1. The 4-layer structure of Bitcoin (main chain, second layer, side chain, cross-chain)
The main chain is mainly responsible for the value system of Bitcoin, especially carrying the decentralization and security of Bitcoin and the value orientation of Bitcoin community representatives. Layer 2, represented by the Lightning Network, focuses on expanding the Bitcoin payment experience. The part of the smart contract is mainly placed on the side chain. Finally, almost all other mainstream public chains use cross-chain bridges to introduce Bitcoin into their own ecosystems, and develop Bitcoin-related Defi projects in their ecosystems (especially ETH).
2. Electronic money to crypto assets
In the white paper, Bitcoin is “peer-to-peer electronic money.” However, from the current technological development and supervision, it is difficult for Bitcoin to be used as ordinary currency by replacing fiat currency on a large scale. Bitcoin is more regarded as an emerging virtual financial asset. At the same time, if Bitcoin abandons the task of replacing fiat currency and instead accepts the positioning of encrypted assets, it may bring new horizons and prospects to Bitcoin.
3. New Perspectives: Bridges
Bitcoin currently has a dual identity. In reality, the exchange of bitcoin and fiat currency makes bitcoin a hedging asset and a means of fighting inflation. Meanwhile, in the crypto world, Bitcoin is a well-deserved hard currency. This bridging function currently appears to be unique. From this, it can be inferred that applications that consolidate and develop the Bitcoin bridge function will have a broad market in the future.
On November 14, at Bitcoin block 709632, Taproot was officially activated.
“The biggest reform of the BTC community in four years”, “a huge improvement in BTC privacy and scalability”, there are different opinions, and there is even a wish to load smart contracts on the Bitcoin mainnet.
Bitcoin has always been a hot topic in the crypto world. Several existing studies have shown that other mainstream cryptocurrencies maintain a high correlation with Bitcoin in price movements. But Bitcoin is another magical special case in the crypto world. When other ecosystems (ETH, BSC, SOL, AVAX) are desperately developing their own projects, the Bitcoin ecosystem is always tepid.
In the latest Messari annual report, TBI wrote, “But who can deny the world’s most unique computing power system that is completely owned by users? Besides, it has such rich reports and development prospects. It is much more than numbers. Gold. At the same time, it is completely different from Ethereum, like the base currency M0 and a technology company called Google.”
What is the development prospect of Bitcoin, TBI did not say. But there have been attempts to make M0 a tech company.
According to the statistics of Defi Prime, there are 23 defi-related projects related to btc. Far less than many other public chains, let alone Ethereum. Except for some centralized exchange wallets on the main chain, the vast majority of these projects are distributed on L2 and several side chains. Even the cross-chain bridge has made up the number in this ecology.
Aside from the halo of Bitcoin, just from the number of projects, this seems to be a second-rate public chain.
It’s not scientific, but this is Bitcoin. The market cap says it right.
Therefore, unlike the ecological logic of other public chains, the value ecosystem of Bitcoin must have its own logic. This is also the core question that this paper attempts to answer.
The next part of this article will focus on 3 points: first, analyze the 4-layer structure of Bitcoin ecology, which corresponds to the current 4 functions of Bitcoin: value, payment, contract and cross-chain; second, Bitcoin In other words, Bitcoin has been transformed from a payment tool when it was founded to a virtual asset today; finally, the current Bitcoin can be regarded as a bridge linking the real world and the encrypted world, its dual identities on the one hand It brings restrictions to Bitcoin, and on the other hand, it also provides possibilities for the future development of Bitcoin.
one. Four-layer structure
Bitcoin’s 4-layer structure resembles a set of concentric circles. The main chain at the center is responsible for the overall value construction of Bitcoin, and it is the attributes of the main chain that endow Bitcoin with its recognized value worldwide. A little outside is the L2 network represented by the Lightning Network. This part is mainly responsible for the transaction payment function of Bitcoin. At present, there are many applications in reality. In the outer circle are several Bitcoin side chains. Their most important function is to add smart contract applications to the Bitcoin ecosystem. The outermost ecology is a cross-chain protocol that interacts with other public chains, and they help Bitcoin enter the entire encryption field.
This structure is also more or less borrowed from other public chain structures. For example, Eth has a similar structure, and Dot’s relay chain, parachain and slot design also have the shadow of this idea, or Avax has three parallel chains at the same time (transaction chain X chain, platform chain P chain; contract Chain C chain), much like the middle three layers of the Bitcoin structure are made together.
1.1 BTC main chain: store of value
This chain is the origin of the crypto world and is the most controversial. In philosophy, we cannot derive “should” from “is”. In this crypto world it also means that we cannot derive values from technology. Values are all native, so about the “should” of Bitcoin, the community will break out again and again, and every major conflict that eventually erupts is a hard fork.
(Source: Investopedia, Circulating Market Cap: CMC, 2022.1.6)
Values are eternal disputes, but the market will decide the life and death of values. Among all the forks of Bitcoin, only the market value of BTC today occupies the absolute mainstream of this market (about 40% of the market share). Of all the remaining forks, the only one that remains in the top 30 by market cap is BCH.
Simply put, the Bitcoin community never gives up the right to run a full node for every user, and has even opposed expanding block size several times, even at the expense of scalability and transaction speed.
So that’s what BTC values. And as long as the market does not abandon Bitcoin, it will have a meaning of existence and the function of gathering the values of this world.
Therefore, Bitcoin is still continuing to write its legend, and the story of Bitcoin is still the most valuable.
(Bitcoin price chart, 2013-2021, source CMC)
1.2 Payment: Lightning Network’s L2 Ecosystem Payment: Lightning, L2 Eco System
Even Buffett and Munger said at their recent annual meeting that they hated Bitcoin’s success. However, it is almost well known that Bitcoin is too inefficient on the main chain.
(btc gas fee graph, https://ycharts.com/indicators/bitcoin_average_transaction_fee)
The high gas fee may be just a minor problem, and the unimprovable transaction speed determined by the mechanism (block speed and block capacity) is the lifeblood.
Therefore, with Layer2, the function of Bitcoin payment has now been basically transferred to L2, especially the Lightning Network. El Salvador, the only country in the world that recognizes Bitcoin as legal tender, uses the Lightning Network, and other developing countries may follow suit in the future, but if nothing else, they will also use the Lightning Network.
Bitcoinvisuals, 11.17, 3251BTC, $195m
According to statistics from Bitcoinvisuals, the usage and number of nodes of the Lightning Network have been on the rise. Through 1ml of node geographic statistics, a considerable number of nodes are located in the United States.
(11.29, node geographic distribution map https://1ml.com/location?type=country)
(Top 5 countries on Lightning Network)
In the Lightning Network Ecological Map released by Arcane Research in September, the positioning of the entire network is very clear, just to play the payment function of Bitcoin. Almost all projects revolve around how to expand the application scenarios of Bitcoin.
With the means of payment, Defi can also be generated. There are many projects around the Bitcoin Lightning Network as an exchange to achieve a DEX in the true sense of the custodian, such as Kollider and Portal. There is also RGB which is trying to bring smart contracts to the Lightning Network.
Kollider: The world’s first derivatives exchange using the Bitcoin Lightning Network.
On Kollider, users can currently trade 5 types of encrypted assets in fiat currency, and can add a maximum leverage of 100 times. It also adopts the perpetual contract model that has been verified for a long time. The transaction volume of the project is not large for the time being, and the number of people in the community is not large.
Portal: A peer-to-peer exchange using the Bitcoin Lightning Network.
Portal is still in the development financing stage and has just recently released its financing plan. According to their white paper, they are developing a cross-chain atomic transaction application. There are already many well-known institutions willing to invest and endorse them.
Portal’s community is thriving, with 120,000 Twitter followers and 65,000 Telegram friends.
RGB: Smart Contract Attempts
Inspired by the previous “colored coins”, RGB chose to bring smart contracts to the Lightning Network. Just as the “real good for Bitcoin” represented by RGB is a beautiful vision. RGB has been under development, but it cannot be directly deployed on the Lightning Network at present, but perhaps smart contracts are not far from the Lightning Network.
1.3 Sidechain: Smart Contract Application
Although there are attempts at smart contracts like RGB on L2, in the BTC ecosystem, the vast majority of Dapps are still deployed on side chains. Among the more well-known ones are Stacks and Liquid.
1.3.1 Stacks: (https://www.app.co/) (24 Projects)
Stacks is currently the best among all BTC sidechains, with 24 projects covering almost every field.
1.3.2 Liquid Network (Blockstream)
Liquid Network is developed by Canadian company Blockstream.
The STO (Security Token Offering) on it tried to create a platform for tokenization of securities and discount the future cash flow brought by Bitcoin computing power. Such an attempt was also very novel at the time.
On November 23, the “Bitcoin Bond” that the El Salvador government plans to issue will be issued on Liquid.The bonds are $1 billion in dollar-denominated 10-year bonds with a coupon of 6.5%. Half of the funds raised will be used to buy bitcoin and hold it for five years, and the rest will be used to fund bitcoin-related construction projects. Using Bitcoin as the underlying asset guarantee and issuing bonds, El Salvador has indeed played a new routine for Bitcoin.
1.3.3 Other side chains:
Other sidechain projects include RSK, Nomic, and Impervious, but they are still under development.
1.4 Cross-chain protocol
At present, the outermost layer of the Bitcoin ecosystem is cross-chain, that is, various wrapped BTCs.According to Dune Analytics, there are 317,780 wrapped BTC assets on ETH (compared to 3,424 on Lightning Network), 80% of which are wBTC.
Bitcoin’s current total liquidity: 18.8 million
(Dune Analytics, 11.29)
There are still more than 100,000 BTC in use in BSC. (The circulation of BTCB on December 15 was 105115.46, CMC) There are also many BTC assets on Sol and Avax.
In addition, there is a large amount of BTC circulating in centralized exchanges, which can also be counted as some form of cross-chain BTC. As of November 29, the average daily transaction volume of BTC on Binance, Currency, ok, FTX and other centralized exchanges was 678,118.
In addition to the Bitcoin mainnet, at present, the cross-chain carries the greatest value of Bitcoin.
1.5 BTC based assets
After a large number of cross-chain BTC assets exist, Defi Lego on ETH integrates these assets into the Defi system. Among them, the more mature projects are BadgerDAO and TranChess.
This is a project that brings cross-chain BTC into Defi. The current products include Digg, which is issued at an anchor btc price, as well as a series of Vaults, as well as liquidity mining in cooperation with Dex.
At present (11.29) TVL: 1.185 billion, and some of the products have a relatively considerable rate of return.
This is a project that increases profits for ETH and BTC by adding leverage. There are 3 products related to BTC. The total lock-up volume is 1.5 billion, and a total of 22,000 BTC has been deposited.
1.6 Possible reasons for the failure of BTC to form an ecosystem
Technical reasons. Before the Taproot upgrade, the Bitcoin mainnet had almost no ability to load smart contracts, nor did it support multi-signature, so the space for complex application development was indeed limited.
community values. Bitcoin is highly dependent on the path of decentralization. Decentralization has successfully created a new era for Bitcoin, but after the birth of Ethereum, the decentralization of Bitcoin has prevented Bitcoin from entering the era of smart contracts. Multiple community disputes, even if they resulted in a hard fork, have mostly ended in conservative victories. So perhaps, Bitcoin does not need and cannot enter the era of smart contracts. Just like if the blockchain loses its decentralization, there is no advantage over traditional multi-point servers.
Lack of motivation. This is like another aspect of Bitcoin’s decentralization. Not to mention Sol, Avax, Matic and other public chain foundations that reward developers with huge rewards for developing projects on them. Even ETH rolled back blocks for a project in the early days. For the decentralization of the blockchain, this is really a kind of “sin”, but for developers, it is real support and protection.
Summary of the first part:
Although BTC is the first blockchain, there are not many surrounding projects. The so-called “public chain ecology” has not yet developed. And the existing direction basically revolves around the expansion of the payment concept. Sidechains capable of carrying smart contracts are no longer comparable to the main chain in terms of security. And even if Taproot is upgraded, it still has a certain distance from other public chains.
Decentralized design concept. Due to the consistent concept of users running nodes by themselves, Bitcoin is prone to hard forks compared to other public chains. Although voting with your feet can prevent giant whales from doing evil, it will also increase the cost of developers.
Therefore, Bitcoin is different from other public chains, and should not even be defined as a public chain in the general sense.
Its value does not lie in its “ecology” either.
2. From currency to asset
Since the answer cannot be found from the ecology, we need to go a step further and find out why a public chain without ecology can have so much value from the definition and identity of Bitcoin. Even if it’s bitcoin.
2.1 The “failed” currency
Originally designed, Bitcoin was a peer-to-peer electronic cash. In many other studies at the moment, Bitcoin (especially L2) is a payment tool that is benchmarked against banks, Visa, MasterCard, and Paypal.
But the high volatility of bitcoin price makes bitcoin can only complete these two tasks (electronic cash and payment tools) in limited scenarios. Tesla briefly accepted BTC payments this year, but it was quickly cancelled. Bitcoin also has a small number of platforms that accept payment, although Twitter and AMC are among them, but they do not constitute mainstream, more like propaganda.
What excites BTC fans is that on September 7 this year, Bitcoin officially became the legal currency of El Salvador. But it’s easy to overlook the fact that the U.S. dollar remains the country’s legal tender and is still widely used.
According to El Salvador’s President’s Sept. 20 Twitter, about a quarter of El Salvador’s 6.4 million people use the Chivo Bitcoin wallet.
On September 30, Reuters had a tracking report (https://www.reuters.com/article/el-salvador-bitcoin-poor-idUKL8N2QP4M4) Bitcoin usage in El Salvador. Found out that a lot of people signed up for the wallet for the $30 reward. At the same time, 90% of the 1,281 people interviewed did not understand or prefer to use Bitcoin. Even for many people without smartphones, they still only accept dollars.
Bitcoin and Banking (Unbanked or underbanked)
It’s also possible that Bitcoin’s ability to improve financially underserved people is overrated. In particular, there are so many reasons for the lack of financial services that Bitcoin will likely satisfy only a tiny fraction of them. Moreover, there are other alternatives competing, such as other on-chain native assets such as Ethereum, or stablecoins.
2.2 Successful USD Assets
The vast majority of Bitcoin in the world is priced in dollars, so it should be safe to say that Bitcoin is a dollar asset. The U-based settlement system widely used in the encryption field is also similar to the current oil system. So Bitcoin actually expands the use case for the dollar.
From the perspective of several bull markets, except for the natural halving effect of Bitcoin, the release of the US dollar is a huge driving force for the rise.
(Source “The Impact of Macro Monetary Policy on Bitcoin”)
At the same time, other important economies in the world that compete with the United States are likely to impose controls on Bitcoin for foreign exchange reasons. At the same time, they will also develop their own digital currencies to reduce the impact of BTC and a number of USD stablecoins.
But anyway, Bitcoin is one of the most successful dollar assets of the last decade after gold and oil.
2.3 Crypto Assets
Compared with real-world payments, Bitcoin is a hard currency in the crypto world. Among all on-chain native assets, Bitcoin is the only one. Even the article (“Only the Strong Survives”) stated that in the crypto world, those “productive” public chains, such as ETH and SOL, are valuable because Bitcoin is valuable. Bitcoin is providing the foundation of value and the cornerstone of trust for the entire encrypted world. His network security is actually the value of the entire encrypted world.
As for whether the “productive” public chain will exceed the market value of BTC someday in the future.Possibly, just like Google, Amazon, Microsoft these Web 2.0 companies surpass GE. But in the “Internet Summer” in 2000, GE was also a very high-quality asset.
The second part concludes:
Bitcoin’s identity has shifted from a payment currency to a dollar asset. And it has a strong influence on both ends of the real and virtual worlds. This also leads to thinking about the future path of Bitcoin.
3. The Bit Bridge: Real Assets to Bitcoin and Bitcoin to the Crypto World
Although it may be challenged by stablecoins and CBDCs, Bitcoin still has a very strong financial asset attribute. Hedging, hedging, asset allocation, anti-inflation, there are many reasons why traditional finance would accept Bitcoin as part of the balance sheet.
On the other hand, Bitcoin is still the hard currency of the crypto world. Even in the future Metaverse, Bitcoin may be the only unit of denomination that can be recognized by all people in the Metaverse.
There are three reasons for the demand for Bitcoin, TBI said:
1. Bitcoin will become a margin for other on-chain assets
2. Cross-chain bridges will unlock more peer-to-peer trading applications
3. Concerns about certain stablecoins lead to the adoption of a digital dollar backed by Bitcoin
Therefore, projects that play the role of a bridge to Bitcoin will be worthy of attention in the future.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/a-new-perspective-on-bitcoin-ecology-from-cornerstone-to-bridge-future-projects-worth-attention/
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