Bitcoin Renaissance

Reviving the Bitcoin Era

Author: Catrina Wang, Portal Ventures – Translator: Qin Jin, Carbon Chain Value

This article aims to explain the “why” behind the Bitcoin papers we often receive. Any discussion topics mentioned in this article should not be understood as investment advice.

Bitcoin (BTC) is an institutional grade asset, a global remittance system, and soon to be a programmable blockchain network, whose identity has always been a topic of debate. While Bitcoin has always been a de facto store of value, there are many technological, institutional, and market catalysts that are pushing it towards a more productive direction, rather than just being “lazy” digital gold. In this article, we introduce our views on the history of innovation and controversy surrounding Bitcoin, the latest initiatives, and Portal’s argument for making Bitcoin more “capital efficient” rather than “programmable”.

• Breaking Tradition Newborn Bitcoin is winning a place in investment portfolios
• Can the Bitcoin ecosystem spawn a Layer2 Summer?
• Stablecoin Symbiosis with crypto, Mark Goodwin’s Bitcoin to USD Exploration

We all love pandas. They are cute, but due to genetic reproduction issues, their numbers are limited. As the most expensive animals in the world (with an annual “rental” income of 1 million US dollars per panda), they are also excellent stores of value.

Today, we keep pandas in zoos mainly to admire their cuteness. Due to their physical structure, there isn’t much they can do: eat bamboo, sleep, defecate, and repeat. One day, someone came up with an idea: what if we train or genetically modify pandas to make them more useful to our society? Well, that’s an interesting thought. Indeed, having pandas work as laborers to contribute more to the world’s GDP would be great.

By now, most readers probably understand what I’m getting at.

Panda = Bitcoin

Making pandas more “useful” to society = Making Bitcoin more programmable like EVM.

In this article, we will explore the unexpected similarities between Bitcoin and pandas to demonstrate our overall interest in the BTC ecosystem. The agenda items are as follows:

The “why” question and the latest catalysts in the Bitcoin ecosystem

Our argument: Capital efficiency vs. programmability

Analysis of various methods for Bitcoin productivity

Summary

To differentiate between categories in this article, I will use “BTC” to refer to the digital asset, and “Bitcoin” to refer to the first-layer blockchain network. Let’s get into it.

Part 1: Why do it this way?

Trying to make BTC more useful, rather than just keeping it in a cold wallet, is nothing new. Its notable advantages have sparked waves of curiosity and efforts – some stronger than others – and we are currently in the strongest phase.

First, let’s recap some popular arguments against the productivity of BTC:

BTC should be a store of value, this is the craziest belief held by the relentless “BTC OGs”, but recently, due to the catalyst effect, there has been a significant shift in community sentiment, which will be discussed later.

Wrapped BTC (WBTC) has poor product-market fit: WBTC is an ERC-20 token on the Ethereum blockchain that represents BTC and is backed by BTC held by centralized custodian BitGo at a 1:1 ratio. WBTC currently has a market value of around $5 billion and a peak value of around $15 billion, only a small fraction of BTC. However, we believe that the low activity of WBTC does not necessarily indicate public interest in making BTC more productive. Instead, it can only suggest that the BTC approach centered around centralization + EVM may be insufficient.

The Bitcoin chain was not designed for programmability. Bitcoin’s smart contracts are implemented using script language (Script), which is not Turing complete. Its design purpose is to maximize network security by limiting the attack surface (for example, there is no re-entry attack using script language).

Contrary to popular belief, the Bitcoin chain does support smart contracts. However, compared to other blockchains like Ethereum or Solana, the form of smart contracts on Bitcoin is more basic. The current available smart contract types on Bitcoin include:

Pay-to-Public-Key-Hash (P2PKH): This is the most basic Bitcoin smart contract that allows BTC to be sent to an address that can only be used by the owner of the corresponding private key.

Multisignature script: This allows collaborative ownership of funds. For example, we can have 3 people with access to a wallet, and transactions can only be made if 2 of the 3 people sign the transaction with their public keys.

Time-locked BTC transactions: BTC can only be used after a set time. For example, a script may require 3 signatures to use BTC before a certain time, and only 1 signature after.

Pay-to-Script-Hash (P2SH): Creates addresses that can receive or send transactions and must follow a series of instructions to unlock the balance in those addresses.

Pay-to-Taproot (P2TR): Utilizes Taproot for privacy upgrades and provides a more flexible transaction authorization mechanism.

Partially-signed Bitcoin Transactions (PSBT): A Bitcoin standard that facilitates the portability of unsigned transactions, enabling use cases such as offline signing, multisignature, and multiparty transactions.

Discreet Log Contracts (DLC): A type of Bitcoin transaction that leverages oracles to execute smart contracts on the Bitcoin blockchain, allowing parties to create and execute private agreements off-chain, with the Bitcoin blockchain serving as the final settlement for the agreements.

But… why can’t we just let Bitcoin be and let it fulfill its role as a store of value?

We divide the arguments for increasing the productivity of BTC into the following six categories:

1. The Temptation of Injecting Liquidity into Defi with BTC

Over the past five years, BTC has consistently dominated the cryptocurrency market, with a market share ranging from 40% to 70%. In comparison, even with the rapid development of L2 and Dapps, ETH’s market share has only reached 20% at its all-time high (ATH).

This is a simple mathematical problem: by releasing one-third of the potential liquidity of BTC, theoretically, we can double the current size of the defi liquidity pool. Of course, we shouldn’t assume that the liquidity injected into Defi will match BTC’s market size, after all, most BTC holders are institutions that will never “cash out” their assets. We will discuss these subtle differences later in this article.

2. Offset the Erosion of Network Security Caused by Each Bitcoin Halving

Bitcoin halving refers to the reduction of rewards for miners who validate network transactions every four years. Currently, the reward per block is 6.25 BTC, and the next halving is scheduled for April 2024. While halving is an integral part of Bitcoin’s supply control design, it may affect security in two ways:

Reduced number of miners: Halving directly reduces the profitability of mining, causing some miners to shut down their operations when mining costs exceed returns.

Reduced cost of a 51% attack: Each halving also halves the cost of bribing miners to carry out a 51% attack. This means that if someone wants to short BTC on a large scale, each halving will make the attack “easier” because the hash rate will decrease, the number of miners will decrease, and the cost of bribing miners (equivalent to the block reward) will be lower.

The security budget of the Bitcoin network has two levers to mitigate this erosion:

The first lever (not very reliable): The scarcity of the total supply of BTC drives up its price. However, the maximum supply of BTC is known to be around 21 million and is price-limited—it is influenced more by macro and cryptocurrency market sentiment.

The second lever (the point of discussion here): Assuming that the increasing cost of network/chain activity on the Bitcoin network will gradually compensate for the decreasing block rewards over time. Apart from the earlier “tokenization” trend this year, this lever has not been used yet, but there is hope that the situation will change.

Creating demand for Bitcoin block space to increase miner fees is a necessary requirement for the longevity and security of the Bitcoin network.

3. Macroeconomic Catalyst

BTC ETF Applications: BlackRock Inc., the world’s largest asset management company, has recently applied for a BTC ETF, followed by other issuers such as Fidelity Investments, Invesco, and WisdomTree. The significance of this is manifold:

Market Access: 80-90% of wealth in the US is controlled by financial advisers or institutions, and their primary means of entering the market currently is through ETFs. The approval of a BTC spot ETF will have a significant impact on market demand, far exceeding the impact of merely doubling it.

Price Impact: As opposed to contract-based BTC futures ETFs, spot ETFs actually require financial institutions to purchase and hold the underlying assets.

Regulatory Leniency: ETFs would be regulated by the US Securities and Exchange Commission (SEC), potentially increasing investor confidence and market stability.

Industry Signal: The introduction of a BTC spot ETF marks an important step towards the legalization and integration of cryptocurrencies into traditional finance.

Impact of the next halving in April 2023: Historically, the Bitcoin halving event has been correlated with a significant price increase, as shown in the following graph (Cointelegraph):

4. The advantages of Bitcoin’s UTXO model over the account model in certain use cases

Parallelism for Zero-Knowledge Proofs (ZKP): The UTXO model is naturally more suitable for running ZKPs compared to the account model. The explicit dependency tracking feature of UTXOs allows for parallel execution, resulting in advantages for zero-knowledge proofs (ZKPs). In contrast to the sequential execution of the account model, UTXOs permit smaller and more manageable computations to run in parallel. For more information on this topic, refer to Zorp, a zkVM that achieves high ZKP performance using the UTXO model.

Privacy: The UTXO model ensures that each UTXO is unique, thus enhancing privacy. This makes it more difficult to trace transaction history compared to Ethereum’s account model, which is more transparent.

Simplified Verification: With UTXOs, transaction verification becomes simpler. Each transaction has specific UTXOs as inputs and outputs, making it easier for nodes to verify transactions without calculating the entire network’s state.

Security: The UTXO model has certain security advantages. In cases where the network is compromised or under attack, the UTXO model may limit the damage to specific UTXOs, while the account-based model may expose a broader range of accounts and their associated assets.

Atomic Swaps and Smart Contracts: The UTXO model is also applicable to atomic swaps, allowing transactions between different blockchains to be executed simultaneously. Additionally, Ethereum’s account-based model is more conducive to complex smart contracts due to its Turing-complete language, while Bitcoin’s UTXO model is more efficient for executing simpler and more deterministic smart contracts.

5. The current situation cannot support the infinite demand for Bitcoin block space

During the Ordinal mint frenzy, Binance had to integrate with the Lightning Network to reduce transfer costs. Users in El Salvador and other areas reported on Twitter that the transaction fee of $100 was close to $20. Interestingly, a few months ago, the gas fee of my experimental BRC-20 minting factory was $800 – something had to change.

6. Bitcoin as a brand asset

Despite ranking relatively low in the “survival of the fittest” criteria, the concept of “Panda diplomacy” has been prevalent since the Tang Dynasty, symbolizing friendship with recipient countries. Similarly, despite Bitcoin’s (BTC) low throughput and limited programmability, it remains the top-notch blockchain due to its brand effect.

While this prediction may take years to materialize, in the future, major layer-one blockchains will all eventually achieve performance power law – the speed increase from 100,000 TPS to 5 million TPS is no longer important for most customers – how will the biggest, most high-end customers choose?

Just like consumers choose to buy Gucci sunglasses instead of regular sunglasses from Target, when block space and performance become increasingly commoditized in the future, brand assets will also become very important. Thanks to Jason Fang from Sora Ventures for inspiring this viewpoint.

Part 2: Our Paper – Programmability and Capital Efficiency

Ethereum’s explicit mission is to become a programmable internet computer, while the interpretation of Bitcoin has always been a fiercely debated topic. What is the future identity of Bitcoin: as “lazy” digital gold for storing value, a payment currency (especially in emerging markets), or a programmable high-performance layer?

In our view, this ambiguity is a feature, not a flaw. The lack of consensus on what Bitcoin should be is the very catalyst we need to build a diverse and vibrant Bitcoin ecosystem, in which we see two different genres of innovation: making Bitcoin more “programmable” and “capital efficient”.

Making Bitcoin more “programmable” involves developing Bitcoin into an ecosystem similar to Ethereum. This includes addressing the limitations of Bitcoin’s native smart contracts and scalability (speed and cost-effectiveness). The scope of this development covers multiple verticals, including

Interoperability with other chains, such as bridging and EVM integration.

Complex DeFi and trading functionalities, including trading, various DEX platforms, synthetic assets, and LSD.

Support for Ordinals, BRC-20, and other future token standards.

The ability to issue new assets on the Bitcoin chain using specific token standards.

Utilize second-layer solutions using Bitcoin as the data availability layer, such as virtual machines, Rollups, and other scaling solutions.

Improving the “capital efficiency” of BTC primarily involves using BTC as a store of value and creating basic financial products on top of it. Capital efficiency theory does not prioritize the scalability or versatility of the Bitcoin chain. Instead, it focuses solely on financializing BTC to achieve sustainable returns and similar foundational financial products, thereby increasing the capital efficiency of BTC while balancing risks. This approach is a gradual extension of the concept of “BTC as a store of value.” The scope of this paper includes:

Trustless BTC bets and profits.

Native stablecoins on Bitcoin or BTC-backed stablecoins.

Bitcoin insurance, both on-chain and off-chain (there could be many directions to explore – please email me if you have any ideas).

Solutions to tackle the MEV (Miner Extractable Value) problem on Bitcoin (currently, if transaction fees are low, transactions often get stuck in the mempool, and MEV frontrunning has already occurred during the NFT craze).

Second-layer solutions, defined as any scaling solutions that can increase transaction speed and reduce Bitcoin network fees (which may include virtual machines, Rollups, using Bitcoin as DA, etc.).

Second-layer scaling solutions fall into both categories as they are the infrastructure for Bitcoin, making it more programmable and capital efficient.

In the two above arguments, we believe in the latter and are looking for products that can make Bitcoin more capital efficient as a digital asset rather than a programmable/general-purpose digital asset. We outline the reasons for taking this stance in the following.

Obvious product-market fit for BTC as a store of value

From the perspective of starting from scratch, which product in the entire cryptocurrency industry has the highest product-market fit? For native DeFi users, the answer might be Ethereum. But for non-cryptocurrency natives, it is BTC as a store of value.

Why not leverage and expand on this validated product-market fit as the sole digital gold rather than playing to other’s strengths? After all, beyond the Bitcoin ecosystem, there are plenty of solutions tailored for specific use cases (Solana, Ethereum L2s, Monad, etc.) with “genes” designed to be more suitable in terms of speed and scalability than the Bitcoin chain.

Source of net new demand: DeFi “non-degenerates”

When we get excited about unlocking liquidity for BTC, one important question to consider is: Where does this new liquidity come from? We believe that institutional BTC holders and non-cryptocurrency natives are the primary contributors. Unlike skilled DeFi users or so-called “degen,” institutional and retail investors have lower risk appetite and tolerance for complexity.

The attractiveness of BTC products to these new customer groups lies in the simplicity of the products, which make their BTC more “capital efficient” and generate sustainable and reliable returns without complex operations and counterparty risks.

The psychology of consuming, using, and risking BTC

Due to the different perceptions and characteristics of BTC and ETH, the psychology of transferring BTC is significantly different from ETH. In practical terms, how can someone transfer their BTC from a hardware wallet? The most important considerations are security and risk. The cost of increasing programmability is the cost of expanding the vulnerability area, which may hinder the participation of institutional miners and holders who are keen to mitigate risks.

We hope to use pandas as an analogy to summarize that our focus is on finding projects that help breed more panda babies, rather than changing the DNA of pandas. In this regard, we are particularly interested in the following vertical areas:

Bitcoin scalability solutions (Rollups/L2s)

Bitcoin-backed stablecoins

Bitcoin insurance products

MEV solutions on Bitcoin

Here are some projects in the above-mentioned areas:

Trust-minimized betting on Bitcoin

Babylon: a bridgeless and trust-minimized BTC staking platform. BTC stakers can earn yields with tokens on their chosen PoS chains. Similar to the Eigenlayer of Bitcoin, it adds another layer of cryptographic innovation to allow for “bargaining” on the non-negotiable Bitcoin chain.

LianGuaiLianGuaiya: a platform that uses STX and sBTC in its underlying infrastructure to enable BTC staking.

Atomic Finance: offers users self-custody yields of Bitcoin using DLC.

ACRE: another “Lido for BTC” that uses Threshold Network sidechains.

Bitcoin-backed stablecoins: eBTC (a Bitcoin-backed stablecoin developed on the EVM by the BadgerDAO team)

Bitcoin L2s and Rollups: see below

Other startups in the BTC ecosystem can be found on Sora Venture’s BTC market map.

Part 3: Bitcoin Renaissance

The Taproot upgrade is the main technological catalyst this year. Since its activation on-chain in November 2021, the Taproot upgrade makes the Bitcoin network more private and secure through Schnorr signatures (BIP 340); it makes the Bitcoin network more scalable by introducing BIP341 – LianGuai to Taproot (P2TR) and Merklized Alternative Script Trees (MAST); and it makes the Bitcoin network more programmable by modifying the Bitcoin scripting language to read Schnorr signatures. Our summer intern Vikram Singh has summarized the Taproot upgrade here.

Under the drive of the Taproot upgrade, various developer groups have emerged with their own ideas for the future of Bitcoin. These new initiatives coexist with the latest advancements from longstanding innovators like STX and Lightning Labs. We summarize the eight major “tribes” in the Bitcoin ecosystem as follows:

1. Stacks Ecosystem (STX)

We have been tracking the STX ecosystem for over a year. The project has multiple advantages. Please note, this is not financial advice.

One of them: Staking STX can earn BTC: The fact that STX can earn BTC rewards makes it a “proxy” for BTC, especially considering the upcoming BTC halving and institutional catalysts, making STX a unique and valuable asset.

Leading Universal Bitcoin L2: The Stacks project, started in 2017, is the brainchild of computer scientists Ryan Shea and Muneeb Ali from Princeton University. Muneeb completed his Ph.D. at Princeton University in 2017, and Ryan and Muneeb previously went through Y Combinator. Stacks has been slowly but steadily evolving to maintain the largest ecosystem built on top of BTC.

Compliant Tokens: STX was the first token issuance to comply with SEC standards and released a decentralized framework in 2021 (also submitted updates as a non-security to the SEC). While many other major tokens are still going through struggles with the U.S. Securities and Exchange Commission to shed the label of “security tokens,” STX has achieved enough decentralization, much like Ethereum did in 2017, to no longer be distracted by legal battles in the future.

Tokenomics (Again, not financial advice, data as of November 27, 2023): As the dominant Bitcoin L2 in the liquid market, STX has a Fully Diluted Valuation (FDV) of **~1.2 billion USD**, compared to recent Ethereum L2s: Celestia with an FDV of 5.5 billion USD, Optimism with an FDV of 7.4 billion USD, and Arbitrum with an FDV of 10 billion USD. Don’t forget that BTC’s market cap is 2-3 times that of ETH.

Additionally, STX’s distribution schedule (78% distribution) – the main source of inflation achieved by releasing more token supply into circulation – is on par with mature projects like Solana (approximately 75% distribution) and in sharp contrast to other newer chains like Arbitrum (approximately 13% distribution), Optimism (approximately 20% distribution), and Celestia (approximately 15% distribution).

Key Ecosystem Catalysts: There are two upcoming ecosystem upgrades – the Nakamoto upgrade and sBTC, planned to launch in early 2024.

Officially Becoming Bitcoin L2 through Nakamoto Upgrade: With the Nakamoto upgrade, STX will inherit 100% of the hash rate of BTC, ensuring the security (against reorganization) of transactions on the Stacks network. This upgrade also marks Stacks’ transition from BTC’s sidechain to L2.

sBTC will allow original BTC to run directly as sBTC on Stacks. While it is trust-minimized (through multi-signature) rather than fully trustless, it is as good as any solution in the market without changing the BTC operation code.

Interoperability through EVM and Rust-VM subnets: A common criticism of the STX ecosystem is its lack of interoperability due to Clarity (its programming language). After the Nakamoto upgrade, Stacks will introduce new subnets to support other programming languages and execution environments like EVM subnets and Rust VM. In addition, Stacks L2 has already started supporting WASM, which will open doors for Rust, Solidity, and other languages directly on the Stacks L2 layer, along with the Nakamoto upgrade.

Source: https://flagship.fyi/outposts/bitcoin-economy/everything-you-need-to-know-about-stacks-nakamoto-upgrade/ 

Our summer intern Vikram also presents his in-depth research on the STX ecosystem here for further reading.

2. NFTs and more: Orderals, BRC-20, and other new standards

On November 7, 2023, Ordinals (ORDI) BRC-20 tokens were listed on Binance, with a trading volume of over $100 million in 24 hours. What is it, and what happened?

The emergence of Ordinals is thanks to two updates to the Bitcoin protocol: Segregated Witness (SegWit) in 2017 and Taproot in 2021. These updates extended the data stored on the blockchain, allowing images, videos, and other media, giving birth to Ordinals. Following closely, DOMO invented the BRC-20 token standard by embedding JSON in Ordinals as a thought experiment (yes… seriously).

BRC-20 has no real value: It lacks smart contract functionality, programmability, or interoperability, which are exactly what you would expect from the corresponding ERC-20 standard on Ethereum. The community is actively working on alternative token standards, such as

BRC-721E: Developed in collaboration with Bitcoin Miladys, Ordinals Market, and the Bitcoin wallet Xverse, BRC-721E allows users to bridge NFTs from Ethereum to Bitcoin, providing the possibility of cross-chain interaction for ERC721 NFTs to migrate to the Bitcoin network.

SRC-20: A token standard that supports Bitcoin stamps for secure and tradable artwork. It can embed data in Bitcoin transactions, similar to BRC-20, but with a different approach.

RUNES (not related to Thorchain—just the same name): A potential alternative to the BRC-20 token standard, it is more lightweight and reduces congestion on the Bitcoin network. However, this is a very novel and uncertain proposition proposed by creator Cacey Rodarmor.

ORC-Cash: A native cash token system for UTXO/Ordinals, protected by 100% hashpower.

Anyway, the rise of BRC-20 and Ordinal Minting Factory in early 2023 has increased the fees charged to miners on the Bitcoin network by 12,800%, with a total fee of 44.5 million. Not too shabby.

Galaxy also released a research report predicting that by 2025, the market size of Bitcoin Inscriptions and Ordinals will reach $5 billion. Some may argue that the wave of Ordinals is just a fashion trend, but the same can be said for Ethereum’s NFTs. At least Ordinals have progressive improvements, so buyers no longer have to worry about their image storage being “swept away”.

From https://statoshi.info

Critics have been against Ordinals, arguing that the block space expansion caused by Inscriptions would lead to long-term centralization. In fact, since Ordinals, the amount of data storage required to run a full Bitcoin node by miners (see the figure above) has dramatically increased. But as the Galaxy report pointed out, Inscriptions on the blockchain can establish minimum block space requirements, which is actually the help that Bitcoin’s security and fee market urgently need.

We believe that Ordinals is a positive development for the Bitcoin community. Some of the projects in this field include: the Ordinal lending protocol, Liquidium; Ordinal wallets such as Hiro/Leather, Xverse, Oyl; and leading market platforms like Ordinal Wallet, Magic Eden, Unisat, and OKX, among others.

3. Sidechains

Rootstock (RSK) is a Bitcoin sidechain that introduces Ethereum Virtual Machine (EVM)-compatible smart contracts to the Bitcoin network. Unlike “Lightning” which runs native BTC within the Bitcoin blockchain, RSK uses two-way pegging to anchor BTC with RSK’s derivative asset smartBTC (or RBTC). RBTC is pegged to BTC at a 1:1 ratio but is not trustless, as its security relies on merged mining and is thus dependent on centralized custodians.

Threshold Network uses threshold ECDSA signatures to connect the Ethereum and Bitcoin networks. It mints ERC-20 tBTC from BTC and anchors BTC-tBTC under the majority-honest assumption via a scheme of multisignatures among verifiers.

Liquid Network is a Bitcoin sidechain that allows users to anchor their own BTC to the Liquid Network and convert them into corresponding tokens (L-BTC), which can be used for faster and more confidential transactions. However, similar to RSK, it also has trust assumptions for “functionaries” such as reputable cryptocurrency exchanges and service providers.

Other sidechain solutions include Softchain, Drivechains, Federated Chains; interoperability layers like Interlay, etc.

4. Rollups or L2s on the Bitcoin Chain

Urbit architecture for Bitcoin L2: With the integration of identity and networking systems, Urbit provides an intriguing architecture for building Bitcoin Layer 2 solutions. Other P2P protocols typically lack a global identity system, but Urbit is different, as it provides a default identity code point. Existing Bitcoin identity solutions are simple and limited in comparison, while Layer 2 nodes on Urbit implement a shared identity system for identification, connection of peers, and exchange of information among peers. This eliminates the need for custom integration, allowing applications to seamlessly interact across different protocols and reducing the complexity of managing different identity formats and node RPC solutions. With Urbit, developers can benefit from comprehensive addressing capabilities, key recovery capabilities, non-spam credibility, and the ability to maintain consistent identities across various applications and network layers. Thanks to Jake Hamilton from Volt company for raising and contributing to this point.

Botanix Spiderchain: A second layer PoS EVM for Bitcoin, using a distributed multi-identity network to achieve bi-directional anchoring with Bitcoin (without requiring BIP).

ZK Rollups on Bitcoin

Alpen Laboratory (requires BIP)

Bison Labs (no BIP required): Using DLC to achieve client-side ZK verification for trustless bridging.

Chainway: ZK Rollups on Bitcoin with an open-source data availability adapter.

Kasar Labs: Collaborated with Taproot Wizards to release a Bitcoin DA adapter, enabling developers to incorporate the Madara stack into Bitcoin to run Starknet Rollup based on the Cairo programming language created by StarkWare.

5. BitVM

So far, attempts at various sidechains have not yet achieved fully trustless bi-directional anchoring solutions that do not rely on the approval of Bitcoin Improvement Proposals (BIPs). Robin Linus’s latest solution, BitVM, seems to be a golden opportunity, although it is still in its early stages. BitVM represents the first step towards achieving Turing-complete Bitcoin contracts without modifying the opcode. The main innovations of BitVM include:

Introducing state in different UTXOs or scripts using Bitcoin commitments

Verifiability through logical gates: Problematic programs can be deconstructed in the virtual machine and the validity of execution can be verified by validators. This ensures that any false claims can be swiftly debunked.

Lightweightness for the Bitcoin network: Similar to Optimistic Rollup on Ethereum, BitVM does not perform a large amount of computation on Bitcoin. Instead, it minimizes the scope of on-chain footprints, only refuting incorrect executions, more like a solver and verifier. Only the output of BitVM programs is used in Bitcoin transactions.

Although BitVM currently has extremely limited functionality, with only one viable feature being zero-knowledge proof verification, potential future use cases include bi-directional anchoring with sidechains to achieve scalability. If a ZK verifier can be built into BitVM, Bitcoin could achieve Rollup upgrades without a soft fork. Please listen to Stephan Livera’s podcast.

6. Lightning Network: It is a second layer scaling solution for Bitcoin (BTC) that combines on-chain settlement with off-chain processing using payment channels. This approach aims to accelerate and reduce the cost of BTC transactions. In my opinion, the Lightning Network is more like an “application” chain designed specifically for payment use cases, rather than a more comprehensive second layer solution like Arbitrum on Ethereum.

The network has seen an impressive 1212% growth in the past two years, with a TVL of approximately $160 million at the time of writing this article. However, the off-chain components also bring their unique challenges, such as the threat of Replacement Cycling Attacks.

Disadvantages: The Lightning Network is not entirely trustless as it requires peer-to-peer payment channels, sufficient liquidity, and continuous online presence. There is a risk of unilateral channel closure when users go offline, potentially resulting in funds being seized. Congestion in these channels can expose the network to fraud and attacks.

7. BTC Digital Asset Insurance

Taproot Assets: Protocols driven by Taproot for issuing assets on the Bitcoin blockchain and working in conjunction with the Lightning Network to enable fast and low-cost transactions.

RGB: A client-side validation of state and smart contract system operating at the second and third layer of the Bitcoin ecosystem. For a further read on the comparison analysis of Taproot Assets and RGB, check out Ben77’s analysis by Discoco Labs.

8. Integration with Other Ecosystems

Solana: SOLightning (Integration of Solana with the Lightning Network)

CEXs & dapps Integration: Binance, Coinbase, Cash App, etc.

Osmosis: NomicBTC

ICP ckBTC: Claimed to seamlessly anchor ICP with the Bitcoin chain without the need for off-chain intermediaries or bridging

Urbit Volt: Implementing the Lightning Network on Urbit. For those unfamiliar with Urbit, there is a comprehensive introduction written by Evan Fisher about its history, latest developments, and why it is a necessary addition to the blockchain.

In addition, the Bitcoin community has launched several initiatives aimed at nurturing the developer ecosystem and generating new ideas, such as Bitcoin Startup Labs, Bitcoin Frontier Fund, Outlier Venture’s BTC Basecamp, Wolf Incubator, Bitcoin Builders Association, etc.

Conclusion

Finally, returning to our previous analogy of pandas, what we believe in are innovations that can produce more panda babies (i.e., make BTC more “capital-efficient”) rather than innovations that take pandas away from their core advantages – rarity and cuteness (i.e., unique digital gold) – and force them into social roles, just like the EVM ecosystem today.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!