Author: Haotian Source: Haotian-CryptoInsight's Substack
Recently, the entire primary and secondary markets have been under a cloud of depression, and many people have asked, what is the next step for BTC layer2? The answer is obviously not as simple as Eastern and Western capital not taking over each other. After in-depth research on multiple representative projects, I have a deep understanding.
In my opinion, there are three main breakthrough points: 1) "new" narrative of asset issuance; 2) narrowing of layer2 "standards"; 3) the opening of BTCFi interest-bearing. Next, let me systematically tell you my opinion:
The “new” narrative of asset issuance
With the development of Ordinals, BRC20, BitVM, Runes, and Layer2, the BTC ecosystem has fallen into a dilemma where the technology is becoming clearer, but the wealth-creating effect is becoming weaker. Why? The fundamental reason is that wealth creation only comes from the information game of existing funds, and technological iteration cannot attract incremental funds to enter the market.
Take the BRC20, which is full of loopholes, and the Runes protocol, which was born with a silver spoon in its mouth, as examples. Although BRC20 has been criticized in every way, it has indeed created a wealth effect and attracted a lot of attention to the BTC derivative market. However, the Runes protocol, which has become mature in data storage, index logic and even gameplay, did not receive the expected market response.
Is it possible that the direction of technological iteration is wrong? Is the direction of OP_Return to remove UTXO junk transactions wrong? Is the design idea of the Premine reservation mechanism wrong? Obviously not. I think that the wealth-creating effect of BRC20 inscriptions is an accidental phenomenon caused by pure information asymmetry under the special environment. Whether the narrative of BTC asset issuance can work is definitely not "first is first", but the continuous value empowerment of the project party.
Therefore, the previous method of issuing new assets by binding UTXO to the BTC main chain can only benefit early birds with information asymmetry. To make the issuance story of BTC derivative assets continue to be attractive, two dilemmas need to be solved in the short and long term respectively:
1) Short-term asset liquidity problem: The purpose of issuing BTC derivative assets is not to allow some early birds to mint a bunch of assets, but to make these assets circulate and generate value through turnover. Obviously, it is not feasible to rely solely on the BTC mainnet to undertake the circulation of inscription assets. Assets can be transferred across chains to the second layer to seek the possibility of activating circulation in the corresponding application ecological market.
@NervosNetwork CKB has realized the idea of allowing BTC mainnet inscription assets to Leap to the CKB layer2 chain for circulation through the RGB++ protocol. This solution can solve the problem of asset circulation, especially some excellent assets with sustainable growth potential.
2) Long-term project empowerment problem: Although the Runes protocol has a mainstream consensus on asset issuance, and the project party can also control the fundraising through the Premine method, if the idea of issuing assets from the mainnet to create popularity and then circulating them on the second layer will lead to huge operation and maintenance costs in the early stage of the project party. Under the market Fomo sentiment, the cost of Premine tokens, the high handling fee cost of issuing airdrops, community marketing and operation and maintenance costs, etc., under these cost pressures, it will be very powerless to talk to the project party about the issue of "empowerment".
@RoochNetwork, a BTC Native layer2 project driven by MoveVM, can achieve low-cost issuance and initial circulation of a BTC inscription asset in the layer2 environment through Parallel's BTC global state synchronization, and then migrate to the BTC mainnet for consensus upgrade after the inscription asset has a certain market scale and consensus. This narrative design centered on the goal of asset circulation aims to solve the difficulty of empowering BTC ecological projects;
In short, BTC is developing a layer 2 ecosystem, and the asset issuance narrative is just the beginning. The turning point lies in whether these purely community-driven assets can find a powerful project to empower them on layer 1 or layer 2, and demonstrate good circulation value within the layer 2 market ecosystem.
Layer2 “standards” narrow
In the past year, the BTC ecosystem has experienced a wild growth and mixed development stage. The "no direction, no standard, no threshold" has quickly filled the BTC layer2 track with builders: EVM-Compatible, UTXO Stack isomorphic binding, UTXO parallel stacking, BitVM off-chain Turing completeness, RGB native, AVM virtual machine, etc. It is said that there are hundreds of BTC layer2s in preparation. However, it is still unclear which direction will come out.
However, the chaos in the BTC layer2 market has not really brought significant growth to the BTC ecosystem. When the market fell into silence, there were occasional disputes about whether BTC layer2 was a false proposition. Although the "no standard" gives BTC layer2 more possibilities for "borrowing", stitching the mature expansion plan directly to the already limited BTC main network may not be able to feed back the expansion gains of the second layer to the mainnet. Instead, it will harm the BTC mainnet user group due to security and stability issues.
In my opinion, the prosperity of BTC layer2 in the non-standard stage is about to pass, and BTC layer2 will move towards a higher technical threshold:
1) UTXO Stack structure framework: The Nervos CKB team has developed a standardized BTC layer2 construction solution based on the RGB++ technology protocol, which is considered the most native solution for integrating with the BTC main chain. Because the UTXO Stack structure inherits the simplicity and security of native BTC, it can be regarded as a relatively mainstream BTC layer2 direction in the short term. The recent protocol upgrade of the RGB++ layer and the engineering implementation of UTXO Swap have provided basic infrastructure for BTC ecosystem developers to expand the Bitcoin ecosystem based on the UTXO structure;
2) zkVM general protocol framework: @ProjectZKM has built a complete set of ZK Bridgeless cross-chain and Entangled rollup Network interoperability layers based on the zkMIPS microprocessor instruction architecture. Through the absolute authority of ZK technology in cross-chain trusted verification, it has introduced a Native general "cross-chain" solution for the BTC ecosystem.
Its technical principle is similar to RGB's Peg-in and Peg-Out Commitment verification and unlocking mechanism, and it also uses BitVM2's challenge mechanism. In contrast, zkVM's protocol framework can provide the possibility for non-UTXO structured public chains to access the BTC ecosystem, and will become a layer2 expansion solution with a wider range of ZK technology support;
3) RGB client verification framework: Native RGB protocol direction, through the P2P off-chain client infra system construction, based on one single seal one-time seal + state channel and other technologies to achieve native BTC second-layer expansion solutions, can support complex applications such as smart contracts, while also being able to connect to the lightning network to expand the application of payment scenarios. For example: @BitlightLabs is working on supporting a series of wallets, DEX and other infrastructure for the RGB protocol;
4) AVM virtual machine framework: By simulating the Bitcoin virtual machine, the originally stateless Bitcoin mainnet can be embedded with a special set of codes to implement the ability to carry smart contracts. This is a "native" expansion method that does not rely on off-chain expansion and follows the current Bitcoin core OP Codes. For example: what @atomicalsxyz has been trying to do.
In short, choosing a high technical threshold and narrowing the layer2 standard will certainly clear out some of the "chaos followers" in the market, allowing more capable developers to further develop an expansion ecosystem suitable for Bitcoin with capital support. Although this exploration cycle will be relatively long, just like Ethereum layer has also experienced a long period of exploration from Plasma, Validium to Rollup mainstream.
BTCFi interest-earning begins
I don’t know when BTCFi has quietly become the narrative and topic of the BTC ecosystem. At first, I was also confused about the difference between BTCFi and DeFi. Could it be that DeFI used to be centered on “decentralization”, and now BTCFi is centered on the “BTC public chain”? However, in order for isolated chain assets with a large community consensus to become a catalyst for activating the liquidity of the entire chain, those more advanced high-performance technologies will inevitably have to compromise with the ancestor of BTC.
Given the special scripting language of the BTC chain and the programmable limitations of stateless storage, this makes sense. Therefore, in my opinion, the BTCFi concept should include three main features:
1) Inclusive asset inclusiveness. In addition to BTC Native assets, the protagonists of the BTCFi stage must include Runes, ARC20, BRC20 and other derivative assets on the BTC public chain. If BTCFi does not aim to activate more derivative assets in the BTC ecosystem, it will be difficult to distinguish the outflow of BTC assets from the existing DeFi ecosystem of Wrapped BTC.
2) Native cross-chain free features can also become Bridgeless cross-chain free bridge or trust-free mechanism. Based on the native cross-chain feature, it can ensure that there will be no "centralized" trust link in the inflow and outflow of BTC and derivative assets, which will provide an absolute technical prerequisite for the interest-bearing of BTC-related assets. Only in this way can the interest-bearing behaviors such as POS Staking and Restaking on layer2 be maintained with absolute on-chain traceability and fairness, laying the foundation for a series of rich BTCFi interest-bearing gameplay.
3) Programmable complex programmable features, regardless of the UTXO Stack architecture or the underlying architecture of the zkVM protocol, the off-chain expansion environment they can access must have complex programmable features. In the short term, UTXO has the advantage of structured homology, which makes it easier to produce landing applications. In the long term, ZK technology can become a powerful interface for BTC to link into high-performance public chain environments such as EVM or MoveVM. By then, what kind of ecology BTCFi can develop and what kind of flowers it can grow, the imagination space is infinite.
For example: @GOATRollup builds the features of "Native secure cross-chain" and "unified liquidity layer" based on the zkVM technical framework, and uses the GOAT Stack stacking method to provide a solid technical expansion solution for the BTC layer2 market;
In addition, the aforementioned Rooch Network, whose Native technical solution aims to provide BTC with application scenarios (Utility) while providing BTC assets with the possibility of generating interest (Yield); the RGB++ layer of the UTXO structure is even more so. The solutions they provide are as close to these three technical characteristics as possible.
However, before BTCFi came out, I was more inclined to view it as a direction for ecological development. The current dull market environment is far from supporting BTCFi to stand out from DeFi. Therefore, technical standards are not a hard condition for judging whether a project is BTCFi. As long as there is a certain market consensus, it can be included in the scope of BTCFi. After all, in addition to technical methodology, the most important thing is to give answers to the market. For example, Blast has not been regarded as layer2 by the mainstream population until now, but it does not hinder its impact on the layer2 industry.
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Note: Although the BTC layer2 market is still messy in terms of asset issuance, layer2 standards, and interest-bearing schemes, I can actually see the signal of "Keep Optimism". As for whether the inscription market boom will come back, whether layer2 can have the same prosperity as Ethereum, and whether BTC interest can break the gap between virtual currency and the real world, the answers are all in your and my optimism.
