This article explores the reasons behind Bitcoin investment theory and highlights how Bitcoin is moving towards greater productivity and capital efficiency. It also proposes possible solutions for overcoming technical barriers. The article is sourced from Polygon Ventures’ X platform and is a comprehensive research document compiled and written by the team at “Chinese Blockchain”.
Summary:
This article aims to answer the frequently asked question of “why” regarding our Bitcoin investment theory. The topics discussed in the article should not be considered financial advice.
In summary, Bitcoin (BTC) is seen as an institutional-grade asset and a global remittance system. It is quickly becoming a programmable blockchain network, which has sparked intense debates. While BTC has long been considered a store of value, there are many technical, institutional, and market factors driving it towards being more productive than just a “lazy” digital gold. In this article, we share our views on the history and controversies of Bitcoin innovation, the latest initiatives, and our investment theory at Portal, with the aim of making Bitcoin more “capital efficient” rather than just “programmable”.
Digital gold is just the prelude. The most robust asset created by human civilization is extending its immense impact to the smart contract field.
Bitcoin is mostly classified as a store of value tool because it lacks programmability. Coupled with low transaction throughput, slow speed, and high fees, most of the Bitcoin held by 3 billion users remains unused.
This lack of programmability stems from its non-Turing complete script language and the strict limitations set by the core development team on executable operations. This inflexibility ensures security but comes at the cost of slow innovation.
While assets like real estate, gold, and stocks can be used as collateral to generate income, Bitcoin mostly remains idle.
Previous attempts to lend Bitcoin left users with an unpleasant impression as they had to hand over the custody of their Bitcoin to highly leveraged entities that eventually went bankrupt.
Attempts to transfer Bitcoin to Ethereum’s virtual machine chain to replicate DeFi lending were not very successful as the two environments are completely different, and a trust zone needed to be provided for the exchange.
Bridges lock Bitcoin and mint a representative on the Ethereum virtual machine chain. This introduces reliance on a central entity or a group of multi-signature validators, which lowers security. The market value of the most popular bridged token WBTC is only $10 billion, less than 1% of Bitcoin’s total market value.
There are three catalysts drawing attention:
1) Ordinals
2) BitVM
3) Babylon
While ETF inflows have attracted attention in the financial industry, Ordinals has attracted a lot of developer attention to the Bitcoin ecosystem. Ordinals and BRC-20 Tokens “burn” data onto the Bitcoin ledger but require a social consensus layer to convert these specific data encodings.
Ordinals has already pushed Bitcoin NFTs to second place in terms of trading volume, second only to Ethereum. This success raises a key question: Can we build an independent, trustless EVM normalization on Bitcoin without relying on a social layer?
Due to limitations at the base layer, this seems impossible. Sidechains have been the only alternative solution, utilizing Bitcoin miners to secure new chains embedded with the EVM environment. However, the security of this layer depends on an external coordinator group.
Robin Linus from the ZeroSync team found a way to implement validator logic on the Bitcoin script without changing the protocol or requiring a soft fork.
BitVM adopts an OP-proven-validator model to express Turing complete smart contracts.
The computation is performed off-chain and settled on the Bitcoin chain, similar to a modular Rollup ecosystem. Any observer can verify the execution results and have the power to penalize the verifier and reduce their funds if fraud is detected.
This became the catalyst for the takeoff of layer 2 extensions on Bitcoin. Teams like BSquaredNetwork are using BitVM to build Rollups with diverse proof mechanisms and virtual machines. The citrea_xyz team designed a zero-knowledge verifier circuit that natively executes on the Bitcoin script.
Rollups on Bitcoin leverage modular technology stacks, greatly improving scalability and efficiency. This progress has not only attracted talented developers skilled in EVM tools but also millions of users eager to interact with the same user experience.
BitVM also introduced trust-minimized bridges to move BTC to POS chains. Citrea collects lightweight client proofs from other chains that can be locally verified on Bitcoin. This reduces the required trust and ensures integrity as long as at least one validator remains honest.
While layer 2 extensions are busy scaling, Babylon has sparked a revolution in capital efficiency within the Bitcoin ecosystem. In short, Babylon is Bitcoin’s EigenLayer. @eigenlayer is a re-collateralization protocol that allows Ethereum stakers to provide verification services to POS chains, bridges, and sequencers and earn rewards.
It ensures integrity through an automatic production reduction mechanism in the base chain smart contract, which is impossible to achieve on Bitcoin. Therefore, the Babylon team proposed a clever solution. Bitcoin is locked in a multi-signature account, allowing holders to stake and retrieve their funds after a waiting period.
If any attack is observed, the protocol reveals the key to this vault, enabling automatic punishment.
By staking their Bitcoin, users can provide verification services for POS chains, DA layers, oracles, AVS, etc. This has sparked a new normalization that allows Bitcoin to generate substantial returns without giving up custodial control.
POS chains and other verification services can leverage Bitcoin’s economic security to bootstrap their protocol and build a secure layer. Portal Finance is securing a Bitcoin bridge, Nubit is using Bitcoin as a DA layer, and the Avail Project plans to use legal persons supported by Bitcoin.
LSTs increase liquidity by creating lock-up staking tokens on POS chains that are freely tradable. Babylon collaborates with Ankr Staking to re-stake these tokens for higher returns, creating stablecoins supported by Bitcoin and more.
In summary, Bitcoin is taking important steps in two areas:
Vertical scaling, addressing programmability issues through layer 2 solutions capable of handling millions of transactions.
Increasing capital efficiency by serving as a reliable collateral in various applications.
BitVM is still in its early stages and faces some challenges in multi-party contracts, high computational costs, and the need for regular server interactions. The ultimate goal may involve integrating zero-knowledge verifier opcodes into Bitcoin’s script language to overcome these obstacles.
Echoing @sandeepnailwal’s view, “Bitcoin is an isolated island with no contact with the wider web3 ecosystem.”
We are on the verge of witnessing the emergence of new applications on Bitcoin that smoothly integrate with the EVM stack, opening up endless possibilities.