFTs), decentralized exchanges (DEX) and other cryptocurrencies, as well as metaverses are being actively developed on the Ethereum blockchain,” emphasized Vladimir Okhotnikov.

Vladimir Okhotnikov is an author of analytical articles, an expert in the field of cryptocurrencies, and an active supporter of decentralized governance. He believes in the promise of blockchain and is convinced that cryptocurrency will soon be accepted almost everywhere, that it will lead to revolutionary changes. The analyst also sees the potential of technology in creating innovative models that can be used to create functions similar to those provided by the state.

The hype is over — Vladimir Okhotnikov on the adoption of ETFs

The euphory seems to have gone and even the price of bitcoin at $50 000 does not look so tempting. The impending halving is also not generating much interest. With the launch of exchange-traded funds in the US that invest directly in Bitcoin, its fans are looking forward to new prospects.

What could further encourage investors to invest in Bitcoin? Of course, new solutions for scaling.

When Lightning Labs first launched the Lightning Network for Bitcoin in 2018, it generated enormous interest. The purpose of the protocol running on top of the Bitcoin blockchain is to speed up and reduce the cost of cryptocurrency transactions.

However, over time, interest in the Lightning Network has waned. Users were concerned about the difficulty of use and the risk of losing funds due to errors. In addition, fees on the Bitcoin network itself have decreased, making the benefits of Lightning less obvious.

Rumors soon began to spread about unsuccessful transactions with Litecoin, which undermined confidence in the new technology. And what previously seemed like the next big thing suddenly became doubtful. Users have complained about liquidity issues and security vulnerabilities in the Lightning Network, creating the impression that it is complex and unreliable.

Even the halving did not help – on August 2, 2023, on the Litecoin network, miners observed another halving of the reward. However, the halving goal was never achieved. The opposite happened: the pace of LTC mining slowed down, which seemed to lead to a supply shortage and an increase in price. However, the value of the asset only fell from $82 to $56, after which the cryptocurrency found itself stuck in a tight sideways trend without a significant update in the highs and lows.

Meanwhile, at the time of the founding of Lightning Labs, the developers managed to attract $82.5 million in investments to scale the blockchain. When Polygon, one of the leading Layer 2 protocols for Ethereum, raised about $450 million in its latest funding round, this created the impression that the Bitcoin blockchain is incapable of expanding and building a DeFi market on it.

The surge in NFTs on the Bitcoin blockchain caused an overload — users were forced to pay high fees to miners

At the end of last year, the number of unconfirmed transactions in the Bitcoin mempool (transaction waiting area) jumped sharply, which led to an increase in the cost of commissions. And users were willing to pay more for priority data processing, but, alas, this did not increase the speed.

“In December 2023, the average transaction fee on the Bitcoin network rose to almost $38. In January, during the first four weeks, this figure stabilized and settled at just above $9. At the same time, the highest commission was observed on January 2, when the average cost of a transfer reached $17.32.

Indeed, in the fourth quarter, Bitcoin transaction fees reached levels seen in early 2021, when Bitcoin crossed the $60,000 mark for the first time.

At the same time, shares of mining companies Marathon and Riot rose in price by 500% and 400%, respectively.

It is estimated that miners earned $170 million in fees in December, which amounted to 20% of total rewards. And for the entire quarter, fee income reached $328 million.

“The growth of activity in the Bitcoin network provides miners with additional income from commissions in addition to rewards for mined blocks. This has a positive effect on the financial performance of the mining business,” explained crypto expert Vladimir Okhotnikov.

The only explanation for the hype around Bitcoin is the leaked news that not only cryptocurrency, but also NFTs can be sent on the blockchain. However, the Bitcoin blockchain cannot process more than 5-7 transactions per second, which is very little. Hence delays in transfers, increased fees and network congestion.

NFT on the Bitcoin blockchain: Vladimir Okhotnikov shares his impressions of the consequences of the launch of the Ordinals protocol

Vladimir Okhotnikov says that initially the blockchain did not support NFTs. However, three updates introduced integration with non-fungible tokens.

Previously, the Bitcoin network had the ability to record information thanks to the Op_return script. Then the Taproot update improved this Op_Return feature, making transactions smaller and allowing more information to be recorded. The Ordinals protocol assigned each smallest piece of Bitcoin – a Satoshi – its own serial number. This made it possible to attach additional information directly to each Satoshi during transactions.

“Thanks to these three improvements, it is now possible to attach data directly to individual pieces of Bitcoin – Satoshi. Thus, it became possible to create something like an NFT with a volume of up to 0.4 MB on Bitcoin”, noted Vladimir Okhotnikov.

“Bitcoin NFTs are added directly to the network, for every satoshi. At the same time, satoshis do not lose their properties – they can still be sent or spent. But NFTs on Bitcoin cannot be called full-fledged NFTs. They are called ordinals or artifacts. That is, on Bitcoin it is more likely to be attached metadata rather than individual tokens. While NFTs on smart contracts contain only a link to the storage location of the NFT – an address in the blockchain,” the expert explained the difference between NFTs on Bitcoin and on smart contracts that are used in Ethereum.

To transfer an ordinal (NFT), you can use a full node and an Ord wallet or Emblem vault. The first method provides direct transfer between users, the second provides the opportunity to create storage on the Ethereum blockchain with subsequent sale through an NFT marketplace.

However, an unfinished infrastructure creates the risk of losing satoshis—you can easily send Bitcoin by mistakenly paying for it with an NFT. In addition, the risk of fraud cannot be excluded. And this is not to mention the possible overload and increased cost of transactions during the wholesale transfer of NFTs.

When investing in such assets, you need to understand that these are still risky investments. Early collections may be forgotten if new, more interesting projects appear.

But if the Ordinals protocol is successful and attracts attention, then the first collections could become a sign of prestige for collectors. Their value can increase significantly, like CryptoPunks or Bored Ape Yacht Club.

Vladimir Okhotnikov believes that the situation with Bitcoin is another attempt to inflate the hype around the blockchain: “Personally, I am of the opinion that Bitcoin is a tool for storing value, and not for making money. All these innovations are unlikely to bring the expected results.”

Indeed, although Bitcoin was created as a decentralized payment system, attempts to turn the blockchain into a tool for getting rich contradict the original idea. Its main value is in the reliable storage of value, and not in speculation.

Once again, we tirelessly say: when investing in this asset, you need to understand that it is very risky and unstable. It is used not only for legal purposes, but also for illegal activities – money laundering, sanctions evasion, extortion, and more. Therefore, investors should carefully consider the risks before investing.

Although one thing cannot be refuted – the blockchain has made it possible to take a different look at reality: after all, now you can create a system in which no one can interfere. And Nayib Bukele seems not to have chickened out.