Author: Primal Capital; Compiled by: Vernacular Blockchain
Key points of this article Focusing on the untapped potential within the Bitcoin ecosystem is a topic of great interest and debate among industry enthusiasts and experts. Our aim is to provide comprehensive insights that not only enrich your understanding of the current market, but also highlight future possibilities.
In short, Bitcoin is still the largest blockchain by market capitalization, but compared to Ethereum, it has not yet developed as large a network as Ethereum. Decentralized Finance (DeFi) Ecosystem. Although Bitcoin has the tools and infrastructure needed for a native ecosystem, its exploration into the DeFi space has been relatively modest. But as interest in Bitcoin grows, we may see Bitcoin emerge as more than just “digital gold.” This article explores the challenges and potential strategies for growing the Bitcoin ecosystem, including second-layer solutions, community engagement, and institutional adoption, highlighting Bitcoin’s untapped potential in the DeFi space.
The following is the basic flywheel model diagram of the Bitcoin ecosystem:
Bitcoin has always been the leader in the blockchain field and took center stage at the opening. Like a pioneer planting a flag in uncharted territory, Satoshi Nakamoto staked his claim on the origins of a completely new technology: blockchain. Indeed, Bitcoin was the forerunner of all blockchain technologies and remains the largest blockchain by market capitalization today. Given its preeminent status, the emergence of a large and vibrant Bitcoin ecosystem seems inevitable. However, that didn't happen, which leaves us with the question: Why?
As the blockchain movement grows, many other networks have emerged to provide the ecosystem and financial infrastructure that Bitcoin lacks. Among them, Ethereum was the first to do this and became the platform champion in advocating the field of decentralized finance (DeFi). Given Bitcoin’s stature and reputation, it seems destined to enter and dominate the DeFi space. However, contrary to expectations, Bitcoin’s exploration into the DeFi space has been relatively modest. 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 relatively small total value locked (TVL) of only $277 million. TVL at the time of writing is $3.3 billion.
Some might explain that this is simply because Bitcoin lacks programmability like Ethereum. However, the emergence of second-layer networks built on Bitcoin has shattered this false assumption, providing users with the tools and infrastructure needed to grow a large and diverse native ecosystem. Now, the only thing left to do is to reach the huge community of Bitcoin users and holders and build a comprehensive ecosystem. Bridging the gap between the vast value contained in Bitcoin and the world of DeFi could lead to countless possibilities for Web3. The roadmap ahead includes adopting more layered solutions and cultivating a more collaborative developer community to take advantage of Bitcoin’s unparalleled security.
Bitcoin originated from the cypherpunk community. Rapidly developing since 2008. Despite this, the core code of the Bitcoin protocol itself has undergone almost no changes, and its role is still mainly limited to a medium of exchange. Indeed, the Bitcoin network’s true value remains as 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 or even 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, side chains, and other decentralized Composed of chemical applications (DApps). Miners and nodes support the network by validating transactions and maintaining consensus for stakeholders. This is accomplished using a Proof of Work consensus mechanism, which can result in slower ecosystem growth compared to other layer-1 protocols that use Proof of Stake. At the same time, the developer community helps expand the local ecosystem and updates the core protocol from time to time. Reaching consensus for upgrades within the developer community is difficult, hence the lack of change. Taproot, for example, is Bitcoin’s first major update since SegWit in 2017. The following is a brief introduction to the ecosystem:
Source: Coin360Due to infrequent updates, Bitcoin has encountered some problems with scalability and programmability. Therefore, a prerequisite for creating a DApp ecosystem on Bitcoin is a scaling solution with smart contract functionality. Therefore, second-layer networks and sidechains are developed on the Bitcoin network to promote the development of its native ecosystem.
The extension solution is built on the basic layer of the blockchain A protocol on top of the blockchain that aims to make transactions more efficient by processing them outside of the main blockchain. By processing transactions outside of 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 functionality.
The first scaling solution to appear on the Bitcoin network was the Lightning Network. This platform is specifically designed to increase the speed and reduce costs of transactions on the Bitcoin network. While the Lightning Network performed well in this regard and attracted over $277 million in total value locked (TVL), it failed to provide the smart contract functionality required for a complex native DApp ecosystem.
Fortunately, several other scaling solutions have emerged specifically designed to implement smart contracts. Some of these solutions include:
1) Counterparty
Launched in 2014, Counterparty is Bitcoin’s pioneer smart contract platform with its native TokenXCP. It allows token creation, crowdfunding, and is compatible with multi-signature. Although its popularity has declined, it has been revived through innovations like Ordinals on Bitcoin.
2) Stacks
Stacks as the intelligence of Bitcoin The contract and DApp layers use their own blockchain and adopt a proof-of-transfer (PoT) mechanism. This mechanism utilizes Bitcoin’s Proof of Work (PoW) to provide security. It enhances the functionality of Bitcoin through DApps, DeFi, and a growing ecosystem.
3) Rootstock/RSK
RSK is a Bitcoin's merged mining side chain has Turing-complete smart contracts and EVM compatibility. It uses a native token called RBTC that maintains a 1:1 peg to Bitcoin through a two-way mechanism. Projects like Sovryn and Money On Chain run on RSK.
4) Liquid Network
Liquid is the bit of Blockstream The currency side chain provides local TokenLBTC through a two-way anchoring 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.
5) Mintlayer
Mintlayer is a dynamic insertion The Bitcoin sidechain of the Slot Allocation (DSA) consensus combines Proof of Stake and Bitcoin’s Proof of Work. It supports smart contracts, asset issuance, and Lightning Network compatibility. Mintlayer’s protocol also allows for the ability to transfer and peg across blockchains.
6) RGB
RGB is the divergence of Bitcoin. The smart contract layer of the chain can create digital assets such as Token and NFT. It uses Bitcoin’s Unspent Transaction Outputs (UTXO) as a one-time seal and provides full Lightning Network compatibility, ensuring fast settlement and scalability.
7) Omni Layer
Omni Layer is the basic smart contract and asset platform of Bitcoin, which can realize Token minting and decentralized exchange platform (DEX). Tether (USDt) was initially launched on Omni. Omni Bolt is an upgraded version of it that adds Lightning Network compatibility, enabling faster and more scalable OmniToken transactions.
These scaling solutions bring more possibilities to the Bitcoin ecosystem, enabling it to support smart contracts and complex decentralized applications. They provide the Bitcoin network with greater scalability and provide users with 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 options and features.
With the development of various scaling solutions on the Bitcoin network With the rise of DeFi, many projects have emerged, providing the foundation for a prosperous DeFi ecosystem. Beyond the Bitcoin network's basic transaction capabilities, these projects have opened the door to more complex financial applications and tools, many of which were once thought to be only available on more flexible platforms like Ethereum. From tokens created on Bitcoin to platforms that support decentralized exchanges, such as decentralized exchanges (DEX), the ecosystem is dynamic and constantly evolving.
Platforms such as Zest Protocol and Atomic Finance have introduced peer-to-peer decentralized lending powered by Bitcoin. Zest is a portfolio company of Primal Capital focused on solving counterparty risk in borrowing on the Bitcoin network. Bisq Network and Alex Labs are a Bitcoin decentralized exchange (DEX) that provides a P2P trading platform and operates autonomously under a Decentralized Autonomous Organization (DAO). Liquality Wallet provides a multi-chain Web3 wallet that supports multiple assets. These are just a few of the many DApps targeting the Bitcoin network. Each project brings unique DeFi solutions and trading platforms that meet different user needs and emphasize different aspects of the DeFi experience.
But the Bitcoin ecosystem is not limited to DApps. Leveraging Bitcoin’s fundamental unit, Satoshi (or Sats), Ordinals brings a unique mechanism for creating NFTs on Bitcoin. Ordinals essentially add value to each Satoshi, allowing it to be "engraved" with unique content. BRC-20Token builds on this foundation, using JSON imprinting to create the original Token contract. The more advanced ORC-20Token further develops this idea, using Segwit witness data and JSON to issue tokens with more functions. Stamps and SRC-20Token, on the other hand, use the blockchain to insert arbitrary data to create native Bitcoin digital items. Ordinals quickly gained traction and grew exponentially, reaching 60 million imprints (minted) since launching in January 2023, just over a year ago.
Source: @dgtl_assets,DuneThese are just some of the many 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 DeFi development. This underdevelopment contrasts with the size and enthusiasm of its global community, presenting a strange juxtaposition in the world of cryptocurrency.
As far as the local user community of this ecosystem is concerned, Bitcoin There are many options for coins. The size, passion, and dedication of the Bitcoin community are undeniable. With a global base of users, miners, developers, and evangelists, Bitcoin has arguably the most influential and passionate community in the cryptocurrency world. This community is characterized by open source ethics, where principles such as decentralization, collaboration, security, and transparency are paramount. From online forums like BitcoinTalk to global conferences, communities thrive on shared knowledge and the collective pursuit of financial sovereignty.
Most Bitcoin users are holders, viewing it as a store of value or a form of digital gold. Bitcoin maximalists are a large subgroup of this community of holders. They believe that Bitcoin is the only cryptocurrency that will stand the test of time. They believe that Bitcoin’s decentralized nature, security, and first-mover advantage make it superior to all other digital currencies. Maximalists often criticize altcoins (alternative cryptocurrencies) and see them as interference or even potential threats to the purity and mission of Bitcoin. Since Bitcoin maximalists are opposed to alternative blockchains, they are the main potential audience for 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 who accept Bitcoin as payment for goods and services to individuals who use 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 key role in bridging knowledge gaps, providing resources, conducting workshops, and dispelling myths about cryptocurrencies. They are often the first point of contact for newbies and play a key role in shaping the perception and understanding of Bitcoin.
These groups often overlap and together form the core of the local Bitcoin community. Each of them brings their own perspective, expertise, and enthusiasm for the future of the network, and they are core components of the Bitcoin ecosystem.
In view of the huge amount of money stored in the Bitcoin network Value, growing Bitcoin’s native ecosystem is not just a matter of attracting new users. Instead, projects need to take advantage of the vast pool of users, developers, and capital already present on the network. Many of these stakeholders are dedicated to the Bitcoin network, and they are valuable resources for any initiative aimed at growing the ecosystem.
The amount of money sleeping in the Bitcoin network is huge, accounting for approximately 70% of the total supply. If only 10% of that value was used in the Bitcoin ecosystem, it would be equivalent to $122 billion in value locked (TVL) based on current calculations. For comparison, the current TVL across 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 for this ecosystem has been laid, and the key now is to attract more community participation, attract greater investment, and build better tools. This triple challenge requires a comprehensive and coordinated approach, as each aspect plays a vital role in the future growth and sustainability of the Bitcoin native ecosystem.
Protection of core principles and values of the Bitcoin protocol Thanks in large part to community 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. In order to get rid of this contradiction, a joint effort is needed to attract users and improve user experience. This could involve a range of initiatives, from social media campaigns to designing more intuitive, user-friendly wallet interfaces to educational campaigns that shed light on the complexities of Bitcoin transactions, smart contracts and network security.
For those who are particularly focused on the purity of Bitcoin, the key is to provide opportunities without sacrificing their core values such as decentralization and security. In particular, appropriate infrastructure and tools, as well as educational resources, are needed to foster their trust in the integrity of these systems. Taking into account the security of the Bitcoin network, decentralized scaling solutions and a powerful smart contract framework can be built. Projects that can deliver on this promise are likely to attract a slew of maximalists looking to leverage their holdings without violating their principles.
The current pace of incremental change is not sufficient to catalyze any significant growth in the Bitcoin ecosystem. We envision a major transformation that encompasses next-generation scalability solutions, advanced smart contract frameworks, and seamless connections to other blockchain networks. In its current state, many existing Bitcoin-based scaling solutions are insufficient. For example, the Counterparty protocol has issues with the rigidity of the smart contract framework and the currency XCP required for certain features, which may dissuade 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 comprehensive approach when developing infrastructure and tools within the Bitcoin ecosystem. To truly improve Bitcoin infrastructure, a multi-pronged strategy is needed:
A. Enhance scalability
There are already many scalability solutions on the Bitcoin network, such as the previously mentioned Lightning Network. However, most solutions fall short on one or more key criteria. What is needed is a comprehensive scalability solution that provides a secure, decentralized and efficient platform for smart contracts.
B. Promoting smart contracts
A key advantage that promotes Ethereum to reach its current heights is the network's intuitive and powerful smart contract engine, such as Solidity and EVM. To build a similar ecosystem on the Bitcoin network, native scaling solutions will need to employ robust and developer-friendly smart contracts and provide extensive educational resources.
C. Promote interoperability and build bridges and connectors to achieve seamless interaction between Bitcoin and other blockchains. This will enable users to easily transfer assets across different chains and take advantage of the best features of each network.
D. Integrate user-friendly experience As the ecosystem grows, tools are needed to simplify the development and deployment process. This includes better wallets, development frameworks, and debugging tools. Beyond this, for those users who may be less technically savvy, user-friendliness is critical to their interaction and engagement with the ecosystem.
E. Education and Community Building a strong community is the backbone 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 are the future. They have the tools to create an ecosystem that can compete with the Ethereum L2 ecosystem. By focusing on platforms like Stacks and building better infrastructure, the Bitcoin ecosystem can lead the way to the forefront of the DeFi movement.
2) Attract developers, investors and entrepreneurs
A prosperous ecosystem Its attraction will be generated automatically. With strong infrastructure, an active community, and opportunities available, developers are naturally drawn to the Bitcoin network and develop new solutions for its ecosystem. In addition to developers, investors will also look for returns in this growing area. For entrepreneurs, this will provide an opportunity to enter at the infancy stages of an already large and opportunity-rich ecosystem. Given the growing standards, growing user base and untapped potential, the possibilities for new ventures are vast.
Once started, the cycle quickly spirals into a network effect, with each new participant, whether a developer, investor or entrepreneur, All will add value to the network, making it more attractive to future participants. The growing network then enters a positive feedback loop, increasing the overall usefulness, security, and value of the system. The cascading effect of attracting developers, investors and entrepreneurs is profound. Each group enhances the other, creating a synergy that amplifies growth. The only thing needed is a catalyst to start the cycle, which will most likely come in the form of improved infrastructure and community awareness of change.
3) Institutional Adoption
Adding Bitcoin to institutional balance sheets over the years The rationale has shifted from a speculative gamble to a strategic necessity. In today's world of economic uncertainty, rising inflation and market volatility, Bitcoin can serve as a hedging tool and investment to diversify your investment portfolio. The most recent major change is the approval and launch of a Bitcoin ETF in early January 2024. The issuance was successful and attracted significant inflows from institutional investors, a strong testament to its value to the entire Bitcoin ecosystem.
Such recognition could open new avenues for institutions to invest directly in new projects being built. While institutional investment is dependent on the success of the Bitcoin ecosystem’s effective development and growth, 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, or may become one of the largest Web3 DeFi ecosystems, attracting widespread attention.
If the Bitcoin ecosystem develops and grows according to the above standards, the result will be profound. The vast amount of stored capital available on the network, coupled with potential inflows of capital from off-chain, could push the Bitcoin ecosystem to exceed the size of Ethereum. The impact of such a shift on the entire cryptocurrency space would be huge. Of course, this assumption depends on numerous factors, each of which will require a concerted effort from the community. However, a major catalyst can trigger this evolution, whether it's a rising market, a sudden change in community perception, or other factors. As history has proven, the only constant in the Web3 space is change, and Bitcoin’s potential for growth and evolution cannot be underestimated.
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JinseFinanceWith any other asset, I would be cautious unless I was extremely optimistic about its future.
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JinseFinanceThis article will discuss the current development direction of the Bitcoin ecosystem. It will only provide an overview of the current Bitcoin ecosystem and does not contain any investment advice.
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