Original title: Towards a Trustless Financial System on Bitcoin (4 of 4)

Original author: Kyle Ellicott, Yan Ma, Darius Tan, Melody He, Spartan Group

Original text Compiled by: 0xNirvana

"Bitcoin Ecological Layer: Pulling Back the Curtain of the Trustless Financial Era" is a report on the development of all aspects of the Bitcoin ecosystem research report. This report was co-authored by the Spartan Group team, Kyle Ellicott, and several experts who provided feedback and insights and generously gave their time to review the final version of this article. This report was drafted in December 2023 and the data contained in it are current at the time of writing. This article is the fourth in a series of four articles.

Please move to the first three articles: 《 Bitcoin Ecological Layer (1): Opening the Curtain of the Trustless Financial Era" "Bitcoin Ecological Layer (2): Bitcoin Economic Awakening" "Bitcoin Ecological Layer (3): Exploration Bitcoin Ecological Evolution".

The Bitcoin ecosystem in 2023 is filled with an exciting and eager atmosphere similar to that in the Ethereum community in 2017. Enthusiastic developers, investors, and community members are actively exploring possibilities on Bitcoin’s multiple ecological layers. With reference to the impressive success of Ethereum, Bitcoin, which is far ahead in market capitalization and still dominates, is at a critical point of breaking through its past heights. Just as Bitcoin upended trust when it first emerged in 2009, now its ecosystem may deliver on its original promise of paving the way to a truly trustless financial system, all built on the L1 technology at its core. superior.

The market opportunity of Bitcoin L2 is undoubtedly the most potential part of the Bitcoin economic system. To estimate the overall opportunity for the Bitcoin L2 market, we drew from the existing Ethereum L2 market. The total locked value (TVL) of Ethereum L2 currently accounts for approximately 5.62% of the total market capitalization of Ethereum [1]. When calculating the market size of Bitcoin L2, we referred to this ratio and applied this data to the market capitalization of Bitcoin is in the process of being estimated.

●     Pessimistic scenario: The pessimistic scenario predicts that the market value of Bitcoin L2 can reach 4.8 billion U.S. dollars, which is only about the current Ethereum 10% of L2 market capitalization (0.56%).

●     Basic scenario: The basic scenario predicts that the market value of Bitcoin L2 can reach US$24 billion, which is approximately the current Ethereum L2 50% of market capitalization (2.81%).

●     Optimistic scenario: The optimistic scenario predicts that the market value of Bitcoin L2 can reach 48 billion US dollars, which is equivalent to the current Ethereum L2 100% of market capitalization (5.62%).

Given that the vast majority of people in the current market have been infected by the market sentiment of "building on the Bitcoin ecosystem", the time range of the above prediction is two years Around, and the additional compound annual growth rate has not been included; at the same time, the above predictions are based on the assumption that Bitcoin L2 will continue to expand. It is precisely because of the rapid development of Bitcoin L2 and various protocol standards, and its close connection with today's existing infrastructure, that it provides a key basis for our prediction, that the market value of the Bitcoin L2 network will reach 24 billion in 2025 Dollar. The potential future development roadmaps and industry events described in this article will also have an impact on the above three different scenarios.

Immediate outlook: The Ordinals’ continued cultural influence

In the short term, the Ordinals’ cultural impact Our efforts cannot be underestimated and we will continue to promote the development of the Bitcoin ecosystem. By integrating art and collectibles into the Bitcoin blockchain, they have successfully brought together a community focused on authenticity, creativity, and permanence. This cultural resonance has solidified Ordinals’ position in the Bitcoin ecosystem and continues to attract a diverse user base to participate. Ordinals adapt to the trends of the digital age and greatly expand the influence of Bitcoin far beyond its original application scope.

As of 2023, the rapid development of Ordinals has made Bitcoin without smart contracts one of the most important NFT platforms, surpassing even Solana, which supports smart contracts. Especially in November, the sales of Bitcoin NFT (Ordinals) achieved a staggering 500%[2] growth, surpassing Ethereum and Solana in the same period. Although Ordinals has only been around for less than a year, assets deployed on Bitcoin have already seen significant increases in value, benefiting from the network’s immutability and durability.

NFT transaction volume of different chains (2023) Source: The Block, CryptoSlam

OnChain Monkey NFTs double in price after creator puts them on Bitcoin. Source: Metagood

As Bitcoin NFT becomes more and more popular and widely accepted, OnChain Monkey, an NFT originally on Ethereum, appeared. The phenomenon of doubling the price of Bitcoin after it is issued. This shows that users are increasingly curious about the Bitcoin ecosystem, and people are increasingly interested in exploring Bitcoin usage scenarios such as DeFi and games. This trend may bring important changes to the future development of Bitcoin. Despite Bitcoin’s limitations in transaction speed, smart contract compatibility, and scalability, innovation continues to emerge, especially at the protocol level.

●     Many early projects in the ecosystem are unable to issue tokens with the same utility as those on Ethereum and governance tokens (e.g., BRC-20 vs ERC-20).

●     These projects must rely on equity financing and cannot effectively use their own tokens to launch the community.

●     Solutions include issuing smart contract fungible tokens SIP-10[3] on Stacks, or Other emerging token standards.

●     Two-way bridges like MultiBit are gradually emerging to enable cross-chain transfers between BRC-20 and ERC-20 tokens . However, these solutions are not final.

Continuous innovation is critical to overcoming these challenges. As L2 continues to make progress, it aims to reduce transaction costs while 100% guaranteeing the inheritance of Bitcoin finality. At the same time, innovation is slowly trickling down to Bitcoin’s L1 network, L1. Despite these challenges, developers and enthusiasts are actively exploring various use cases.

What we saw today Most innovation is still being implemented through Bitcoin L1. Source: ALEX

Mid-term: Breakthroughs and emerging use cases of Bitcoin L2

Bitcoin Ecology The system is expected to see a major breakthrough in the medium term, mainly due to advances in L2 technology (such as Stacks' Satoshi upgrade SIP-021 Nakamoto Release) and sBTC[4]. These developments are not only incremental, but transformative, especially in Bitcoin DeFi and other application areas.

Stacks and other Bitcoin smart contracts continue to evolve.  Source: Stacks

The Satoshi Nakamoto upgrade can reduce block times from over 10 minutes to 5 seconds, achieving this significant speed increase while also enhancing Security is crucial to creating a smooth, "Ethereum-like" transaction experience for users, which is crucial to attracting new developers and catalyzing a circular ecosystem of "adoption and innovation."

●     The implementation of fast blocks and sBTC will enable Stacks to provide high-performance BTC denominated applications such as NFTs Marketplace that facilitates the efficient trading of Ordinals and unique L2 NFT collectibles.

●     The Bitcoin DeFi space is expected to experience a massive expansion, such as lending functions through sBTC. The Zest Protocol team is already building these features ahead of time on Stacks.

●     ALEX is making full preparations for all DeFi functions. Recently, its trading volume has exceeded US$500 million. And the foundations for an sBTC-denominated exchange market have been established for other sub-tokens. These different applications can automatically generate revenue based on Stacks while being explored.

The key to unlocking Bitcoin’s market capitalization is to create a flywheel effect of user adoption similar to that of Ethereum. As the infrastructure gradually improves, many new application scenarios will emerge in the Bitcoin ecosystem, which will cover multiple aspects of Bitcoin and ultimately attract end users. Not only does the Bitcoin ecosystem have the largest potential TVL in the industry, but it is also targeting a wider audience – i.e. building services for mainstream users. The following key developments lay a solid foundation for the ecosystem's success:

●     Trust Machines is building Bitcoin applications program, whose goal is to expand the Bitcoin economy by proposing new use cases for Bitcoin that maximize the value of the network.

●     To prepare for the expected wave of developers, Hiro is strengthening developer tools in the Bitcoin ecosystem .

●     Wallets such as Xverse, Leather and Ryder are working to provide a seamless user experience to achieve mass adoption, Compatible with various assets across all layers of Bitcoin.

●     After Ordinals became popular, some large centralized trading platforms quickly opened Ordinal Marketplace, including Binance and Magic Eden and OKX included. At the same time, other markets such as Ordzaar and Gamma also emerged rapidly. On-chain Monkey also recently launched its own marketplace called Osura.

●     Other notable developments include Ordz Games launching the first-ever Bitcoin-based game and introducing Its BRC-20 token, $OG.

●     Friend.tech similar project New Bitcoin City, built on the Bitcoin second-layer network NOS, launched by Trustless Computer, as of 2023 In October 2019, its total TVL exceeded US$1.38 million.

●     StackingDAO introduced the liquidity stack function to Stacks in December 2023 and launched Liquidity STX (stSTX ).

●     In addition, Darewise, a subsidiary of Animoca Brands, is building a metaverse based on Ordinals, demonstrating the possibilities within the Bitcoin ecosystem. An ever-expanding field of possibilities.

Bitcoin application ecosystem snapshot in March 2024[5]

Ultimately, the expansion of the Bitcoin ecosystem driven by L2 technology is not only about introducing new features and attracting more users, but also about transforming Bitcoin into Deeper integration into the global blockchain economy. Pioneering projects like ALEX are pioneering this space, launching permissionless, revenue-generating stablecoins based on Bitcoin, and Bitcoin cross-chain bridges like XLink, which connect Bitcoin and Ethereum. and other ecosystem connections. These measures are critical to creating a more connected and efficient Bitcoin ecosystem and provide a solid foundation for continued financial innovation and services within the industry.

In addition, Stacks’ ongoing expansion plans are expected to greatly enhance the L2 level interoperability of the Bitcoin ecosystem with other blockchain networks. With the upcoming Satoshi upgrade, Stacks plans to introduce new subnets that support multiple programming languages and execution environments, including the EVM subnet and the Rust VM. Meanwhile, the goal of directly integrating WASM support in Stacks L2 is also in the works, and this feature is expected to be enabled at the same time as the Satoshi upgrade. In December 2023, a working group within the Stacks ecosystem released details of a new ClarityWASM virtual machine integration scheme. This integration will allow more languages, such as Rust and Solidity, to run directly on Stacks L2.

Stacks enables scalability through subnets and different virtual machines. Source: Stacks White Paper

Long-Term Vision: Paving the Way for Institutional Adoption

Bitcoin’s The long-term outlook further solidifies its position as a leader in institutional-grade digital assets and DeFi adoption. The industry is widely looking forward to the approval of the first Bitcoin spot exchange-traded fund (ETF), which is seen as a turning point that may fundamentally change the way institutional investors participate in the Bitcoin market. The approval is expected to trigger a major paradigm shift, with institutional investors placing greater focus on financial products and services with Bitcoin at its core. As an asset class that has been deeply scrutinized and proven to be resilient, Bitcoin is crossing the threshold of widespread institutional adoption.

Once the Bitcoin Spot ETF is approved, demand for Bitcoin-native trading and income products is expected to grow significantly, primarily due to Their security and tax efficiency. As interest in these products increases, we may see the development of a wide variety of regulated Bitcoin financial products. As traditional banks recognize this shift, they may begin to integrate Bitcoin and these emerging products into their own private blockchains, allowing them to provide services to institutional clients at scale.

The integration of institutions into Bitcoin’s DeFi ecosystem brings much more than capital injections. This step symbolizes a unique synergy that combines the advantages of the traditional financial system with the revolutionary innovation of decentralized finance. Based on the security and transparency of Bitcoin, this integration is expected to reshape the landscape of institutional finance and dilute the boundaries between traditional finance and modern financial systems.

From cultural change to technological innovation to institutional adoption, these successive developments are expected to significantly enhance Bitcoin’s market value and its popularity within its ecosystem TVL. As we explore the decentralized finance landscape of this future, it is clear that Bitcoin is not just a digital asset, but the cornerstone of an emerging, trustless financial paradigm.

Conclusion and Thoughts

Evolving from a silent asset to the foundation of decentralized finance Technology, the progress Bitcoin has gone through has been driven by its market capitalization of over $850 billion, thanks to the stability and security of its network. However, we still need to note that a key challenge is that the Bitcoin network capabilities are not fully utilized, and this often stems from people’s failure to distinguish between Bitcoin as a network and as a digital asset (BTC). In order to awaken this dormant capital and realize Bitcoin’s full potential, we must leverage its network capabilities to transform Bitcoin from a mere store of value into the critical infrastructure of the Bitcoin economic system.

This shift is manifested in the “ecological layer” architecture developed to solve Bitcoin’s scalability issues, which is on top of Bitcoin’s core network (L1) Constructed. This architecture is inspired by Ethereum’s scalability and flexibility and catalyzes a cultural and development shift with the introduction of Ordinals. While critical L1 upgrades like SegWit and Taproot have alleviated some of the issues, rising transaction fees highlight the growing need for more efficient L2 solutions like Stacks.

As we inch closer to the 2024 Bitcoin halving event, and with market-wide expectations for the approval of a Bitcoin spot ETF, the Bitcoin ecosystem is becoming Increasingly scalable and more secure. This evolution is expected to drive significant institutional adoption and Bitcoin will be at the forefront of a new financial paradigm, enabling seamless integration with traditional and decentralized financial systems. Particularly driven by the cultural impact of Ordinals and the context of expanding use cases in DeFi and gaming, the potential of Bitcoin smart contracts is expected to attract more attention and capital injections.

In the mid-development period, breakthroughs in Bitcoin L2 technology, especially Stacks’ “Satoshi upgrade” and the introduction of sBTC, are expected to completely change decentralized finance. (DeFi) landscape. These developments are expected to create a smoother, more efficient user experience and open up new possibilities for Bitcoin-based NFT markets and DeFi applications.

In the long term, Bitcoin is expected to become a key player in the adoption of digital assets and decentralized finance (DeFi) by institutional investors, especially in the first Bitcoin spot exchange-traded fund (ETF) could be approved. This development is expected to prompt large-scale inflows of institutional investors into Bitcoin-based financial products and services, deepening the integration of traditional finance and decentralized financial systems. This integration will go beyond the injection of capital, and will also combine the advantages of the two fields to open up a new financial era for institutional investors.

Overall, the above progress will greatly enhance the market value of Bitcoin and the TVL within its ecosystem, ushering in a new era of decentralized finance in the future. . Innovative technologies such as Ordinals and Satoshi upgrades from Stacks and sBTC, coupled with the possible participation of institutional investors through the approval of Bitcoin spot ETFs, Bitcoin has not only consolidated its market position, but is also actively shaping the future of finance. picture. Bitcoin is further becoming the cornerstone of building a new, trustless financial system, leading a new wave of financial change.

Appendix:

[1] The total locked value (TVL) data of Ethereum L2 comes from L2Beat - https://l2beat.com /scaling/summary

[2] https://www.theblock.co/data/nft-non-fungible-tokens/nft-overview/nft-trade-volume-by-chain

[3] SIP 10 - Fungible Token Standard

https://github.com/stacksgov/sips/blob/main/sips/sip-010/sip-010-fungible- token-standard.md

[4] SIP 021: Trustless two-way anchoring based on Bitcoin - https://github.com/stacksgov/sips/pull/113?ref=stacksroadmap

[5] Note: This market map only shows part of the picture of Bitcoin applications. Currently, new experiments, projects and applications are emerging every day. If your project has not yet been included but you would like to see it in a future edition, please contact us

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