This article discusses the reasons behind Bitcoin investment theory and highlights the direction in which Bitcoin is moving towards increased productivity and capital efficiency. It also presents possible solutions to overcome technical barriers. The article is sourced from Polygon Ventures’ X platform and translated, organized, and written by the Plain Blockchain team.
Table of Contents:
1. Bitcoin/Accounts: Undiscovered Potential
2. So, why the renewed interest in programmable Bitcoin?
1) Ordinals
2) Introduction of BitVM
3) Babylon
3. Conclusion
This article aims to address the frequently asked “why” question regarding our investment theory in Bitcoin. The topics discussed in the article should not be considered financial advice.
In simple terms, Bitcoin (BTC) is seen as an institutional-grade asset and a global remittance system that is quickly becoming a programmable blockchain network. Its identity has become a topic of intense debate. Although BTC has always been seen as a de facto store of value, there are many technological, institutional, and market factors that are driving it towards being more productive than just a “passive” digital gold. In this article, we share our views on the history and controversies surrounding Bitcoin innovation, recent initiatives, and Portal’s investment theory, 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 tremendous influence to the smart contract space.
Bitcoin is mostly categorized as a store of value tool because it lacks programmability. Additionally, it suffers from low transaction throughput, slow speed, and high fees. Most of the Bitcoin held by 3 billion users remains unused and dormant.
This lack of programmability stems from its non-Turing complete scripting language and strict limitations set by the core development team on executable operations. This inflexibility ensures its security but comes at the cost of slow innovation.
While assets like real estate, gold, and stocks can be used as collateral or generate income, Bitcoin remains mostly unused.
Previous attempts to lend Bitcoin left users with a bad impression as they had to relinquish custody of their Bitcoin to overleveraged entities that eventually went bankrupt.
Attempts to transfer Bitcoin to the Ethereum virtual machine chain for DeFi replication have also been unsuccessful as the two environments are completely different, and a trusted zone must be provided for the exchange to take place.
Bridges lock Bitcoin and mint a representation on the Ethereum virtual machine chain. This introduces a reliance on a central entity or group of multisignature validators, which lowers security. The most popular bridged token, WBTC, has a market value of only $10 billion, less than 1% of Bitcoin’s total market value.
There are three catalysts that have attracted attention:
1) Ordinals
2) BitVM
3) Babylon
While ETF inflows have attracted attention in the financial industry, Ordinals has attracted a lot of attention from developers in the Bitcoin ecosystem. Ordinals and BRC-20 Tokens “burn” data onto the Bitcoin ledger but require a social consensus layer to encode and translate this specific data.
Ordinals have already propelled Bitcoin NFTs to the second position in terms of trading volume, second only to Ethereum. This success raises a critical question: Can we build an independent, trustless EVM normalization on Bitcoin that is supported by Bitcoin L1 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 has found a way to implement validator logic on Bitcoin scripts without protocol changes or soft forks. BitVM adopts an OP-proof-validator model to express Turing complete smart contracts.
Computation is executed off-chain, and the results are 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 validator and reduce their funds if fraudulent behavior is detected.
This has become the catalyst for launching second-layer extensions on Bitcoin. Teams like BSquaredNetwork are using BitVM to build Rollups with diverse proof mechanisms and virtual machines. The citrea_xyz team has designed a zero-knowledge verifier circuit that natively executes on the Bitcoin script.
Rollups on Bitcoin utilize modular technology stacks, greatly improving scalability and efficiency. This progress has not only attracted talented developers proficient in EVM tools but also millions of users eager to interact with the same user experience.
BitVM also introduces 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, ensuring integrity as long as at least one validator remains honest.
While second-layer extensions are busy scaling, Babylon has sparked a revolution in capital efficiency within the Bitcoin ecosystem. Simply put, 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 reduction mechanism in the base chain smart contract, which is impossible to achieve on Bitcoin. Therefore, the Babylon team has proposed a clever solution. Bitcoin is locked in a multisignature account, allowing holders to stake and retrieve their funds after a waiting period.
If any attack is observed, the protocol will expose the key to this treasury, enabling automatic punishment.
By staking their Bitcoin, users can provide verification services for POS chains, DA layers, oracles, AVS, and more. This has led to a new normalization where Bitcoin generates substantial returns without having to relinquish self-custody.
POS chains and other verification services can leverage the economic security of Bitcoin to bootstrap their protocols and build security layers. Portal Finance is protecting a Bitcoin bridge, Nubit is using Bitcoin as a DA layer, and the Avail Project plans to utilize a statutory number supported by Bitcoin.
LSTs increase liquidity by creating lock-staking tokens that can be freely traded on POS chains. Babylon collaborates with Ankr Staking to re-stake these tokens for higher returns, creating Bitcoin-backed stablecoins and more.
In conclusion, Bitcoin is taking important steps in two aspects:
1. Vertical scaling by addressing programmability issues through second-layer solutions capable of handling millions of transactions.
2. Increasing capital efficiency by serving as a reliable collateral in a wide range of applications.
BitVM is still in its early stages and faces some challenges such as multi-party contracts, high computational costs, and the need for regular server interactions. The ultimate goal may involve integrating zero-knowledge verifiers opcodes into Bitcoin’s scripting language to overcome these barriers.
Echoing @sandeepnailwal’s perspective, “Bitcoin is an isolated island with no connection to the wider web3 ecosystem.”
We are on the verge of seeing the emergence of new applications on Bitcoin that seamlessly integrate with the EVM stack, opening up endless possibilities.