Bitcoin is now facing a novel and potentially damaging risk known as a “vampire attack,” a scenario where liquidity is siphoned off from the Bitcoin blockchain to other platforms. Duo Nine, founder of Your Crypto Community (YCC), recently warned of this threat, referencing a prediction attributed to Bitcoin’s creator, Satoshi Nakamoto. According to Nine, the “vampire attack” could hinder Bitcoin’s long-term operability as third parties increasingly absorb liquidity through decentralized finance (DeFi) applications and exchange-traded funds (ETFs).

The Nature of Bitcoin’s ‘Vampire Attack’

The concept of a vampire attack centers around the practice of attracting liquidity away from its origin, in this case, Bitcoin’s blockchain, to another ecosystem. This shift happens when Bitcoin is moved to other chains or protocols as “wrapped” assets, often within DeFi structures where it generates yield, or held by ETF custodians, like BlackRock and Coinbase, to support their financial products.

Nine points out that this trend discourages Bitcoin holders from directly using or transacting on the Bitcoin network. Instead, Bitcoin is increasingly immobilized in “bridge addresses,” as wrapped versions of Bitcoin are used for earning returns on other platforms. This, he argues, could erode Bitcoin’s primary value proposition as a decentralized, trustless currency.

Potential Risks to Bitcoin’s Network Health

The effects of the vampire attack extend beyond liquidity issues. Nine warns that such usage of Bitcoin, particularly through ETFs, introduces third-party custodianship, stripping the currency of its original autonomy. By siphoning liquidity and value off-chain, these DeFi and ETF structures inadvertently lower on-chain transaction volumes, which could reduce miner fees. As Bitcoin’s block rewards continue to decline, it will increasingly rely on transaction fees to sustain the network. If fees decrease significantly due to off-chain migration, Bitcoin’s financial incentive for miners could also drop, weakening the network’s security.

Satoshi’s Warning: Bitcoin’s Value Proposition at Risk

In the original Bitcoin whitepaper, Satoshi Nakamoto cautioned about the risks associated with third-party custodianship. Nine argues that with the rise of DeFi and ETFs, Bitcoin is seeing a version of this risk materialize. By reducing liquidity on the Bitcoin network, the ecosystem loses miner fees critical for its future security, making it potentially unsustainable over time if trends continue.

As Nine puts it, the attack vector works by “siphoning liquidity and value from one chain or protocol and moving it to another, together with its users.” The impact? Miners and Bitcoin’s fundamental network operability could suffer as a greater percentage of Bitcoin remains idle off-chain, without generating transaction fees necessary to support the infrastructure.

Can Self-Custody Offer a Solution?

Nine’s recommendation for mitigating the vampire attack involves reinforcing the use of self-custody and conducting transactions directly on the Bitcoin network. He argues that self-custody empowers users to maintain Bitcoin’s decentralized foundation, keeping it operational and resistant to the centralized risks introduced by custodial DeFi and ETFs. Moreover, transacting on Bitcoin’s native blockchain can help sustain miners’ fees, a crucial component for the network’s health as block rewards phase out.

Writer’s Take: Is Bitcoin Really at Risk?

While this vampire attack presents a theoretical concern, Bitcoin’s network likely won’t see an immediate threat to operability. Miner incentives and fee structures are set up to maintain functionality for years, if not decades, as demand for Bitcoin as a store of value and medium of exchange continues to grow. Nonetheless, Nine’s concerns highlight a long-term risk: as more Bitcoin is held by institutions and used in DeFi, its central value proposition of decentralization may diminish.

Ultimately, Bitcoin’s success may come with an ironic twist: as it becomes more widely adopted as a store of value through ETFs and wrapped tokens, it may move away from its original intent, potentially challenging the future security of its own network.