Ethereum-Based Protocol Alkimiya Creates Market for Hedging Bitcoin Fees

Blockchain protocol Alkimiya has launched, offering a tool that allows users to hedge against volatile Bitcoin {{BTC}} transaction fee rates.

The hardest part may be convincing hard-core bitcoiners, sometimes known as “maximalists” or “maxis,” to use the new protocol, as it is built on top of the Ethereum blockchain. Described as a “blockspace markets protocol,” target users for the platform could include traders, mining pools, and foundations.

“We understand that Bitcoin Maxis may initially be hesitant to use an Ethereum-based solution, but our primary focus is to create the most robust and efficient marketplace for trading Bitcoin transaction fees,” Alkimiya founder and CEO Leo Zhang told CoinDesk in an email interview.

There can be little doubt about the usefulness of a solution like Alkimiya: in April, when Casey Rodarmor’s Runes protocol for minting fungible tokens on Bitcoin went live, the Bitcoin network fee rate skyrocketed from $4.80 to $125 per transaction.

“Faced with high operating costs, Bitcoin mining companies are increasingly turning to hedging instruments to protect against fee volatility,” Alkimiya said in the press release.

According to the statement, the company was founded in 2021 and is backed by investors including Dragonfly, Castle Island Ventures, 1KX, GMR, Coinbase Ventures, Circle Ventures, Tribe Capital, and Robot Ventures. The project raised $7.2 million in funding in January 2023 and went live on a testnet in April.

Designed as a peer-to-peer payment network, Bitcoin has been around since 2009, and many of its users are extremely loyal and skeptical of solutions that are not built “locally” or do not use a secure device on top of the oldest and original blockchain.

But it is notable that Bitcoin lacks the programmability of Ethereum, which emerged in 2015 and was founded by developers such as Vitalik Buterin, many of whom had previously worked on Bitcoin.

Like many decentralized applications and protocols on Ethereum, Alkimiya’s design requires some programming.

How does Alkimia work?

According to the project’s documentation, Alkimiya works as follows: “Alkimiya users can enter Buy and Sell positions for any pool. These Buy and Sell positions are represented by NFTs (ERC-1155) called Long and Short shares. Long shares from the same pool have the same tokenId and are interchangeable, while Long shares from different pools have different tokenId and are not interchangeable. The same rule applies to Short shares.”

The story continues

According to the definition on the Ethereum Foundation’s website, ERC-1155 is a standard for “a smart contract interface that can represent and control any number of fungible and non-fungible token types.”

Founder Zhang told CoinDesk that the project is “actively monitoring” the development of Ethereum-compatible layer-2 solutions on top of the Bitcoin blockchain, as well as “UTXO-based approaches.”

UTXO (unspent transaction output) represents a fundamental element of Bitcoin’s architecture and is fundamentally different from Ethereum’s accounting approach.

The truth is that many Bitcoin layer-2 solutions are still in the works, especially those with Ethereum compatibility.

“Since we can’t currently develop on Bitcoin, developing on Ethereum is the most decentralized approach available, which aligns with our commitment to decentralization and avoiding a centralized approach,” Zhang said.

Zhang said their goal is to create “seamless integration paths that make it easy for Bitcoin users to access and use our platform without having to manage multiple wallets or interfaces.”