What’s next for the Bitcoin ecosystem? Explore potential opportunities

This article will introduce the future challenges and potential opportunities of BTC inscriptions, and how BTC's L2 will inject new vitality into the ecosystem.

Four shocks

The first wave is the community's consensus process on fair distribution. BRC20 creates a new type of asset that is completely different from FT and NFT. This is the first innovation on the blockchain and represents the rise of civilian culture.

We are experiencing the second wave, which is the Renaissance of BTC culture. Big funds and exchanges have also participated in the consensus. At the same time, more developers have joined the inscription world, launched many excellent protocols, and overflowed to more chains. BTC culture is overwhelming, which of course has also caused some other problems.

The third wave may be the outbreak of "inscription-based" expansion solutions. The great development of the second wave promoted the prosperity of the BTC ecosystem, but the competition for BTC network resources eventually conflicted with BTC conservatives. At the same time, poor user experience prevented more users from entering the market. Therefore, the expansion of the inscription itself (rather than the expansion of BTC) is urgent and necessary, but the direct development of a second-layer expansion solution based on BTC (such as Bitvm) is difficult and time-consuming. Therefore, the compromise solution will be adopted first. Maybe in the next six months, we will see a large number of new side chains of BTC that use inscriptions as native assets (different from stx) and introduce main chain inscriptions through cross-chain and other methods.

The fourth wave represents the full maturity of the final expansion plan "based on BTC", which includes complete smart contract capabilities, better performance, and strong security shared with BTC. High-value inscription assets will place more demands on security, and a more native, more orthodox, and more secure second-layer expansion solution becomes important. This requires the second layer to use the BTC chain as a DA layer, upload proofs, and even allow the BTC network to verify, such as BitVM and Atomicals Protocol's AVM. Under the strong guarantee of orthodoxy, BTC will be more absorbed into the inscription ecosystem.

In the end, I will get an experience, performance, and smart contract functionality that is almost identical to ETH and its L2, but backed by BTC's huge community and funding, with "fair distribution" as its core culture and a new ecosystem with "inscriptions" as its native assets.

Next stop L2

After experiencing a magnificent wave of new asset distribution, the main narrative of "Inscription" has been established, and we are about to usher in new opportunities and challenges.

Relying solely on the narrative of fair distribution or meme, the total market value of 200 million seems to be a hurdle. If we don’t continue to build steadily, it will be difficult to break through the ceiling (the end of fair distribution is PUA). In the process of returning to rationality, utility becomes more important, either providing more capabilities or being regarded as an underlying asset.

“Inscription-based” sidechains could be the next big step. They are called sidechains, not L2s, because these “L2s” do not use the security of BTC.

But this is like Polygon to ETH. Inscription L2 can effectively lower the threshold for users to enter Inscription and compromise with BTC conservatives. Most importantly, the complete smart contract capability will also introduce more gameplay to Inscription, defi, socialfi, gamefi...

Brc20 and its derivative inscriptions choose to write token information in human-readable Json. The advantage of this is extremely high flexibility, and the inscription can be split into any number under the "amt" field.

This flexibility is very suitable for interacting with the second layer of inscriptions, because as long as the second layer reads the json and restores the Brc20 status, subsequent defi and other businesses are very easy to carry out.

As a new type of asset different from NFT and FT, the business of Inscription L2 can also be developed around the inscription itself, and even the native asset itself is best to use inscription. If Inscription L2 simply splits the inscription into FT after cross-chain, and then copies the Ethereum DeFi gameplay, it will lack appeal, because for current traders, the cost-effectiveness of trading FT is already very low.

The index of Brc20 is the ledger. After reading the index, the EVM chain is created to continue the properties of the inscription. And continue to launch a large number of innovative paradigm applications that are different from FT defi.

Indexer-oriented programming

Will BRC20 and its json inscription sidechains definitely continue the ETH model? In fact, EVM sounds very boring, and we don’t need to reinvent a series of L2s. But perhaps, starting from the native properties of the inscription itself, it would be more interesting to think about the expansion of functions and businesses.

Brc20 is a token system that records on-chain and processes off-chain, using BTC as storage. Therefore, for this type of expansion, it may be possible to achieve it by adding more business logic to the off-chain index server.

For example, in addition to "mint", "deploy", and "transfer", new primitives are directly introduced under the "op" field of Json to perform operations such as placing orders, pledging, destroying, and authorizing. The combination of these "ops" can further evolve into Inscription-Fi (inscription finance) such as swap and lending, and even more complex socialfi and gamefi.

This is essentially indexer-oriented programming, which is more like programming the server interface in web2. It is easy to implement and can even start directly from an index server, but the effect is very significant. At present, unisat's swap and other functions, including brc100, orc20, and Tap protocols, are all pioneers of this type of Json expansion school and have the opportunity to bring about changes quickly.

The attempt to add cryptographic primitives is exciting. Of course, decentralization is always a question that needs to be considered. Indexer-oriented programming will inevitably lead to increasing pressure on servers and make it more difficult for the community to run. Complex businesses must also require consensus, which will ultimately lead to the development of smart contract platforms.

Or... a more original approach

The issuance method of the first layer of BTC is actually divided into two major schools. In addition to the Json school introduced above, there is the UTXO school unique to Atomicals (the definition of Rune is still relatively vague and will not be discussed for the time being).

Atomicals’ arc20 token is directly represented by BTC’s UXTO itself, without any Json update. Therefore, operations directly based on UXTO can enable arc20 tokens to achieve many interesting capabilities, such as swapping Arc20 tokens with BTC, consuming Arc20 tokens to produce another Arc20 token…

Controlling the input and output of transactions can also realize simple DeFi functions, but this places higher demands on developers and is more difficult. The benefits are also very obvious. All logic is directly processed by the BTC network, sharing the greatest security and consensus. At the same time, BTC assets can be seamlessly absorbed. It needs to rely on a third-party BTC bridge like a side chain. After all, "not your keys, not your coins".

Obviously, Arc20 itself is not Turing complete. Therefore, after absorbing the design ideas of Bitvm, the Atomicals protocol also proposed Avm's Bitcoin Layer 2 solution, which is a L2 that submits proofs on the BTC network layer and is verified by the BTC script circuit logic. As an asset represented by UTXO, Arc20 is naturally suitable to be used as collateral for fraud proofs on the AVM layer 2.

This will be the ultimate narrative for BTC scaling, the ability to implement smart contracts using shared security with BTC DA.

This may be the fourth wave of L2 that will be truly implemented, but Atomicals' development service provider @wizzwallet seems to have given some information about AVM in the recent update. Perhaps the progress is faster than I thought.