BTC ECOSYSTEM (BTC LAYER 2) PERSPECTIVES

Layer 2 narrative

The first Layer-2 concepts began to emerge in the mid-2010s. The Lightning Network, first introduced in 2015, is the first L2 blockchain solution implemented on the Bitcoin infrastructure. Currently, the L2 narrative is capturing increasing attention from the crypto enthusiast audience. L2 solutions emerged as a response to the key limitations and challenges of first-generation blockchain platforms: limited throughput, high fees, low confirmation speeds, and more. Layer 2 offers mechanisms to enhance the existing infrastructure’s scalability, efficiency, and functionality.

The overview of L1 and L2 chain usage

In the current market, L2 solutions account for approximately 10-20% of various benchmarks, such as the number of issued coins, the number of protocols and decentralized applications, and so on. In terms of value, the total locked value (TVL) on L2 chains amounts to $8-9B or about 9% compared to L1. This share continues to grow rapidly, outpacing the current market growth and significantly surpassing the growth of L1 solutions.

The expansion of the L2 ecosystem is one of the key factors driving the bull run in 2024. This factor is much more sustainable as it is non-speculative in nature: we observe many projects building their infrastructure by implementing L2 solutions. Against this backdrop, the narrative associated with L2 solutions on BTC stands out significantly.

BTC Ecosystem

During the current bull run, these solutions are especially relevant for the BTC ecosystem, as Bitcoin is the number one asset by total market capitalization. The metrics of many infrastructure projects demonstrate the positive dynamics of this ecosystem.

The share of TVL BTC is growing and by Q2 24 reached 1% (more than doubled over the year).

The growth of this ecosystem is significantly faster than the market average: BTC protocols are growing even faster (than all protocols combined). At the same time, we are seeing an increase in the funds’ interest in solutions built on the BTC ecosystem.

The ever-growing gas within major ecosystems forces the search and development of alternative solutions: the emergence of the BRC-20 standard has led to Ordinals displacing ETH into NFTs. The following signal highlights the following: the potential of networks based on Ethereum is at its maximum, and without radical changes it is not able to offer the market fundamentally new opportunities. In turn, the potential of Bitcoin networks has not yet been revealed.

Over the years, the focus has been predominantly on Ethereum, which is a big competitor as it provides the necessary scaling solutions for application development, such as L2s (e.g. Arbitrum, OP Mainnet, etc.), subnets (e.g. Evergreen by Avalanche), etc. However, in 2023, after recent updates to Bitcoin L1, the development of the BRC-20 standard and Ordinals, there was a noticeable shift. Developers are increasingly turning their attention back to Bitcoin to solve the problems of the Bitcoin L1 Trilemma.

Main directions and leading projects of Bitcoin Layer-2

Sidechains

• Liquid Network — Bitcoin sidechain, functioning as a settlement and payment network for cryptocurrency exchanges, market makers, brokers, and other market participants. It provides additional throughput for Bitcoin transactions, allowing faster and more private transfers between participants. It works like this: users freeze their Bitcoin on the mainnet and receive in return L-BTC tokens on the Liquid sidechain, which they can instantly trade and then exchange back for Bitcoin. However, its operation depends on a centralized federation, raising issues of trust and centralization as opposed to the core principles of the Bitcoin blockchain. Additionally, the need to freeze Bitcoins to exchange them for L-BTC limits liquidity and may hinder the widespread adoption of the technology.
• Drivechain: Proposes the concept of sidechains that can be added to Bitcoin without changes to the main code. This allows Bitcoin to support different types of blockchains and even entire ecosystems running in parallel with the main blockchain.
• Rootstock (RSK): A smart contract platform that seeks to bring Ethereum functionality to the Bitcoin ecosystem using sidechain. RSK allows developers to build Ethereum-compatible applications on the Bitcoin blockchain while ensuring robust security.
• Stacks uses its own blockchain, compiler, and programming language called Clarity. It functions in parallel with Bitcoin. Instead of pooling assets through bridges, Stacks integrates with the Bitcoin main chain by sending anchor transactions.

Protocols

• Lightning Network (LN) — This is a Bitcoin scaling system that serves as one of the solutions to the problem of its limited throughput. It can be used to make small transactions quickly and with low fees, solving Bitcoin's scalability problems. The Lightning Network faces challenges to mass adoption due to complexities in managing payment channels and a lack of unified standards, which hinders integration and interoperability with various wallets and platforms. Limited channel liquidity and low levels of user trust also hinder the adoption and usefulness of the protocol.
• Atomicals (ARC-20) — The protocol sets the standard for fungible tokens on the Bitcoin blockchain, using satoshi as the fundamental basis for token representation and recording token information in transaction scripts. This way, the balance of ARC-20 tokens remains consistent with the number of SATS in the UTXO, eliminating the need to rely on an off-chain indexer to calculate the balance. This allows ARC-20 tokens to be transferred directly via UTXOs, which can be recognized by the Bitcoin network. This technique enhances decentralization and provides faster transaction speed compared to BRC-20. Additionally, ARC-20 is the first token protocol in the Bitcoin ecosystem to implement Proof of Work (POW) for minting inscriptions and NFTs, similar to Bitcoin mining.
• Runes — A protocol designed specifically for issuing fungible tokens on the Bitcoin network. The developers (the creators of Ordinals) position the protocol as a simpler and more efficient alternative to the BRC20 standard, which also allows the issuance of fungible tokens based on Bitcoin, but at the same time heavily overloads the network and leads to a sharp increase in transaction fees. The Runes protocol was launched in April 2024, immediately after the fourth BTC halving. The project attracted the attention of many developers and created a stir.
• Stacks Protocol – Formerly known as Blockstack, it implements smart contracts and DApps using Bitcoin as a base layer. Stacks introduces the new smart contract language Clarity and allows you to create decentralized applications directly protected by Bitcoin security. => Liquidium is the largest Bitcoin NFT lending protocol on the Stacks blockchain by transaction volume.
• Dova protocol is designed to provide two main products: the Dova lending protocol, where users lend BRC-20 assets to generate profits and incentivize BRC-30 tokens, and the Dova collateral protocol, allowing the conversion and collateral of Bitcoin into BRC-30.

Rollups

• RGB (Really Good for Bitcoin) — protocol for creating smart contracts on the Bitcoin network. The RGB Network performs computational tasks and stores data outside the Bitcoin blockchain using L2 protocols. This significantly reduces the load on the main blockchain, ensuring high speed and low transaction costs. RGB can interact with other blockchain networks and systems, making it more flexible.
• BitVM (Bitcoin Virtual Machine) is a virtual machine similar to the Ethereum Virtual Machine (EVM), created to provide Bitcoin with functionality similar to Ethereum, allowing it to run complex decentralized applications (dApps) and smart contracts.

Сross-chain solutions: bridges and infrastructure solutions

• RIF (RSK Infrastructure Framework) — A smart contract platform connected to Bitcoin through a two-way bridge. However, RSK also provides interoperable solutions, allowing developers to use smart contracts and dApps in the Bitcoin ecosystem. Technically, RSK uses a bridge to work with Bitcoin, but the platform itself extends the capabilities of Bitcoin beyond simple bridging by integrating Ethereum-compatible smart contracts.
• RSK Bridge — A mechanism that provides two-way communication between the Bitcoin blockchain and the RSK smart contract platform. It allows users to convert Bitcoin into RBTC, which is used on the RSK network to power smart contracts and decentralized applications, combining the security of Bitcoin with the flexibility and capabilities of Ethereum smart contracts.
• pTokens BTC (pBTC) — A bridge system that provides reversible tokenization of Bitcoins onto various blockchains, including Ethereum and EOS. This allows Bitcoin to move between blockchains while maintaining the transparency and security of the underlying Bitcoin blockchain, while expanding the use of Bitcoin in new decentralized ecosystems.
• Multibit — A bridge protocol launched in May 2023 designed to connect BRC-20 assets to EVM networks. This protocol allows users to transfer tokens between Ethereum, BNB Chain, and the Bitcoin network.
• DeepLake offers APIs that make it easier to work with Bitcoin transactions, making the process of creating decentralized applications (DApps) and smart contracts based on Bitcoin more accessible to developers.

Projects (tokens) of the BRC-20 ecosystem

• $ORDI is undoubtedly the most famous token in the BRC-20 ecosystem. It has the highest trading volume and is the most liquid asset in the ecosystem. With the listing of $ORDI on Binance, the token's global trading volume exceeded $2 billion in one day (December 6). In addition to significant trading volume on centralized exchanges (CEX), $ORDI is stored in over 13,000 addresses on the Bitcoin network.
• Memecoins: $SATS bills itself as the “most memorable memecoin” on Bitcoin. Its "total supply is 21 trillion coins with a maximum mintage limit of one hundred million per event." This means that a minimum of 210 thousand minting events will be required to achieve full release. The number of addresses containing $SATS currently exceeds 46,000. Additionally, $SATS has received approval from Unisat, which plans to use it as a transaction fee for its robust swap platform BRC-20 Swap. This gives the BRC-20 meme token practical utility and also introduces a deflationary consumption feature for $SATS. + $RATS has become a topic of interest on social media, attracting people who did not participate in $SATS and are now exploring new opportunities.

Platforms and marketplaces

• UniSat and Web3 Marketplace from OKX for Ordinals: These platforms offer Bitcoin-based token and NFT trading.
• Atomicals Market and Bitatom: Specialize in trading ARC-20 tokens (Atomicals), providing alternative markets for trading and investing in Bitcoin-based digital assets.