Bitcoin has established itself as a store of value within the cryptocurrency industry. However, bitcoin is mostly held passively in wallets and cold storage. It is not considered to be a productive asset, nor a hedge against inflation. Currently, any positive usage of bitcoins to trade or lend is mostly done via centralized companies such as Coinbase or BlockFi.
Let’s Put Bitcoin to Work
There is now an enormous opportunity to finally allow for decentralized Bitcoin use cases, which could turn it into a productive asset through the active deployment of BTC into smart contracts. During the past bull run, we saw web3 – DeFi, NFTs, and other use cases rise. Most of those experiments are happening now in Ethereum, as well as in the emerging L1s such as Solana and Avalanche.
With that, the development and application ecosystem remains relatively small from a Bitcoin perspective as opposed to Ethereum. This is because Bitcoin’s basic layer is simpler and does not support complicated apps. Bitcoin follows a simple design architecture that keeps the base layer safe, immutable, and stable. Yet, despite the simplicity, Bitcoin remains the largest asset class in the industry.
Billions of dollars in search of utility
Even during the current bear market, Bitcoin has nearly $400B in capital simply sitting there waiting for developers to unlock it into new use cases and applications. In this article, we will discuss what is next for bitcoin, how that ecosystem is going to build, and we will spotlight a few projects that are bringing new use cases into the bitcoin ecosystem.
All this is happening via Bitcoin layers, which will unleash a new wave of innovation which could greatly extend Bitcoin’s utility and adoption.
DeFi is coming to Bitcoin
Bitcoin is designed to be scaled up layer by layer, and Bitcoin L1 is meant to settle, not pay.
For instance, payments could be made on a faster, cheaper layer such as Lightning, then settled on L1. Similarly, other layers of bitcoin, such as RSK or Stacks, bring in smart contracts (full runtime environments) without changing the base layer.
There is a distinct separation between Bitcoins role and that of its layers. Experiments are happening in higher layers. The lower layers are optimized to decentralize and to last; they are focused on being stores of value. Bitcoin becomes more efficient at higher layers, without sacrificing decentralization and other valuable features such as censorship-resistance, at L1.
There are currently four major layers of bitcoin and each layer is in varying stages of maturity and adoption:
Lightning is focused on making payments fast and inexpensive with minimal trust. Payments happen off-chain via a defined channel; eventually, that channel does final settlements on Bitcoins mainchain. Lightning does not have a runtime or a global ledger; it has a peer-to-peer design that is focused on payments. Today, Lightning Networks peering capacity has recently passed $100M, with 17,000+ active nodes and millions of payments processed. Lightning is the layer used to enable large-scale payments in Bitcoin.
Stacks is the bitcoin layer for smart contracts.
It has an entire runtime environment, and any app that could be built on chains such as Ethereum or Solana could be built on the Stacks layer. Transactions in the stack are settled to bitcoin automatically on each bitcoin block. Contracts on Stacks layer are capable of reading and responding to Bitcoin transactions, and work is underway to move BTC in and out of the Stacks layer in an easy, trustless manner. Developers recently published over 5000 contracts in the Stacks, with contracts such as.
RSK is the layer of bitcoin which is mined in conjunction with bitcoin (simultaneously mining an RSK block alongside bitcoin blocks) and brings with it smart contracts that are EVM-compatible. RSK uses federated hardware wallets to perform peg-ins and peg-outs from BTC into RSK. Liquid is the federated layer, and Bitcoins peg in and peg out features are managed by the federation.
Liquid currently has asset emission features, but no complete execution framework yet (unlike Stacks and RSK). In addition to the bitcoin layer discussed above, a few scripts on bitcoins mainchain, such as DLC (Discreet Log Contracts) and Taproot, may provide a limited ability to program directly on bitcoins mainchain layer (ex: Atomic Finance). Taproot and DLCs also have the potential to improve Bitcoin layers functionality, improving interactions between the base layer and the different layers in Bitcoin. Taproot or DLCs should not be confused with complete execution environments such as the EVM; they are a different scale, but are complementary to Bitcoin layers such as the stacks and the RSK, which have complete execution environments (the EVM for RSK, and Clarity VM for the stack).
Bitcoin: Endurance and Decentralization
Bitcoin is focused on endurance and decentralization. Users can take bitcoin software as early as 2013 and run it without modifications for use on the current chain. Furthermore, regular users with laptops and home Internet connections can run Bitcoin full nodes, as opposed to many of the newer L1s, which are impossible given high hardware or bandwidth requirements to full nodes.
Bitcoin has a grass-roots movement, and its culture rejects any centralization points within the ecosystem — at least at the foundational level. The bitcoin community has a cautious, risk-averse approach to upgrading the network, and changes to the codebase are made slowly and thoroughly.
As the apex crypto asset Bitcoin has the largest capital base, biggest brand name, and the largest community. Bitcoin has been around for the longest time, and given Lindy’s effect, it is most likely to stay for decades.
It has reached the decentralization level and security budget where any one actor would find it extremely hard to bring the network down or mount significant attacks on it. The Bitcoin codebase has the largest active bug bounty on the planet; anybody on the globe could find an exploit that would steal money, yet for over 10 years, we have seen no exploits or hacks of a live network.
In our view, successful experiments and valuable applications of cryptocurrency will ultimately gravitate toward using BTCs capital, and to taking advantage of Bitcoins transactional security.
There is already some evidence that this is happening. For example, the Zest protocol is bringing bitcoin-on-chain lending on business balance sheets into the bitcoin ecosystem, similarly to the way Maple Finance brought that feature into Ethereum.
Challenges of building on Bitcoin
Often developers are intrigued and excited about the idea of building on top of Bitcoin. However, they soon realize that there is a lot of work needed in terms of dev tools and infrastructure, as well as the fact that the speed and performance issues are very real, and they will have to be matured even more.
There are difficult technical challenges, such as the Bitcoin tethering of layers, which must be solved before we progress towards achieving scalable, successful applications of cryptocurrencies with widespread adoption.
Ethereum has undoubtedly the largest community of developers in cryptocurrency, with emerging L1s such as Solana and Avalanche drawing in a larger number of developers than Bitcoin.
Yet, we’ve seen developers and capital move rapidly from one blockchain to the next. The developers and user experiences across different layers of bitcoin are still maturing, and recently, significant amounts of capital have flowed to companies built on top of bitcoin: Trust Machines raised $150 million in funding, while LightSpark raised an even larger amount in 2022.
Bitcoin is not a stone; it is a programmable store of value, and will be made more valuable by introducing layers on top of Bitcoin. While it has a long way to go, DeFi on Bitcoin is being built today and this is something we should all support.
Jay Speakman is a technology writer based in San Francisco, California. He writes on the topics of blockchain, cryptocurrency, DeFi and other disruptive technologies. Clients include Avalanche, Be[in]Crypto, Trust Machines and several blogs devoted to blockchain gaming. He will not rest until fiat currency is defeated.