Bitcoin Ecology: What Will Happen After the Craze?
In 2023, the Bitcoin ecosystem gained popularity in the market after the “inscription” boom. However, what will happen to the market after the hype? This article is based on the column article “What Kind of Bitcoin Ecology Do We Need in the Post-Inscription Era?” by xingpt, compiled, written, and translated by Shenzhen Tide.
(Background:
Sun Yuchen announced TRON’s entry into the Bitcoin Layer2, and the community mourned: “Sun is here… run away quickly.”
Supplement:
Bitcoin Layer2 surged across the board! STX surged 27% in a single day, CKB rose 300% in a month.)
Table of Contents:
ICO – Creating Fair but Useless Assets
Meme
Staking Bitcoin for Interest
Bitcoin Staking Mining
Issuing “Junk” Assets with Bitcoin Financing
So how do we “package” a perfect Bitcoin ecosystem infrastructure project?
In the cryptocurrency industry, when it comes to projects of technical nature, we often need to distinguish between short-term narratives and long-term value to determine which type of project belongs to speculative bubble assets and which type of project has long-term value from a technical perspective. Of course, good projects can also have both popular narratives and long-term value, and speculative bubble assets are not completely worthless.
When Ethereum was in its infancy, it needed to find an independent positioning separate from Bitcoin and derivative currencies, which was to support smart contracts to enable various applications. The first type of application was ICO, which emphasized fair token launches, i.e., raising ETH and providing users with Ethereum format erc20 tokens for their projects. The low market value of new coins caused early price surges, leading to the first asset speculation frenzy of Ethereum – the ICO boom.
Although in hindsight, 99% of ICO projects have no value, the speculation of ICO-like assets solidified the product positioning of Ethereum as a launch platform for applications. Later, it was also packaged as a more cool-sounding “world computer.”
DeFi and NFT: After Ethereum experienced a downturn in 2018 and 2019, the previous bull market from 2020 to 2022 mainly went through two rounds of mainstream speculation: DeFi assets, whose underlying product logic uses Ethereum’s native currency ETH as a “shovel” to provide ETH liquidity in various protocols such as lending, DEX, derivatives, etc., in exchange for project tokens. Unlike ICO, ETH is no longer used as investment capital but as collateral. The user experience is: I can get new tokens for free, using the users’ “freeloading” psychology to quickly capture users.
However, the mode of selling useless assets, similar to ICO, continued through the speculation of NFT. NFT meets several major characteristics: “useless” – more room for speculation, “low circulation and low market value” – early participants can gain huge profits, “fair” – everyone has the opportunity to participate except for whitelisted users. (Note: Here, we will not discuss the cultural attributes of NFT and ICO, only the similarities in asset speculation.)
Although Shib and the zoo market opened up the play of memes, it was not until the emergence of the Pepe series that memes became a separate track. However, the current problem with memes is that it is difficult to accommodate multiple high market value projects. Only 1-2 leaders can reach a market value of over 1 billion. Therefore, the driving force to boost the market value of Ethereum itself is still insufficient.
From the same perspective, we can also observe the reasons why ETH’s performance in this round is not as expected. It lacks low liquidity assets that can be sold similar to NFT and does not have the function of being a “shovel”. Arb/OP/Stark, etc., do not provide opportunities to stake ETH and mine Layer2 native tokens, except for rare cases like Manta and Blast, and the upper limit of restaking mined coins does not reach the market value of public chain Layer2. Therefore, ETH is weak in this round. For ETH, projects like Celestia that perform well have maximized the “shovel” attribute through modular narratives. In terms of “junk” assets, Solana has also brought out huge meme assets such as Bonk and Wif, and Sol’s ecosystem has many airdrops similar to Pyth, Jupiter, Jito, which also gives SOL some “shovel” attributes.
For the Bitcoin ecosystem, the biggest change in this market cycle is the introduction of “junk” assets directly on Bitcoin for the first time, with the attributes of low circulation, fair distribution, and low market value. The question is, what else can Bitcoin do in the post-inscription era?
Following the logic of using Bitcoin as a “shovel,” several speculations are proposed here.
Babylon, one of the leading projects in the Bitcoin ecosystem, provides BTC staking and aims to ensure the security of the Cosmos public chain by implementing slashing on the Bitcoin network. Both the narrative of using Bitcoin as a underlying interest-bearing asset and of ensuring the security of the public chain through the Bitcoin network are attractive enough. Therefore, Babylon was highly sought after by major VCs in the primary market. However, to make Bitcoin play the role of a “shovel,” two conditions need to be met: First, the PoS coins mined through the Babylon protocol should have sufficient value and quantity. Second, the Bitcoin staked through the Babylon protocol should also meet a certain volume. If the TVL is too low, the narrative of ensuring the security of the Bitcoin network will not hold. Both conditions require top-notch BD resources to promote, and it requires simultaneous efforts in both the Bitcoin ecosystem and the Cosmos ecosystem, which is quite challenging. Projects that want to emulate Babylon need to carefully consider whether they have the ability to raise hundreds of millions of dollars in financing.
Staking Bitcoin for mining is a cold start method adopted by many emerging Bitcoin Layer2 projects, such as BSquare and MerlinChain. However, for Bitcoin holders, there are two notable problems. First, security: Storing Bitcoin in the second layer network through cross-chain bridges requires trust in the security of the second layer network’s contracts and nodes, which is a significant downgrade in security compared to the Bitcoin network. Second, inconvenience in operations: Unlike Celestia, which is itself a Cosmos-based chain, where users can stake TIA once and receive multiple project airdrops, Bitcoin Layer2 mining requires users to switch between different protocols, which is not user-friendly and carries additional operational risks.
Another challenge is also the issue of returns. The value of the chain itself, which is mined as a shovel, is also worth considering. It is difficult to attract large Bitcoin holders to mine tokens of new chains without an annualized return of 10% or even 20% or more, despite the risks involved.
Therefore, projects adopting this model need to be proactive and try to attract high-risk preference holders from a limited number of large Bitcoin holders (which is not a high percentage). They also need to increase the value of their native token, including listing on exchanges and launching ecosystem projects, etc. It is more favorable for projects with experience in the cryptocurrency industry or asset operations.
The reason why “junk” assets seem “useless” but still find buyers is because of their innovative narrative methods. The narrative of Bitcoin’s revival is told in the inscription article, and NFT plays with cultural out-of-the-box concepts. Currently, Rune’s preparation is the most comprehensive, with Casey, the founder of Ordinals, and various community gameplay similar to RSIC constantly emerging. The project RCSV of Merlin, the project party of Merlin, can be said to be a typical one that starts with issuing new assets, focuses on speculative assets, and ultimately returns to a larger infrastructure story.
Other new Bitcoin Layer2 chains and cross-ecosystem chains similar to Babylon may need to consider not only how to create a more decentralized and secure second-layer chain (as the narrative basis of orthodox projects) but also how to create new asset categories and innovative fair distribution of assets before launching the chain, rather than simply airdropping users’ Bitcoin.
First, we hope to allow Bitcoin users to stake their Bitcoin in our protocol without the need to trust, without the need to use cold wallet funds for transfers, and to use similar Bitcoin-native underlying verification logic, such as Bitcoin Convenant, DLC, etc.
Second, we hope that the interest or new assets obtained from staking can be exchanged back for Bitcoin in some way, generating an attractive annualized return in Bitcoin terms.
For degens, newly issued assets should have relatively fair participation methods, relatively limiting the advantage of large holders, rewarding early community core users, and encouraging participation in open-source community construction as much as possible, contributing to the basic development tools and documentation of Bitcoin, and rewarding the open-source community. Feedback to the community is an important non-technical means to gain legitimacy, which may be even more important than technical means themselves.
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