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CONTRIBUTORS

Lou Mohn

Senior Deal Analyst
Franklin Templeton Digital Assets

Julian Love

Deal Analyst
Franklin Templeton Digital Assets

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A version of this article was first published on CoinDesk on June 6, 2024.

Since its inception in 2009, Bitcoin has steadily gained adoption and it now has a market cap of over $1.3 Trillion.1 It was designed to be a decentralized currency and real-time gross settlement system. The decentralized, protocol-based approach enables holders to shift trust from a centralized actor to a decentralized, code-enforced protocol.

Despite Bitcoin being the original cryptocurrency and corresponding blockchain, its functionality has been extremely limited up to this point relative to the smart contracts and decentralized finance (DeFi) functionality offered by Ethereum, Solana and other block­chains. However, this dynamic is set to change with the emergence of Bitcoin Layers, the meta-protocols, sidechains, Layer 2’s and other technologies currently being built on Bitcoin. These layers will enable faster payments, as well as lending, enhanced function­ality of fungible and non-fungible tokens, decentralized exchanges, GameFi, SocialFi and many other use cases. Holders of bitcoin will soon be afforded the opportunity to increase the productivity of their asset via a protocol-based decentralized financial system. The primary differentiator between DeFi on Bitcoin and DeFi on other chains is the underlying asset (native token). Whereas Ethereum, Solana and next-gen blockchains compete on the merits of their respective technologies, DeFi on Bitcoin is purely focused on increasing productivity of bitcoin, placing the Bitcoin DeFi ecosystem in a league of its own.

The case for value creation via a Bitcoin-based decentralized financial system is driven by three assumptions:

  1. Preference for Bitcoin blockchain as the base layer for other tokenized assets
  2. Demand for greater productivity of bitcoin, the asset
  3. Demand for a financial system that reflects the decentralized principles of Bitcoin

We already see strong demand signals for the Bitcoin blockchain as a base layer for other tokenized assets. The market for non-fungible tokens on Bitcoin, called Ordinals, grew from less than $100M to over $1.5B in less than 6 months.2

However, the largest opportunity is still ahead. Most of the market value of Bitcoin’s decentralized finance system will show up in the value of fungible tokens on Bitcoin. Fungible tokens will power greater productivity of bitcoin (the asset) via yield bearing instruments and decentralized financial systems via protocols and Layer 2s. Relative to Ethereum, Solana and other chains, the value of fungible tokens on Bitcoin is still miniscule, largely because we are in the early innings of programmable functionality on Bitcoin.

Endnotes

  1. Source: CoinMarketCap as of May 29, 2024.
  2. Source: “Top NFT Collectibles—BTC.” Crypto Slam. March 31, 2024.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.

Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.

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