Bitcoin Ecosystem Development Trends and Future Outlook

The Bitcoin ecosystem in 2023 is bustling and reminiscent of the Ethereum community in 2017. Passionate builders, investors, and community members are exploring the possibilities of the Bitcoin layer. Given Ethereum's amazing development trajectory, Bitcoin is expected to surpass history and create new glory with its industry-leading market capitalization and BTC's dominance. Just as Bitcoin completely subverted trust when it debuted in 2009, the Bitcoin ecosystem is now at another critical juncture, and it is now closer to fulfilling its original promise and paving the way for a truly trustless financial system based on its core L1 technology.

The market opportunity for Bitcoin L2 is by far the largest in the Bitcoin economy. To establish the overall market opportunity use case for Bitcoin L2, we will focus on the existing market for Ethereum L2. In the Bitcoin L2 market cap estimate below, we took the guiding ratio of the TVL of all Ethereum L2s to the overall Ethereum market cap (approximately 5.62% at the time of writing) and applied it to the Bitcoin market cap.

• Bearish scenario. Bearish scenario suggests that the Bitcoin L2 market could reach a market cap of $4.8 billion, which at the time of writing only represents approximately 10% (0.56%) of the total Ethereum L2 market cap.

• Basic market conditions. Basic market conditions indicate that the market capitalization of the Bitcoin L2 market can reach $24 billion, which only accounts for about 50% (2.81%) of the total market capitalization of the Ethereum L2 market at the time of writing.

• Bullish scenario. The bullish scenario suggests that the Bitcoin L2 market could reach a market cap of $48 billion, equivalent to 100% (5.62%) of the total Ethereum L2 market cap at the time of writing.

Given the current market sentiment surrounding Bitcoin, these forecasts span only two years, do not account for additional year-over-year growth, and assume that Bitcoin L2 will continue to expand. The accelerated development of Bitcoin L2 and protocol standards, in relation to existing infrastructure, provides a key factor in the forecast that Bitcoin L2 will reach a market cap of $24 billion by 2025. The following explores potential roadmaps and industry events that could impact our bear, bull, and fundamental scenarios.

1. Short-term outlook: Ordinals’ cultural influence will continue

In the short term, Ordinals’ cultural impact remains an important driver of the Bitcoin ecosystem. Ordinals’ ability to integrate art and collectibles into the Bitcoin blockchain resonates deeply with a community that values ​​authenticity, creativity, and permanence. This cultural resonance solidifies Ordinals’ position in the Bitcoin space, continually attracting and retaining a diverse audience. By tapping into the zeitgeist of the digital age, they are expanding the scope and influence of Bitcoin far beyond its initial limitations.

The rapid adoption of Ordinals has propelled Bitcoin to become one of the largest NFT platforms by the end of 2023, surpassing Solana, even without smart contract functionality. In November, sales of Bitcoin NFTs (Ordinals) increased by an astonishing 500%, surpassing the same period data for Ethereum and Solana. Although Ordinals has only been around for about a year, data shows that assets deployed on Bitcoin can also achieve higher value due to the immutable nature and permanence of Bitcoin network storage.

The growing popularity of Bitcoin NFTs, such as the OnChain Monkey NFT, which doubled in price after being integrated with Bitcoin, shows that users are becoming more and more curious. This naturally leads users to further explore the Bitcoin ecosystem, eager to delve into other use cases such as DeFi and gaming. While this curiosity paves the way for major shifts, many innovations remain at the protocol level, with inherent limitations in transaction speed, smart contract compatibility, and scalability.

• For example, many early projects in the ecosystem were unable to issue tokens with the same utility and governance capabilities as tokens on Ethereum (e.g., BRC-20 vs. ERC-20).

• Therefore, these projects must rely on equity financing and are unable to guide the community through their own tokens.

• Solutions include issuing fungible tokens on Stacks, which provides smart contract functionality with the SIP-10 fungible token standard or other emerging token standards.

• Two-way bridges are emerging, such as MultiBit for transferring BRC-20 and ERC-20 tokens across networks. However, these solutions are not the final solution.

Continued innovation is essential to address these challenges. L2 continues to make increasing progress in reducing transaction times while inheriting 100% of Bitcoin’s finality. At the same time, innovation is percolating through Bitcoin L1. Despite these challenges, developers and Bitcoin enthusiasts are already experimenting with various use cases.

2. Medium-term Outlook: Bitcoin L2 and emerging use cases achieve breakthroughs

The Bitcoin ecosystem is expected to achieve major breakthroughs in the medium term, mainly due to the progress of L2 technology, such as the Nakamoto Release of Stacks and the launch of sBTC. These developments are not only incremental but also transformative, especially in the field of Bitcoin DeFi and other applications.

The significant reduction in block times (from over 10 minutes to 5 seconds) and increased security help create a smooth “Ethereum-like” user experience, which is critical to attracting new developers and catalyzing a new wave of adoption and innovation.

• Fast blocks and the implementation of sBTC will enable Stacks to offer high-performance, BTC-dominated applications such as NFT marketplaces, facilitating more efficient transactions of Ordinals and unique L2 NFTs.

• Bitcoin DeFi is expected to experience considerable expansion, such as lending will be enabled through sBTC. The Zest Protocol team has already built this in advance on Stacks.

• ALEX is preparing for all DeFi functions, recently surpassed 500 million in transaction volume, and has laid the foundation for sBTC-denominated exchange markets for other sub-tokens. These different applications can all be explored by users while generating automatic returns based on Stacks.

Unlocking the Bitcoin market cap by creating a user adoption flywheel like Ethereum. As the infrastructure continues to mature, a host of new use cases will emerge across all Bitcoin layers, attracting end users. The Bitcoin ecosystem not only has the largest potential TVL in the industry, but also a much larger target audience - building for mainstream users. The key developments to build the ecosystem for success are:

• Trust Machines is building Bitcoin applications with the goal of growing the Bitcoin economy by demonstrating new use cases for Bitcoin, thereby maximizing the value of the network.

• In preparation for the expected influx of developers, Hiro is stepping up the construction of developer tooling across the Bitcoin layer.

• Wallets like Xverse, Leather, and Ryder are focused on seamless user experience for mass adoption, compatible with a wide range of assets on the Bitcoin layer.

• Larger centralized exchanges opened Ordinal markets shortly after Ordinals became popular, such as Binance, Magic Eden, and OKX. Other markets quickly emerged, including Ordzaar, Gamma, etc. On-chain Monkey also recently launched its own market, Osura.

• Other notable ones include Ordz Games, which launched the first Bitcoin-based game, which released a BRC-20 token, $OG.

• New Bitcoin City, a project comparable to friend.tech, was developed by Trustless Computer on Bitcoin L2 NOS, and its TVL exceeded $1 million in October 2023.

• StackingDAO launched Liquid STX (stSTX) in December 2023, bringing liquidity staking functionality to Stacks.

• Additionally, Animoca Brands’ Darewise is creating a virtual world based on the Ordinals, showcasing the expanding possibilities within the Bitcoin ecosystem.

Ultimately, this L2- driven expansion of the Bitcoin ecosystem will not only add new features and attract new users, but will also more subtly integrate Bitcoin into the global blockchain economy. Projects such as ALEX are at the forefront of this movement, designing BTC-native permissionless yield-generating stablecoins and BTC cross-chain bridges (such as XLink) that connect Bitcoin to Ethereum and other ecosystems. These initiatives are critical to fostering a Bitcoin ecosystem that is not only more connected but also more productive, and in the long run, lays the foundation for a variety of financial innovations and services across the industry.

In addition, the development of further expansion solutions on Stacks will significantly enhance the interoperability of the Bitcoin ecosystem with other L2 blockchain networks. With the upcoming Nakamoto upgrade, Stacks will launch new subnets compatible with various programming languages ​​​​and execution environments, including EVM subnets and Rust VMs. In addition, efforts to integrate WASM support directly on Stacks L2 are underway and will be launched with the Nakamoto upgrade. In December 2023, a working group within the Stacks ecosystem released details on the integration of the new virtual machine ClarityWASM. This integration will open the door to a wider range of languages ​​​​(such as Rust, Solidity, etc.) directly in the Stacks L2 environment.

3. Long-term outlook: paving the way for institutional adoption

Bitcoin's long-term outlook will solidify its position as a leader in institutional digital asset and DeFi adoption. The Bitcoin spot ETF is expected to be approved, a key milestone that could revolutionize institutional participation in Bitcoin. This approval is expected to usher in a major paradigm shift, with institutions increasingly focusing on Bitcoin-centric financial products and services. Bitcoin is considered a resilient and thoroughly vetted asset class that is on the verge of gaining widespread institutional adoption.

With the approval of Bitcoin spot ETFs, demand for "Bitcoin native" trading and income products is expected to surge, driven by their security and tax efficiency. This rising interest may spur the development of a variety of regulated Bitcoin financial products. Recognizing this shift, traditional banks may begin to combine Bitcoin and these new products with their private blockchains, allowing them to serve institutional clients at scale.

The significance of institutional integration into the Bitcoin DeFi ecosystem is not only capital injection, but also represents the creation of a unique synergy, combining the advantages of traditional finance with the disruptive nature of the decentralized financial system. This integration based on Bitcoin's security and transparency will redefine the institutional financial landscape and blur the boundaries between traditional and modern financial systems.

From cultural shifts to technological innovation to institutional adoption, these developments will significantly increase Bitcoin’s market cap and the total value locked (TVL) within its ecosystem. As we navigate this decentralized financial future, it’s clear that Bitcoin will be not only a digital asset, but the cornerstone of a new, trustless financial paradigm.

4. Summary

Bitcoin has evolved from a dormant asset to a dynamic foundational technology for decentralized finance, driven by its $850 billion+ market cap, as well as the stability and security of the network. However, a key challenge is the underutilization of Bitcoin network capabilities, a result of the often overlooked distinction between the Bitcoin network and the Bitcoin digital asset. In order to activate this dormant capital and realize the full potential of the Bitcoin network, the network's performance must be harnessed to transform Bitcoin from a mere store of value to core infrastructure in the Bitcoin economy.

This shift is reflected in Bitcoin developing “layers” on its core network (L1) to solve scalability issues, taking inspiration from Ethereum’s scalability and flexibility, and promoting development through the introduction of Ordinals, which marks a cultural and development shift. While major L1 upgrades like SegWit and Taproot have alleviated the problem to some extent, rising transaction fees highlight the rising need for more advanced L2 solutions such as Stacks.

As we get closer to the 2024 halving event and anticipate the approval of a Bitcoin spot ETF, Bitcoin’s evolution is fostering a more scalable and secure ecosystem. This evolution is expected to spur significant institutional adoption, with Bitcoin at the forefront of a new financial paradigm that seamlessly integrates traditional and decentralized systems. The potential of Bitcoin smart contracts, especially with the cultural influence of Ordinals and the expanding use cases of DeFi and gaming, is likely to attract more interest and capital.

In the medium term, breakthroughs in Bitcoin L2 technology, especially the release of Stacks Nakamoto and the introduction of sBTC, are expected to revolutionize the DeFi landscape. These developments are expected to create a smoother and more efficient user experience, opening up new possibilities for Bitcoin-based NFT markets and DeFi applications.

In the long run, Bitcoin will become a key player in the institutional adoption of digital assets and DeFi, especially with the potential approval of the first Bitcoin spot ETF. This event may trigger a major shift in institutional investment toward Bitcoin-based financial products and services, enhancing the synergy between the traditional financial system and the decentralized financial system. This synergistic integration is not only about capital injection, but also about the integration of the advantages of both parties, paving the way for a new era of institutional finance.

Together, these developments are expected to significantly increase Bitcoin’s market cap and total locked value within its ecosystem, marking a new chapter towards the future of decentralized finance. With innovations such as Ordinals, Nakamoto’s launch, and Stacks’ sBTC, as well as the potential for Bitcoin institutional adoption following the approval of a Bitcoin spot ETF, Bitcoin is not only maintaining its relevance, but will actively reshape the future of finance as the cornerstone of a new, trustless financial paradigm.