Analyzing How to Utilize Second Layer Solutions, Transform Community Perception, Improve Infrastructure, and Promote the Development of the Bitcoin Ecosystem, Potentially Surpassing the Scale of the Ethereum Ecosystem. This article is sourced from Primal Capital.
Article
, Compiled, organized, and written by Plain Blockchain.
(Background Summary:
In-depth discussion on the differences between Layer2 and L2 Rollup, the way forward for the Bitcoin ecosystem.
)
(Supplementary Background:
Commentary: Why the Bitcoin Ecosystem “Will” Surpass Ethereum?
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Table of Contents
Why Bitcoin Needs an Ecosystem
Current State of the Bitcoin Ecosystem
Scaling Solutions
Counterparty
Stacks
Rootstock/RSK
Liquid Network
Mintlayer
RGB
Omni Layer
Notable Projects
Local Communities
Developing the Bitcoin Ecosystem
Changing Community Perception
Building Better Infrastructure and Tools
Attracting Developers, Investors, and Entrepreneurs
Institutional Adoption
Conclusion
This article focuses on the untapped potential of the Bitcoin ecosystem, a topic that enthusiasts and experts in the industry are highly interested in and debating. Our goal is to provide comprehensive insights that enrich your understanding of the current market and highlight future possibilities.
In summary, Bitcoin remains the largest blockchain by market capitalization, but compared to Ethereum, it has not yet developed a decentralized finance (DeFi) ecosystem as extensive as Ethereum’s.
While Bitcoin has the tools and infrastructure necessary for a native ecosystem, its exploration in the DeFi field has been relatively mild. However, with growing interest in Bitcoin, we may see Bitcoin emerge as more than just “digital gold”.
We will explore the challenges and potential strategies for developing the Bitcoin ecosystem, including second layer solutions, community involvement, and institutional adoption, highlighting the untapped potential of Bitcoin in the DeFi field.
Below is the basic flywheel model of the Bitcoin ecosystem:
Why Bitcoin Needs an Ecosystem
Bitcoin has always been a leader in the blockchain field, taking the center stage from the beginning. Like a pioneer planting a flag in uncharted territory, Satoshi Nakamoto claimed his stake in the origin of a new technology – blockchain.
Indeed, Bitcoin is the pioneer of all blockchain technologies and still holds the largest market capitalization in the blockchain industry. Given its prominent position, the emergence of a large and vibrant Bitcoin ecosystem seems inevitable. However, this has not happened, which leads us to a question: why?
As the blockchain movement developed, many other networks emerged, offering ecosystems and financial infrastructure that Bitcoin lacked. Ethereum was the first to achieve this and became the champion platform advocating for decentralized finance (DeFi).
Given Bitcoin’s status and reputation, it seemed destined to enter and dominate the DeFi field. However, contrary to expectations, Bitcoin’s exploration in the DeFi field has been relatively mild. For example, Bitcoin’s largest second layer network, the Lightning Network, has a relatively small Total Value Locked (TVL) of only $277 million, while Ethereum’s largest second layer network, Arbitrum, has a TVL of $3.3 billion at the time of writing.
Some may argue that this is simply because Bitcoin lacks the programmability of Ethereum. However, the emergence of second layer networks built on top of Bitcoin has debunked this misconception, providing users with the tools and infrastructure needed to develop a vast and diverse native ecosystem.
Now, the only remaining task is to influence the vast Bitcoin user and holder community and build a comprehensive ecosystem. Bridging the gap between the immense value Bitcoin holds and the world of DeFi could bring countless possibilities to Web3. The roadmap ahead includes adopting more layer solutions, nurturing a more collaborative developer community, and leveraging Bitcoin’s unparalleled security.
Current State of the Bitcoin Ecosystem
Bitcoin originated from the cypherpunk community and has rapidly developed since 2008. Despite this, the core code of the Bitcoin protocol itself has seen minimal changes, and its role still primarily revolves around being a medium of exchange.
Indeed, the true value of the Bitcoin network still lies in its role as a digital gold; Bitcoin itself. But even in this role, the Bitcoin network faces challenges related to scalability, transaction speed, and cost, hindering its ability to process transactions and support a comprehensive DeFi ecosystem.
Currently, the Bitcoin network is composed of a series of miners, nodes, stakeholders, developers, and a certain scale of second layer networks, sidechains, and other decentralized applications (DApps). Miners and nodes support the network by verifying transactions and maintaining consensus among stakeholders. This is achieved through the use of Proof of Work (PoW) consensus mechanism, which can lead to slower ecosystem growth compared to other layer one protocols that use Proof of Stake mechanism.
At the same time, the developer community helps expand the native ecosystem and occasionally updates the core protocol. Achieving consensus for upgrades within the developer community is challenging, resulting in a lack of change. For example, Taproot is the first significant update to Bitcoin since SegWit in 2017. Here is a brief introduction to the ecosystem:
Source: Coin360
Due to infrequent updates, Bitcoin has encountered some challenges in terms of scalability and programmability. Therefore, a prerequisite for building a DApp ecosystem on Bitcoin is a scalability solution with smart contract capabilities. Thus, second layer networks and sidechains have been developed on the Bitcoin network to facilitate the development of its native ecosystem.
Scaling Solutions
Scaling solutions are protocols built on top of the blockchain base layer that aim to improve efficiency by processing transactions off the main blockchain. By processing transactions off the main blockchain, they offer improved scalability, reduced transaction costs, and faster confirmation times. In addition to scalability, second layer networks and sidechains can introduce complex smart contract capabilities.
The first scaling solution to appear on the Bitcoin network was the Lightning Network. This platform is specifically designed to improve transaction speed and reduce costs on the Bitcoin network. Although the Lightning Network has performed well in this regard and has attracted a TVL of over $277 million, it has not provided the smart contract capabilities needed for a complex native DApp ecosystem.
Fortunately, several other scaling solutions specifically designed to enable smart contracts have emerged. Some of these solutions include:
Counterparty
Counterparty, launched in 2014, is a pioneering smart contract platform on Bitcoin, with its native token XCP. It allows for token creation, crowdfunding, and compatibility with multisig. While its popularity has declined, it has been revitalized through innovations like Ordinals on Bitcoin.
Stacks
Stacks serves as the smart contract and DApp layer for Bitcoin, using its own blockchain and employing the mechanism of Proof of Transfer (PoX). This mechanism leverages Bitcoin’s Proof of Work (PoW) for security. It enhances Bitcoin’s capabilities through DApps, DeFi, and a growing ecosystem.
Rootstock/RSK
RSK is a sidechain that merges mineable with Bitcoin, featuring Turing-complete smart contracts and EVM compatibility. It uses a native token called RBTC, which is anchored to Bitcoin through a two-way peg at a 1:1 ratio. Projects such as Sovryn and Money On Chain are built on RSK.
Liquid Network
Liquid is Blockstream’s Bitcoin sidechain that provides a native token called LBTC through a two-way peg mechanism. It offers decentralized trading, asset issuance, and confidential transactions. Liquid supports the creation of various digital assets such as NFTs, stablecoins, and tokens.
Mintlayer
Mintlayer is a Bitcoin sidechain that uses Dynamic Slot Allocation (DSA) consensus, combining Proof of Stake and Bitcoin’s Proof of Work. It supports smart contracts, asset issuance, and compatibility with the Lightning Network. Mintlayer’s protocol also enables cross-chain transfers and anchoring capabilities.
RGB
RGB is an off-chain smart contract layer for Bitcoin that allows for the creation of tokens and NFTs. It uses Bitcoin’s Unspent Transaction Outputs (UTXO) as one-time seals and provides full compatibility with the Lightning Network, ensuring fast settlements and improved scalability.
Omni Layer
Omni Layer is the foundational smart contract and asset platform for Bitcoin, enabling token creation and decentralized exchange (DEX). Tether (USDt) was originally launched on Omni. Omni Bolt, an upgraded version, adds compatibility with the Lightning Network, enabling faster and more scalable OmniToken transactions.
These scaling solutions have brought more possibilities to the Bitcoin ecosystem, allowing it to support smart contracts and complex decentralized applications. They provide higher scalability to the Bitcoin network and offer users a cheaper and faster transaction experience. Over time, as more developers and innovators join, the Bitcoin ecosystem will continue to grow and provide users with more choices and functionalities.
Notable Projects
With the rise of various scaling solutions on the Bitcoin network, many projects have emerged, providing the foundation for a thriving DeFi ecosystem. Beyond the basic transaction capabilities of the Bitcoin network, these projects open doors to more complex financial applications and tools that were previously considered only suitable for more flexible platforms like Ethereum.
From tokens built on Bitcoin to platforms supporting decentralized trading such as decentralized exchanges (DEXs), the ecosystem is dynamic and constantly evolving.
Platforms like Zest Protocol and Atomic Finance introduce peer-to-peer decentralized lending supported by Bitcoin.
Zest is a portfolio company of Primal Capital, focusing on mitigating counterparty risk in lending on the Bitcoin network.
Bisq Network and Alex Labs are Bitcoin decentralized exchange platforms (DEXs) that provide a peer-to-peer trading platform and operate autonomously under a decentralized autonomous organization (DAO).
Liquality Wallet offers a multi-chain Web3 wallet supporting multiple assets.
These are just a few examples of the DApps on the Bitcoin network. Each project brings unique DeFi solutions and trading platforms that cater to different user needs and emphasize different aspects of the DeFi experience.
But the Bitcoin ecosystem is not limited to just DApps. Leveraging Bitcoin’s fundamental unit, Satoshi (or Sats), Ordinals introduced a unique mechanism for creating NFTs on Bitcoin. Ordinals essentially adds value to each Satoshi, allowing it to be “stamped” with unique content.
Built on this, BRC-20 Tokens use JSON sealing to create original token contracts. The more advanced ORC-20 Tokens further develop this idea, utilizing SegWit witness data and JSON to issue tokens with more functionality. Stamps and SRC-20 Tokens, on the other hand, use blockchain insertion of arbitrary data to create native Bitcoin digital items. Ordinals quickly gained popularity and experienced exponential growth, reaching 60 million stamps (mintings) just in the past year since its launch in January 2023.
Further Reading:
BRC-20 on the Rise! BitcoinCoin NFT sales volume exceeds Ethereum by 1.6 times, miner rewards reach a year and a half high
Source: @dgtl_assets, Dune
These are just some of the projects being built on the Bitcoin network. Together, they form the foundation of a thriving decentralized finance system. However, despite having a sizable DeFi ecosystem, the network still lags behind its competitors, especially Ethereum, in terms of DeFi development. This underdevelopment is in stark contrast to the scale and enthusiasm of its global community, creating a peculiar juxtaposition in the cryptocurrency world.
Local Community
In terms of the local user community of this ecosystem, Bitcoin has many options. The size, enthusiasm, and dedication of the Bitcoin community are undeniable. With a global user base, miners, developers, and evangelists, Bitcoin can be considered the most influential and passionate community in the cryptocurrency world.
This community is characterized by open-source ethics, where decentralization, collaboration, security, and transparency are crucial principles. From online forums like BitcoinTalk to global conferences, the community flourishes through shared knowledge and the collective pursuit of financial sovereignty.
Most Bitcoin users are holders who see it as a store of value or digital gold. Bitcoin maximalists are a large subgroup within this holder community. They believe Bitcoin is the only cryptocurrency that can withstand the test of time. They consider Bitcoin’s decentralization, security, and first-mover advantage superior to all other digital currencies.
Bitcoin maximalists often criticize alternative coins (altcoins) and see them as interference or even potential threats to the purity and mission of Bitcoin. As Bitcoin maximalists oppose alternative blockchains, they are a major potential audience within the local Bitcoin ecosystem.
Bitcoin also has a large network of entities and users who use Bitcoin for its intended purpose – as a decentralized peer-to-peer electronic cash system. These users range from merchants accepting Bitcoin as payment for goods and services to individuals using Bitcoin for remittances, investments, or as a hedge against economic instability.
In addition to these entities, there are groups of developers and educators who play a crucial role in bridging the knowledge gap, providing resources, organizing workshops, and dispelling misconceptions about cryptocurrencies. They are often the first point of contact for newcomers and play a key role in shaping the understanding and perception of Bitcoin.
These groups often overlap and together form the core of the local Bitcoin community. Each brings their own perspectives, expertise, and enthusiasm about the future of the network, making them integral components of the Bitcoin ecosystem.
Developing the Bitcoin Ecosystem
Given the significant value stored in the Bitcoin network, developing the local ecosystem of Bitcoin is not just about attracting new users. Instead, projects need to leverage the existing user base, developers, and capital already present in the network. Many stakeholders in the Bitcoin network are dedicated to any initiatives aimed at developing the ecosystem, making them valuable resources.
The dormant funds in the Bitcoin network are substantial, accounting for about 70% of the total supply. If only 10% of this value is used for the Bitcoin ecosystem, it would amount to an estimated TVL (Total Value Locked) of $122 billion based on current calculations. To put this into perspective, the current TVL of all DeFi protocols is estimated to be around $91 billion. The potential of this ecosystem is undeniable as long as appropriate measures are taken to attract new users.
The foundation of this ecosystem has been laid, and the key now is to attract more community participation, larger investments, and build better tools. This triple challenge requires a comprehensive and coordinated approach, as each aspect plays a crucial role in the future growth and sustainability of the local Bitcoin ecosystem.
Changing Community Perception
The protection of the core principles and values of the Bitcoin protocol largely stems from the community’s resistance to change. However, this attitude is a double-edged sword as it slows down the integration of new features and adoption within the local ecosystem.
To overcome this contradiction, concerted efforts are needed to attract users and enhance user experience. This may involve a range of initiatives, from social media marketing campaigns to designing more intuitive and user-friendly wallet interfaces, and conducting educational activities to unveil the complexity of Bitcoin transactions, smart contracts, and network security.
For those who place particular emphasis on the purity of Bitcoin, the key is to provide opportunities without sacrificing their core values such as decentralization and security. Specifically, appropriate infrastructure and tools, as well as educational resources, are needed to cultivate their trust in the integrity of these systems.
Considering the security of the Bitcoin network, decentralized scaling solutions and robust smart contract frameworks can be built. Projects that can fulfill this promise may attract a large number of maximalists who want to leverage their holdings without compromising on their principles.
Building Better Infrastructure and Tools
The current pace of incremental change is insufficient to foster significant growth in the Bitcoin ecosystem. What is envisioned is a major shift that encompasses next-generation scaling solutions, advanced smart contract frameworks, and seamless interoperability with other blockchain networks.
In the current state, many existing Bitcoin-based scaling solutions are insufficient. For example, the Counterparty protocol has issues with the rigidity of its smart contract framework and the currency XCP, which is needed for certain functionalities. This may discourage purists from using the platform.
Some scaling solutions, such as the Lightning Network, completely lack smart contract functionality. These challenges highlight the need for a more holistic approach when developing infrastructure and tools within the Bitcoin ecosystem. To truly improve the Bitcoin infrastructure, a multi-pronged strategy is needed:
A. Enhancing Scalability
There are already many scalable solutions on the Bitcoin network, such as the Lightning Network mentioned earlier. However, most solutions have shortcomings in one or more key standards. What is needed is a comprehensive scalable solution that provides a secure, decentralized, and efficient platform for smart contracts.
B. Promoting Smart Contracts
One key advantage that propelled Ethereum to its current height is its intuitive and powerful smart contract engine, such as Solidity and EVM. To build a similar ecosystem on the Bitcoin network, local scaling solutions will need to adopt powerful and developer-friendly smart contracts and provide extensive educational resources.
C. Facilitating Interoperability
This will enable users to easily transfer assets between different chains and leverage the best features of each network.
D. Simplifying Development and Deployment Tools
This includes better wallets, development frameworks, and debugging tools. Additionally, user-friendliness is crucial for their interaction and participation in the ecosystem, especially for those who may have less technical knowledge.
E. Building a Strong Community, the Cornerstone of Any Successful Blockchain Project
Investing in education, workshops, and community-driven initiatives can help users discover, developers build, and investors connect.
While the Bitcoin ecosystem has made significant progress over the years, there is still much work to be done. Platforms like Stacks represent the future. They have the tools to build an ecosystem that can compete with Ethereum’s L2 ecosystem. By focusing on platforms like Stacks and building better infrastructure, the Bitcoin ecosystem can lead the forefront of the DeFi movement.
Attracting Developers, Investors, and Entrepreneurs
A prosperous ecosystem automatically generates its own attractiveness. With strong infrastructure, an active community, and available opportunities, developers will naturally be drawn to the Bitcoin network and develop new solutions for its ecosystem. In addition to developers, investors seek returns and look for opportunities in this growing field. For entrepreneurs, this provides an opportunity to enter a large and opportunistic ecosystem at its early stages. Given the standards of growth, the growing user base, and untapped potential, the possibilities for new ventures are vast.
Once started, this cycle quickly spirals into a network effect, where each new participant, whether a developer, investor, or entrepreneur, adds value to the network, making it more attractive to future participants.
The growing network then enters a positive feedback loop, increasing the overall utility, security, and value of the system. The cascade effect of attracting developers, investors, and entrepreneurs is profound. Each group mutually reinforces the others, creating a synergistic effect that amplifies growth. The only requirement is a catalyst to kickstart the loop, which may come in the form of improved infrastructure and a change in community perception.
Institutional Adoption
Over the years, the reasons to add Bitcoin to institutional balance sheets have shifted from speculative gambling to strategic necessity. In today’s world full of economic uncertainty, rising inflation, and market volatility, Bitcoin can serve as a hedge tool and investment asset, achieving portfolio diversification. The recent significant development is the approval and launch of Bitcoin ETFs in early January 2024. The successful issuance and the influx of substantial institutional investment funds strongly demonstrate the recognition of the value of the entire Bitcoin ecosystem.
This recognition may pave the way for institutions to directly invest in newly developed projects. While institutional investment relies on the effective development and successful growth of the Bitcoin ecosystem, its occurrence will be the final piece of the puzzle. Once institutional funds start flowing into projects and on-chain financial products, the network will become one of the largest Web3 DeFi ecosystems, attracting widespread attention.
Conclusion
If the Bitcoin ecosystem develops and grows according to the aforementioned standards, the results will be profound. With a significant amount of capital stored on the network, coupled with potential capital inflows from off-chain sources, the Bitcoin ecosystem has the potential to surpass Ethereum in scale. Such a transformation would have a tremendous impact on the entire cryptocurrency space. Of course, this hypothesis depends on numerous factors, and each factor requires collective efforts from the community.
However, a significant catalyst can trigger this evolution, whether it be market rallies, sudden changes in community perception, or other factors. As history has shown, the only constant in the Web3 space is change, and the growth and evolutionary potential of Bitcoin should not be underestimated.