Analysis of How to Utilize the Second Layer Solution, Transform Community Awareness, Improve Infrastructure and Other Measures to Promote the Development of the Bitcoin Ecosystem, and Even Have the Opportunity to Surpass the Ethereum Ecosystem in Scale. This article is sourced from the author Primal Capital and was compiled, organized, and written by the Plain Blockchain Translation Zone.
(Foreword: In-depth exploration of the differences between Layer2 and L2 Rollup, the way forward for the Bitcoin ecosystem)
(Background: Commentary on Why the Bitcoin Ecosystem Will “Inevitably” Surpass Ethereum?)
Table of Contents:
Why Bitcoin Needs an Ecosystem
Current Status of the Bitcoin Ecosystem
Scaling Solutions
Counterparty
Stacks
Rootstock/RSK
Liquid Network
Mintlayer
RGB
Omni Layer (Omni Layer)
Prominent Projects
Local Communities
Developing the Bitcoin Ecosystem
Changing Community Awareness
Building Better Infrastructure and Tools
Attracting Developers, Investors, and Entrepreneurs
Institutional Adoption
Conclusion
This article focuses on the untapped potential of the Bitcoin ecosystem, which is a topic that enthusiasts and experts in the industry are very interested in and debating about. Our goal is to provide comprehensive insights that not only enrich your understanding of the current market but also highlight future possibilities.
In summary, Bitcoin is still the largest blockchain in terms of market value, but compared to Ethereum, it has not developed a decentralized finance (DeFi) ecosystem as extensive as Ethereum’s.
Although Bitcoin has the tools and infrastructure required for a native ecosystem, its exploration in the DeFi field has been relatively modest. However, with the 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 participation, and institutional adoption, highlighting the untapped potential of Bitcoin in the DeFi field.
Below is the basic flywheel model of the Bitcoin ecosystem:
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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 declared his rights in the origin of a new technology – blockchain.
Indeed, Bitcoin is the pioneer of all blockchain technologies and still remains the largest blockchain in terms of market value. Given its prominent position, the emergence of a large and vibrant Bitcoin ecosystem seems inevitable. However, this has not happened, which raises the question: why?
With the development of the blockchain movement, many other networks have emerged, providing the ecosystem and financial infrastructure that Bitcoin lacks. Among them, Ethereum was the first to achieve this and became the champion platform 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 modest. For example, the largest second-layer network of Bitcoin, the Lightning Network, has a relatively small Total Value Locked (TVL) of only $277 million, while the largest second-layer network of Ethereum, 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 Bitcoin has debunked this false assumption and provided users with the tools and infrastructure needed to develop a large and diverse native ecosystem.
Now, the only thing left to do is to influence the vast community of Bitcoin users and holders and build a comprehensive ecosystem. Bridging the gap between the immense value inherent in Bitcoin and the world of DeFi could bring countless possibilities to Web3. The roadmap ahead includes adopting more layering solutions, nurturing a more collaborative developer community, and leveraging Bitcoin’s unparalleled security.
Current Status of the Bitcoin Ecosystem
Bitcoin originated in the cypherpunk community and has rapidly developed since 2008. Despite this, the core code of the Bitcoin protocol itself has undergone 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 being the arbiter of digital gold – Bitcoin itself. But even in this role, the Bitcoin network faces challenges related to scalability, transaction speed, and cost, which hinder its ability to process transactions and support a comprehensive DeFi ecosystem.
Currently, the Bitcoin network consists 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, compared to other first-layer protocols that use Proof of Stake mechanisms, may result in slower ecosystem growth.
At the same time, the developer community helps expand the native ecosystem with scaling solutions and occasional updates to 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 major update to Bitcoin since SegWit in 2017. The following is a brief introduction to the ecosystem:
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Source: Coin360
Due to infrequent updates, Bitcoin has encountered some issues in terms of scalability and programmability. Therefore, a prerequisite for building a DApp ecosystem on Bitcoin is having a scaling 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, aiming to improve its 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 the speed and reduce the cost of transactions on the Bitcoin network. While the Lightning Network has performed well in this regard and attracted a total value locked (TVL) of over $277 million, it has failed to provide the smart contract capabilities required 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 is compatible with multisig. Although 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) to provide 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 in a 1:1 ratio through a two-way peg. Projects like Sovryn and Money On Chain operate on RSK.
Liquid Network
Liquid is Blockstream’s Bitcoin sidechain, offering native token LBTC through a two-way peg mechanism. It provides tools for 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 utilizes the Dynamic Slot Allocation (DSA) consensus, combining Proof of Stake and Bitcoin’s Proof of Work. It supports smart contracts, asset issuance, and Lightning Network compatibility. The Mintlayer protocol also allows for cross-blockchain transfers and anchoring capabilities.
RGB
RGB is an off-chain smart contract layer for Bitcoin that enables the creation of tokens and NFTs. It utilizes Bitcoin’s unspent transaction outputs (UTXOs) as one-time seals and provides full Lightning Network compatibility, ensuring fast settlements and scalability.
Omni Layer
Omni Layer is the foundational smart contract and asset platform for Bitcoin, enabling token creation and a decentralized exchange (DEX). Tether (USDt) was initially launched on Omni. Omni Bolt, an upgraded version, added Lightning Network compatibility, resulting in faster and more scalable OmniToken transactions.
These scaling solutions have brought more possibilities to the Bitcoin ecosystem, enabling it to support smart contracts and complex decentralized applications. They provide higher scalability for 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.
Prominent Projects
With the emergence of various scaling solutions on the Bitcoin network, many projects have emerged to provide the foundation for a thriving DeFi ecosystem. In addition to the basic transaction capabilities of the Bitcoin network, these projects have opened the doors to more complex financial applications and tools, many of which were previously thought to be only suitable for more flexible platforms like Ethereum.
From creating tokens on Bitcoin to supporting decentralized trading platforms like decentralized exchanges (DEXs), this ecosystem is dynamic and constantly evolving.
Platforms like Zest Protocol and Atomic Finance have introduced peer-to-peer decentralized lending supported by Bitcoin.
Zest, a portfolio company of Primal Capital, focuses on addressing counterparty risk in lending on the Bitcoin network.
Bisq Network and Alex Labs are Bitcoin decentralized exchange platforms (DEXs) that provide a P2P trading platform and operate autonomously under a decentralized autonomous organization (DAO).
Liquality Wallet offers a multi-chain Web3 wallet that supports multiple assets.
These are just a few of the many 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 has introduced a unique mechanism for creating NFTs on Bitcoin. Ordinals essentially adds value to each Satoshi, enabling it to be “stamped” with unique content.
BRC-20Token is built on top of this, creating original token contracts using JSON stamps. The more advanced ORC-20Token further develops this idea, utilizing Segwit witness data and JSON to issue tokens with more functionality. Stamps and SRC-20Token use blockchain insertion of arbitrary data to create native Bitcoin digital items. Ordinals quickly gained popularity and experienced exponential growth, reaching 60 million stamps (minted coins) in just the past year since its launch in January 2023.
Further Reading:
BRC-20 Trending! BitcoinBitcoin 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 a few of the projects being built on the Bitcoin network. Together, they form the foundation of a thriving decentralized financial 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 size and enthusiasm of its global community, creating a peculiar juxtaposition in the cryptocurrency world.
Local Community
When it comes to the local user community of this ecosystem, Bitcoin has many options. The size, passion, and dedication of the Bitcoin community are undeniable. With a global user base, miners, developers, and evangelists, Bitcoin can be said to have 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 essential principles. From online forums like BitcoinTalk to global conferences, the community thrives on shared knowledge and the collective pursuit of financial sovereignty.
Most Bitcoin users are holders, viewing it as a store of value or digital gold. Bitcoin maximalists are a large subgroup within this holder community. They believe that Bitcoin is the only cryptocurrency that can withstand the test of time. They believe that Bitcoin’s decentralization, security, and first-mover advantage make it 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 the primary potential audience for the local Bitcoin ecosystem.
Bitcoin also has a large network of businesses 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 vital role in shaping the understanding and perception of Bitcoin.
These groups often overlap and collectively form the core of the local Bitcoin community. Each brings their own perspectives, expertise, and enthusiasm about the future of the network, making them an integral part of the Bitcoin ecosystem.
Developing the Bitcoin Ecosystem
Given the significant value stored in the Bitcoin network, developing the local ecosystem goes beyond attracting new users. Instead, projects need to leverage the existing user base, developers, and capital present in the network. Many stakeholders in the Bitcoin network are committed to any initiatives aimed at developing the ecosystem, making them valuable resources.
The dormant funds in the Bitcoin network are substantial, accounting for approximately 70% of the total supply. If only 10% of this value is utilized for the Bitcoin ecosystem, it would amount to an estimated $122 billion in Total Value Locked (TVL) based on current calculations. For comparison, the TVL of all current 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 Bitcoin’s core principles and values largely owes to 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, joint efforts are needed to attract users and enhance the user experience. This may involve a range of initiatives, from social media promotion to designing more intuitive and user-friendly wallet interfaces, to conducting educational activities that reveal the complexities of Bitcoin transactions, smart contracts, and network security.
For those particularly focused on Bitcoin purity, 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 foster 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 their principles.
Building Better Infrastructure and Tools
The current pace of incremental change is not sufficient to spur significant growth in the Bitcoin ecosystem. What is envisioned is a major transformation encompassing next-generation scalable solutions, advanced smart contract frameworks, and seamless connections with other blockchain networks.
In the current state, many existing Bitcoin-based scaling solutions fall short. For example, the Counterparty protocol has issues with the rigidity of its smart contract framework and the currency XCP required for certain functionalities, which may discourage purists from using the platform.
Some scaling solutions, like the Lightning Network, completely lack smart contract functionality. These challenges highlight the need for a more comprehensive approach when developing infrastructure and tools within the Bitcoin ecosystem. To truly improve the Bitcoin infrastructure, a multi-faceted strategy needs to be adopted:
A. Enhancing scalability: There are already several scalable solutions on the Bitcoin network, such as the Lightning Network mentioned earlier. However, most solutions have shortcomings in one or more key criteria. 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 has 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 robust and developer-friendly smart contracts, along with providing extensive educational resources.
C. Promoting interoperability: Building bridges and connectors to seamlessly interact with other blockchain networks 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 users who may have less technical knowledge, as it influences their interaction and participation in the ecosystem.
E. Building a strong community: Community-driven initiatives, investment in education, workshops, and community-driven initiatives can help users discover, developers build, and investors connect with the ecosystem.
Despite significant progress in the Bitcoin ecosystem over the years, there is still much work to be done. Platforms like Stacks represent the future, as 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 thriving ecosystem generates its own appeal. With a strong infrastructure, active community, and available opportunities, developers will naturally be drawn to the Bitcoin network and develop new solutions for its ecosystem. Investors, too, seek returns and look for opportunities in this growing field. For entrepreneurs, it presents an opportunity to enter a vast and opportunity-filled ecosystem at its early stages. Given the standards of growth, the growing user base, and untapped potential, the possibilities for new businesses are wide-ranging.
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, enhancing the overall utility, security, and value of the system. The cascading effect of attracting developers, investors, and entrepreneurs is profound. Each group mutually reinforces, creating a synergistic effect that amplifies growth. The only requirement is a catalyst to start the loop, which may come in the form of improved infrastructure and a shift in community perception.
Institutional Adoption
Over the years, the reasons for adding Bitcoin to institutional balance sheets have evolved from speculative gambling to strategic necessity. In today’s world 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 January 2024. The successful issuance and significant inflow of institutional funds into these ETFs strongly validate the value of the entire Bitcoin ecosystem.
This recognition may pave the way for institutions to directly invest in new projects being built. While institutional investment relies on the effective development and successful growth of the Bitcoin ecosystem, its occurrence would 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 or possibly the largest, attracting widespread attention.
Conclusion
If the Bitcoin ecosystem develops and grows according to the above standards, the results will be profound. With a significant capital stored on the network and potential inflow of capital from off-chain, the Bitcoin ecosystem has the potential to surpass Ethereum in scale. Such a transformation would have a tremendous impact on the entire cryptocurrency field. Of course, this assumption depends on numerous factors, and each factor requires collective efforts from the community.
However, a major catalyst can ignite this evolution, whether it be a market rally, a sudden change 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.