As the first and largest blockchain by market capitalization, Bitcoin has not only paved the way for digital assets but also continues to dominate the market in terms of capitalization. Throughout its history, Bitcoin has been regarded as “digital gold” primarily due to its role as a store of value rather than for decentralized applications. However, recent developments indicate that the potential of Bitcoin’s active DeFi ecosystem is greater than previously expected. This shift is happening at a time when the interests and technical capabilities of Bitcoin are aligning like never before.
The next few years could be crucial for Bitcoin as it transitions from being a passive store of value to an active ecosystem full of innovation and investment opportunities. We believe this represents an opportunity worth exploring, especially since most people have not yet invested in this ecosystem due to its novelty, and with features like Runes set to be released.
The Bitcoin ecosystem currently consists of miners, nodes, stakeholders, developers, and various Layer2 solutions, sidechains, and DApps. Miners and nodes maintain the network by verifying transactions and ensuring consensus through proof-of-work mechanisms. The developer community contributes by expanding the local ecosystem and occasionally updating the core protocol, although achieving consensus on these upgrades can be challenging, resulting in few substantial changes.
Several Layer2 solutions have been proposed to address Bitcoin’s scalability issues. While the majority of Bitcoin users view the proof-of-work system as a fundamental part of Bitcoin’s identity and are generally unwilling to support major protocol changes, Layer2 solutions present a more practical approach and seem to be gaining attention as they do not involve any significant modifications to the core blockchain. These solutions run as independent blockchains on top of the main Bitcoin network, making them easier to implement and more realistically address the scalability issues.
Three notable participants in this progress are:
1. Lightning Network: Introduced in 2016, it is the first Layer2 payment protocol developed on the Bitcoin blockchain. It aims to improve transaction speed and reduce costs by utilizing Bitcoin’s smart contract functionality for near-instant payments. While the Lightning Network has successfully improved transaction efficiency and attracted over $287 million in total locked value (TLV), it does not provide the advanced smart contract capabilities necessary for a diverse DApps ecosystem. Instead, it focuses on its payment capabilities within its peer-to-peer network.
2. Stacks: Currently the market leader, Stacks is about to undergo the Nakamoto upgrade, which will bring significant improvements in security and speed. Founded by Muneeb Ali, a computer scientist at Princeton University in 2013, Stacks enables smart contracts and decentralized applications to use Bitcoin as an asset and settle transactions on the Bitcoin blockchain. All transactions on the Stacks layer are automatically hashed and settled on Bitcoin. With a highly qualified team and its technology peer-reviewed by experts from Stanford and Princeton, Stacks is poised for growth.
3. BVM Network: Addressing Bitcoin’s smart contract and scalability limitations through its Layer2 meta-protocol, BVM enables the creation of DApps and smart contracts, facilitating the expansion of the Bitcoin L2 blockchain. BVM has gained traction, especially during recent market downturns, demonstrating potential for growth, particularly as interest in BTC L2 solutions increases. As a Rollup-as-a-Service (RaaS) protocol, BVM allows users to easily launch new Bitcoin L2 blockchains, and all value flows back to BVM token holders as the new L2 continuously pays for its $BVM tokens. Significant developments include ecosystems launched using the BVM SDK, such as Tuna Chain and Naka Chain. Additionally, plans to integrate Runes functionality suggest further growth for BVM.
Several other scaling solutions have been developed to enable smart contracts on Bitcoin:
– RGB: An off-chain layer that uses Bitcoin’s UTXOs to create digital assets like tokens and NFTs, fully compatible with the Lightning Network.
– Counterparty: Enables token creation and crowdfunding; reactivates innovation with features like Ordinals.
– Rootstock (RSK): A merged-mining sidechain compatible with EVM smart contracts, using an RBTC token pegged to Bitcoin.
– Liquid Network: Blockstream’s sidechain supporting decentralized trading and asset issuance, including NFTs and stablecoins.
– Omni Layer: Supports token issuance and decentralized exchanges; enhanced with Omni Bolt for faster transactions via the Lightning Network.
– Mintlayer: Combines proof-of-stake with Bitcoin’s proof-of-work on a sidechain, supporting smart contracts and cross-chain transfers.
While Ethereum has been the primary Layer1 blockchain for DeFi, recent developments position Bitcoin as an important part of mainstream DeFi adoption. With regulatory changes in the US, anticipation of Bitcoin halving, and the introduction of Bitcoin ordinals, Bitcoin is gaining momentum.
The Bitcoin network is expanding beyond basic transactions and leading the development of a thriving DeFi ecosystem. This has led to the emergence of projects that support more complex financial applications, challenging Ethereum’s dominance.
For example, Sovryn provides an uncustodial, permissionless environment on RSK, a second-layer EVM smart contract blockchain built on Bitcoin, for trading, lending, and borrowing Bitcoin and other selected assets.
Additionally, platforms like Zest Protocol, supported by Primal Capital, are pioneering peer-to-peer decentralized lending backed by Bitcoin. Bitcoin DEXes like Bisq Network operate under decentralized autonomous organizations, facilitating P2P transactions.
Especially with the development of the Bitcoin network, the Runes protocol has gained recognition. Many people are still unfamiliar with how Runes simplifies Bitcoin transactions by utilizing UTXO-based accounting, which is more cost-effective than traditional methods like those used in the Unisat marketplace. Previously, Bitcoin transactions were primarily managed through an account model and required specific transaction amounts, making it less user-friendly compared to trading tokens on Ethereum.
Created by the innovators of Ordinals, Runes aims to be the equivalent of Ethereum’s ERC20 on the Bitcoin blockchain, facilitating fungible tokens. This protocol was launched after the Bitcoin halving on April 19 and has quickly gained a significant amount of Bitcoin Layer1 transaction fees. Greythorn is further examining its impact on Bitcoin Layer2 solutions.
Unlike Ordinals, which stores data in transaction witnesses and attaches information to individual satoshis, Runes embeds token records into Bitcoin’s unspent transaction outputs (UTXOs). This approach seamlessly integrates with Bitcoin’s existing system, enhancing functionality and blockchain integrity. It is specifically designed to be easily implemented on various L2 platforms like Stacks.
Some notable projects associated with the Runes protocol include:
– PUPS/Rune Pups: An NFT collection with a Post-Runes activation, where 23% of the PUPS supply will be distributed through airdrops to participants.
– WZRD: This cultural token is an early participant in the Ordinals ecosystem and has gained popularity rapidly.
– Runestones: This project will transition to the Runes token after the Bitcoin halving. It has been airdropped to various ordinal collections, including Bitcoin Puppets.
With the ecosystem’s launch, there will be more to come, so stay tuned.
The bullish arguments for Runes can be summarized as follows:
– Innovation in Bitcoin’s fungibility: Runes introduces a new token standard on the Bitcoin blockchain aimed at improving the current BRC-20 fungible token standard. This innovation is considered significant enough to trigger a reassessment of Bitcoin’s decentralized application potential.
– Efficiency and design: The design of the Runes token standard is more efficient, adopting a UTXO-based design. This shift from Bitcoin’s BRC-20 and Ethereum’s ERC-20 token account-based design can reduce the inflation and high fees generated in the current process.
– Market positioning: Compared to Ethereum and Solana, Bitcoin’s market value for fungible tokens is relatively small. However, the introduction of more efficient token standards like Runes could help Bitcoin narrow the gap.
– Compatibility and privacy: Runes is designed to be compatible with the Lightning Network and promises increased privacy as the data is hidden within UTXOs. This compatibility and privacy feature can be seen as a significant improvement over existing standards, potentially making Bitcoin a more attractive platform for DeFi.
RGB++
RGB++ enhances Bitcoin’s capabilities by integrating smart contracts on the Nervos CKB blockchain. Its key feature is its isomorphic binding, which synchronizes asset management between Bitcoin and the CKB Nervos blockchain. From a practical perspective, each Bitcoin UTXO is linked to a corresponding Cell (imagine “transaction blocks”) on the CKB blockchain. Therefore, when a Bitcoin transaction is made using a UTXO, it is automatically recorded on the CKB blockchain, and the corresponding Cell on CKB is updated.
This system doesn’t require a third-party multisig bridge, allowing for trustless transactions between these blockchains while ensuring accurate reflection of activities on both networks. RGB++ is considered a promising BTC Layer2 solution, especially as we approach the Bitcoin halving.
In terms of investment, the token directly associated with RGB++ is $CKB, with a market capitalization of $1 billion and over 99% of tokens already in circulation. This reduces concerns about market impact due to the release of new tokens.
In conclusion, Greythorn highlights that the Bitcoin ecosystem is worth paying attention to because BTC still has the highest adoption rate among cryptocurrencies and is recognized by individual and institutional investors, which may bring more stability and growth potential. Thanks to the ongoing development of the BTC ecosystem, such as the Lightning Network accelerating transactions and the Runes initiative enhancing token fungibility, we expect Bitcoin to continue improving and expanding its applications, bringing about new transformations.