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Cardano as a platform for BTC

Published 1.6.2023

Bitcoin will never be the network most users will use to spend BTC or for financial services. The low scalability of the protocol makes this impossible. People will use BTC on other networks. The Lightning Network and several sidechains are being built. What if the best place to have BTC is Cardano? Cardano is a platform, so in addition to fast and cheap transactions, it offers a much broader use of BTC, for example in DeFi services. Bitcoiners don't have to use a centralized service like the bankrupt Celsius for lending. In addition, Bitcoin doesn't need Ordinals and BRC-20 because of tokens, as Cardano is a more suitable platform for minting them. Users want to find a place where they can use BTC while having tokens available along with related services such as DEXs, NFT marketplaces, lending platforms, etc. Networks that can send digital value quickly and cheaply are important for wider adoption, but perhaps even more important is offering financial services to users, and these cannot do without smart contracts.

TLDR

People will use the networks with the most utility on them. They will not be driven by ideology but will make pragmatic choices. Using BRC-20 tokens just clogs up Bitcoin, while Cardano can mint tokens better and you can use apps and second layers.

Ecosystem integration improves the utility

If one network does only one thing very well and is deliberately simple, it is obvious that it cannot offer a more comprehensive service. Bitcoin was considered a network with these characteristics before the advent of the Ordinals scheme. PoW is considered by bitcoiners to be the most important property for the entire blockchain industry. Bitcoin can secure BTC very well, but the protocol had to sacrifice scalability. The Lightning Network and Liquid network are supposed to allow for fast and cheap BTC sending and other functionality.

Some people believe it is necessary to protect the Bitcoin ecosystem from competition. It's okay to use networks in your own ecosystem, but for ideological reasons, it's supposedly wrong to use BTC in another ecosystem, such as the Cardano ecosystem.

Cardano is considered a secure and reliable platform for token minting and building financial services. In addition, it has a huge community that includes not only fans of this project but also those who hold BTC in addition to ADA.

Services are being created on the Cardano platform where you can use BTC. The Lace wallet will be multi-platform and there is a real chance that you will be able to hold BTC on it in the future. From our perspective, it makes sense to use BTC on the Cardano platform as it combines BTC as the biggest asset in the blockchain industry with a secure smart contract platform.

The success of networks can be measured by the network effect, i.e. number of users, volume, TVL, etc. Users usually go where some people already are. If someone is already using a network, it is obvious that they trust it. It's a signal to others that they can start to trust it too. Success rolls in like a snowball rolling down a slope. People bring capital, so volume and liquidity grow. The success of the network is an impetus for wider adoption and integration with other existing services.

We dare say that most people will not be guided by ideology when choosing a network, but will pragmatically choose the best available solution. The features that are most visible to the user, i.e. transaction speed, fees, user-friendliness, etc. will be the deciding factor.

Once BTC is ported to any other network, the properties regarding decentralization and security will be completely different from the Bitcoin network. The integration may be more or less secure as well as the network in which users will have BTC. The quality of these technologically important details is beyond the ability of most users to judge objectively. Success will be determined primarily by utility and simplicity.

If users transfer BTC to Cardano, they will primarily gain security and utilities. Security is a prerequisite for users to consider porting BTC to another ecosystem. Cardano is the most decentralized network in the top 10 and PoS is provably secured. At the time of writing, no one has managed to hack a single application on Cardano's DeFi.

Cardano has its own solution similar to Lightning Network (LN) called Hydra. Hydra is a solution based on state channels. The advantage of Hydra is that it will offer the ability to execute smart contracts and use tokens in addition to fast and cheap transactions between users. This is not yet possible with LN. In the near future, you can send BTC very quickly and cheaply indeed. Cardano already has a functioning Milkomeda sidechain.

Cardano has DeFi on the first layer. For many users who honor the principles of decentralization, but also for those who have lost money on Celsius-like services, Cardano will seem like a better choice than the emerging CeFi services.

The successful network or ecosystem will be the one with the largest utility

BTC holders can choose between using the Lightning Network (LN) or Hydra in the Cardano ecosystem. Which is the better choice?

It's currently LN, due to higher adoption at retailers. We anticipate that as other ecosystems develop, retailers will soon be forced to adopt other networks. This will be due not only to the demand for cryptocurrency payments (which is not very high) but also to the demand for stablecoin payments. It is possible that a solution will emerge that integrates multiple networks and allows merchants to easily accept payments via LN, Hydra, Optimism, etc.

The reason for choosing Hydra may be the ability to send tokens and use applications. It is realistic to imagine that networks that only send value will be less used than those networks that can do something extra.

If the user wants to mostly pay, but at least occasionally do some BTC swap with stablecoin or buy NFT, Hydra will be a better solution for him. It doesn't make sense to pay for an on-chain transaction to enter LN and then pay again to enter the Cardano ecosystem because of Hydra. The more networks or ecosystems a user uses, the more they will pay for on-chain transactions. By joining the Cardano ecosystem, the user gets cheap access to sidechains and Hydra.

Higher utilities will naturally attract users to the Cardano ecosystem.

Thanks to the Ordinals scheme, one of the other narratives has been proven to be false. Hardcore bitcoiners used to say they didn't need tokens, NFTs, or DeFi. The mania around Ordinals and BRC-20 shows that many Bitcoiners are actually very interested in these things.

Ordinals and the BRC-20 token standard is a very inefficient solution. We dare say they are only suitable for meme coins but are unsuitable for building DeFi services that are expected to be highly secure.

The Bitcoin protocol cannot provide more utility, as it would completely clog it up. The frenzy over Ordinals and BRC-20 made LN essentially useless for opening and closing new channels. Those who were already on LN at the height of the frenzy when transaction fees were in the tens of dollars could continue to use it. Anyone who wasn't or wanted to close a channel was out of luck.

The Bitcoin ecosystem may not be self-sustaining if the pace of adoption is faster than technological advances across the ecosystem. A poorly scalable first layer may be a barrier to the use of the entire ecosystem. The solution is very simple, namely porting BTC to another ecosystem that does not have these problems.

It is already happening. There are approximately 156,000 BTC in the largest BTC tokenization project, Wrapped Bitcoin. In the Lightning Network, only roughly 5,500 BTC. There are 30 times less BTC in LN than there are WBTC. This can be interpreted as capital seeking the best possible utility. At the moment, it's not necessarily the payments, but mainly the interest in DeFi.

In our view, the Bitcoin protocol is not suitable for tokens or even DeFi services. Especially it is not necessary at all, as Cardano has much better technology for minting and transferring tokens. It also has better technology for creating decentralized applications.

Cardano has something more, namely a plan for higher scalability (Ouroboros Leios), privacy (Midnight), a team that wants to continue technological innovation together with the community, and a tool to easily upgrade the protocol (the hard-fork combinator).

Cardano is perfect for connecting BTC with tokens and decentralized applications. It is certainly possible that L2s will emerge in the Bitcoin ecosystem and have similar capabilities to Cardano. The reality is that not many people are using the existing L2 yet compared to the existing smart contract platforms. Why this is the case would be the subject of another article. One possible explanation is that other ecosystems have technologically leapfrogged the Bitcoin ecosystem and have attracted a large number of people who do not want to migrate back to the Bitcoin ecosystem. Or it could be that people are not loyal to the Bitcoin ecosystem at all costs if they have the option of using BTC elsewhere under better conditions.

It's definitely very positive for the blockchain industry that people are where they find the most utility and best user experience. Cardano will very likely be another very successful ecosystem who bitcoiners can utilize. They certainly won't all do it, but some probably will. At least those who are fans of both projects, i.e. Cardano and Bitcoin.

Conclusion

Just as people choose the best bank for their money they will one day look for the best protocol or decentralized app for their cryptocurrency. It is natural to use BTC on the Bitcoin network and ADA on the Cardano network. Native coins of a given protocol will always be the hardest currency in a given ecosystem. However, this does not mean that coins cannot leave their home protocol and be used on another network. If someone is thinking about using Liquid Network for DEXs, why not try Cardano instead? For some, it may definitely be a better choice because of the higher liquidity, security, or decentralization of Cardano. It is not normal for ideology to influence the choice of technology. Fortunately, people are being pragmatic and not afraid to use BTC in other ecosystems. We believe that once services using BTC mature in the Cardano ecosystem, this ecosystem will become home to many fans of decentralization.

If Cardano became a network in which a large amount of BTC would migrate, it would have a positive effect on the market capitalization of the Cardano network. A large number of fees would be collected, which would benefit the network (higher security), the project treasury, and also the stakers.

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