Research and analysis on the BTC ecology in this bull market

In simple terms, Bitcoin’s (BTC) identity as an institutional-grade asset, global remittance system, and soon-to-be programmable blockchain network has become the focus of intense debate.

While BTC has long been viewed as the de facto store of value, there are a number of technological, institutional, and market factors that are pushing it toward becoming something more productive than simply “inert” digital gold.

In this article, we share our thoughts on Bitcoin’s history of innovation and controversy, recent initiatives, and Portal’s investment thesis to make Bitcoin more “capital efficient” rather than just “programmable.”

Bitcoin/Account

Digital gold is just a prelude. The most solid asset created by human civilization is extending its huge influence to the field of smart contracts.

Untapped potential

Bitcoin is mostly classified as a store of value due to its lack of programmability. Coupled with low transaction throughput, slow speeds, and high fees. Most of the Bitcoin held by 3 billion users lies dormant and unused.

This lack of programmability stems from its non-Turing-complete scripting language and the strict restrictions placed by the core development team on the types of operations that can be performed. This inflexibility ensures its security, but also comes at the cost of slow innovation.

While stores of value like real estate, gold, stocks, etc. can be used as collateral/generate income, Bitcoin mostly remains idle.

Previous attempts to lend Bitcoin out have left users with a sour taste in their mouth as they had to hand over custody of their Bitcoin to over-leveraged entities that eventually went bankrupt.

Attempts to replicate DeFi by sending Bitcoin to the Ethereum Virtual Machine chain have also not been very successful, as the two are completely different environments and the bridge requires a trust zone for this exchange.

The bridge locks up Bitcoin and mints a representation on the Ethereum Virtual Machine chain. This introduces reliance on a centralized entity or a group of multi-signature validators, which has lower security guarantees. The most popular bridge token, WBTC, has a market cap of just $10 billion, less than 1% of Bitcoin’s total market cap.

Programmable Bitcoin

So why the renewed interest in programmable Bitcoin? Three catalysts have attracted attention:

1) Ordinals

While the inflow of funds into ETFs has attracted attention from the financial community, Ordinals has attracted a lot of developer attention to the Bitcoin ecosystem. Ordinals and BRC-20 tokens "burn" data to the Bitcoin ledger, but a social consensus layer is needed to convert these specific data codes.

Ordinals has pushed Bitcoin NFTs to second place in terms of volume, behind only Ethereum. This success raises a key question: Can we create a trustless EVM paradigm on Bitcoin that does not rely on social layer support and is backed by Bitcoin L1 guarantees?

This seems impossible due to the limitations of the base layer. Sidechains have been the only alternative, using Bitcoin miners to secure new chains embedded in the EVM environment. However, the security of this layer depends on an external group of coordinators.

2) Enter BitVM

Robin Linus from the ZeroSync team found a way to implement validator logic on Bitcoin Script without changing the protocol or soft forking.

BitVM adopts an OP's proof-verifier model to express Turing-complete smart contracts.

The calculation is performed off-chain and the results are settled on the Bitcoin chain, similar to a modular Rollup ecosystem. Any observer can verify the execution results and has the right to punish the prover and cut off his funds if fraud is found.

This became the catalyst for second-layer scaling on Bitcoin to take off. Teams like BSquaredNetwork are using BitVM to build Rollups with diverse proof mechanisms and virtual machines. The citrea_xyz team designed a zero-knowledge validator circuit that runs natively on Bitcoin Script.

Rollups on Bitcoin leverage a modular technology stack that greatly improves scalability and efficiency. This advancement has attracted not only talented developers skilled in EVM tooling, but also millions of users eager to interact with the same user experience.

BitVM also introduces a trust-minimized bridge to transfer BTC to the POS chain. Citrea collects lightweight client proofs from other chains that can be verified locally on Bitcoin. This reduces the trust required and ensures integrity as long as at least one validator remains honest.

3) Babylon

While the second layer is busy expanding, Babylon has sparked a revolution in capital efficiency in the Bitcoin ecosystem. Simply put, Babylon is the EigenLayer of Bitcoin. It is a re-mortgage protocol that allows Ethereum stakers to provide verification services to POS chains, bridges, and sequencers and earn returns.

It ensures integrity through an automatic production reduction mechanism in the base chain smart contract - a feature that is impossible to achieve on Bitcoin. Therefore, the Babylon team came up with an ingenious solution. Bitcoin is locked in a multi-signature account, allowing holders to stake and retrieve their funds after a waiting period.

If any attack is observed, the protocol will reveal the key to this vault, enabling automatic penalties.

By staking their Bitcoin, users can provide validation services for PoS chains, DA layers, oracles, AVS, etc. This sparks a new paradigm that allows Bitcoin to generate lucrative returns without giving up self-custody.

POS chains and other validation services can leverage Bitcoin’s economic security to bootstrap their protocol launches and build security layers. Portal Finance is securing a Bitcoin bridge, Nubit is using Bitcoin as a DA layer, and the Avail Project plans to use a quorum backed by Bitcoin.

LSTs increase liquidity by creating freely tradable locked and staked tokens on the POS chain. Babylon works with Ankr Staking to re-stake these tokens for higher yields, create stablecoins backed by Bitcoin, and more.

Summarize

To summarize, Bitcoin is making important strides in two areas:

Scaling vertically, solving the programmability problem through a second-layer solution capable of processing millions of transactions.

Second, it improves capital efficiency by serving as reliable collateral in a wide range of applications.

BitVM is still in its early stages and has encountered some issues with multi-party contracts, high computational costs, and the need for regular server interactions. The ultimate goal may involve integrating zero-knowledge validator opcodes into Bitcoin’s scripting language to overcome these obstacles.

We are on the verge of seeing entirely new applications emerge on Bitcoin that will integrate smoothly with the EVM stack, opening up endless possibilities.