he Cardano network unveiled Cardinal on June 10, a new protocol designed to connect and bridge the gap between that network and the Bitcoin ecosystem.
This development, according to Charles Hoskinson, founder of Cardano, represents the “first Bitcoin DeFi protocol developed for Cardano.”
Cardinal, developed by Input Output Hong Kong (IOHK), one of the founding entities of Cardano, led by Hoskinson, introduces a “trustless” mechanism for integrating Bitcoin UTXOs (unspent transaction outputs) into the Cardano ecosystem, explained Romain Pellerin, CTO of IOHK.
However, the protocol is not yet a fully production-ready solution. Pellerin stated that Cardinal is in its early stages, describing it as an infrastructure that requires further refinement.
How does Cardinal work?
Cardinal 's core lies in its ability to handle Bitcoin UTXOs. A UTXO represents a portion of Bitcoin that has been received but not yet spent , serving as proof of ownership on the BTC network.
Traditionally, integrating Bitcoin into other ecosystems required custodial solutions or wrapped tokens, which introduced complexity and risks, such as reliance on centralized intermediaries.
Cardinal on Cardano would change that paradigm by enabling a bridge with minimal trust dependency, reducing the need for third parties, according to Pellerin. IOHK's CTO noted that Cardinal has achieved a historic feat by successfully securing a wrapped version of a Bitcoin ordinal for use on the Cardano mainnet.
This process involves locking a UTXO in Bitcoin and minting a corresponding non-fungible token (NFT) on Cardano, which represents the locked asset. The wrapped asset can then be used within the Cardano ecosystem, preserving its one-to-one peg to the original Bitcoin. When users wish to redeem their Bitcoin, the NFT is burned on Cardano and the original UTXO is unlocked in Bitcoin.
New DeFi opportunities for Bitcoin holders?
Pellerin emphasized that Bitcoin holders can interact with wrapped versions of BTC on Cardano through platforms like Indigo Protocol, lend them using Liqwid Finance, or use them for loans on Lenfi or FluidTokens.
They can also participate in yield farming, a process of providing liquidity to decentralized exchanges like Minswap or SundaeSwap in exchange for rewards, or trade Bitcoin-based ordinals on marketplaces like JPG Store.
These opportunities allow Bitcoin holders to generate returns on their assets, a feature previously limited by the lack of native smart contract support in Bitcoin.
In turn, with Cardinal, Pellerin continued, the tokens created by the Ordinals protocol in Bitcoin serve as collateral in DeFi applications, as well as to be auctioned between chains or used in lending and borrowing protocols without losing their provenance, that is, the record of their origin and ownership.
Thus, while this protocol is in an experimental phase, Cardinal could boost Cardano adoption by integrating Bitcoin liquidity into DeFi, as well as adding new features to Bitcoin, something that often generates controversy among more conservative Bitcoiners.
