In the second half of the competition among hundreds of chains, where will the BTC Layer2 market go?

Original author: Haotian | CryptoInsight (X: @tme l0 211 )

Recently, the entire primary and secondary markets have been under a cloud of depression, and many people have asked, what is the next step for BTC layer 2? The answer is obviously not as simple as Eastern and Western capital not taking over each other. After in-depth research on multiple representative projects, I have a deep understanding.

In my opinion, there are three main breakthrough points: 1) the new narrative of asset issuance; 2) the narrowing of layer 2 standards; 3) the opening of the BTCFi interest-bearing curtain. Next, let me systematically tell you my opinion:

The “new” narrative of asset issuance

With the development of Ordinals, BRC 20, BitVM, Runes, and Layer 2, the BTC ecosystem has fallen into a dilemma where the technology is becoming clearer, but the wealth creation effect is becoming weaker. Why? The fundamental reason is that wealth creation only comes from the information game of existing funds, and technological iteration cannot attract incremental funds to enter the market.

Take the BRC 20, which is full of loopholes, and the Runes protocol, which was born with a silver spoon in its mouth, as examples. Although BRC 20 has been criticized in every way, it has indeed created a wealth effect and attracted a lot of attention to the BTC derivative market. However, the Runes protocol, which has become mature in data storage, indexing logic and even gameplay, did not receive the expected market response.

Is it possible that the direction of technological iteration is wrong? Is the direction of OP_Return to remove UTXO junk transactions wrong? Is the design idea of the Premine reservation mechanism wrong? Obviously not. I think that the wealth creation effect of BRC 20 inscription is an accidental phenomenon caused by pure information asymmetry under the special environment. Whether the narrative of BTC asset issuance can work is definitely not first is first, but the continuous value empowerment of the project party.

Therefore, the previous method of issuing new assets by binding UTXO to the BTC main chain can only benefit early birds with information asymmetry. To make the issuance story of BTC derivative assets sustainable, two dilemmas need to be solved in the short and long term:

1) Short-term asset liquidity problem: The purpose of issuing BTC derivative assets is not to allow some early birds to mint a bunch of assets, but to make these assets circulate and generate value through turnover. Obviously, it is not feasible to rely solely on the BTC main network to undertake the circulation of inscription assets. The assets can be cross-chained to the second layer to seek the possibility of activating circulation in the corresponding application ecological market.

@NervosNetwork CKB has realized the idea of allowing BTC mainnet inscription assets to Leap to the CKB layer 2 chain for circulation through the RGB++ protocol. This solution can solve the problem of asset circulation, especially some excellent assets with sustainable growth potential.

2) Long-term project empowerment problem: Although the Runes protocol has a mainstream consensus on asset issuance, and the project party can also control the fundraising through the Premine method, if the idea of issuing assets from the main network to create popularity and then circulating them on the second layer will lead to huge operation and maintenance costs in the early stage of the project party. Under the market Fomo sentiment, the cost of Premine tokens, the high handling fee cost of issuing airdrops, community marketing and operation and maintenance costs, etc., under these cost pressures, it will be very powerless to talk to the project party about the issue of empowerment.

@RoochNetwork , a BTC Native layer 2 project driven by MoveVM, can achieve low-cost issuance and initial circulation of a BTC inscription asset in a layer 2 environment through Parallels BTC global state synchronization, and then migrate to the BTC main network for consensus upgrade after the inscription asset has a certain market scale and consensus. This narrative design centered on the goal of asset circulation aims to solve the difficulty of empowering BTC ecological projects;

In short, the asset issuance narrative is just the beginning of BTCs development of the layer 2 ecosystem. The turning point lies in whether these purely community-driven assets can find a strong project to empower them on layer 1 or layer 2 and demonstrate good circulation value within the layer 2 market ecosystem.

Layer 2 “standards” narrowed

In the past year, the BTC ecosystem has experienced a wild and chaotic development stage. The no direction, no standards, no thresholds have quickly filled the BTC layer 2 track with builders: EVM-Compatible, UTXO Stack isomorphic binding, UTXO parallel stacking, BitVM off-chain Turing completeness, RGB native, AVM virtual machine, etc. It is said that there are hundreds of BTC layer 2 projects in preparation. However, it is still unclear which direction will come out.

However, the chaos in the BTC layer 2 market has not really brought significant growth to the BTC ecosystem. When the market fell into silence, we often heard about whether BTC layer 2 is a false proposition. Although the no standard gives BTC layer 2 more possibilities for borrowing, stitching the mature expansion plan directly to the BTC main network, which is already very limited, may not be able to feed back the expansion gains of the second layer to the main network. Instead, it will harm the BTC main network user group due to security and stability issues.

In my opinion, the prosperity of BTC layer 2 without standards is about to pass, and BTC layer 2 will move towards a higher technical threshold:

1) UTXO Stack structural framework: The Nervos CKB team has developed a standardized BTC layer 2 construction solution based on the RGB++ technical protocol, which is regarded as the most native solution for integrating the BTC main chain. Because the UTXO Stack structure inherits the simplicity and security of native BTC, it can be regarded as a relatively mainstream BTC layer 2 direction in the short term. The recent protocol upgrade of the RGB++ layer and the engineering implementation of UTXO Swap have provided basic infrastructure for BTC ecosystem developers to expand the Bitcoin ecosystem based on the UTXO structure;

2) zkVM general protocol framework: @ProjectZKM has built a complete set of ZK Bridgeless cross-chain and Entangled rollup Network interoperability layers based on the zkMIPS microprocessor instruction architecture. Through the absolute authority of ZK technology in cross-chain trusted verification, it has introduced a Native general cross-chain solution for the BTC ecosystem.

Its technical principle is similar to the commitment verification and unlocking mechanism of Peg-in and Peg-Out of RGB, and it also adopts the challenge mechanism of BitVM 2. In contrast, the protocol framework of zkVM can provide the possibility for the public chain Native of Non-UTXO structure type to access the BTC ecosystem, and will become a layer 2 expansion solution with a wider range of ZK technology support;

3) RGB client verification framework: Native RGB protocol direction, through the P2P off-chain client infra system construction, based on one single seal one-time seal + state channel and other technologies to achieve native BTC second-layer expansion solution, can support complex applications such as smart contracts, while also being able to connect to the lightning network to expand the application expansion of payment scenarios. For example: @BitlightLabs is working on supporting a series of wallets, DEX and other infrastructure for the RGB protocol;

4) AVM virtual machine framework: By simulating the Bitcoin virtual machine, the originally stateless Bitcoin mainnet can be embedded with a special set of codes to implement the ability to carry smart contracts. This is a native expansion method that does not rely on off-chain extensions and follows the current Bitcoin core OP Codes. For example: what @atomicalsxyz has been trying to do.

In short, choosing a high technical threshold and narrowing the layer 2 standard will inevitably clear out some of the chaos followers in the market, allowing more capable developers to further develop an expansion ecosystem suitable for Bitcoin with capital support. Although this exploration cycle will be relatively long, just like the Ethereum layer from Plasma, Validium to Rollup mainstream has also experienced a long period of exploration.

BTCFi interest-earning begins

I don’t know when BTCFi has quietly become the narrative and topic focus of the BTC ecosystem. At first, I was also confused about the difference between BTCFi and DeFi. Could it be that DeFI used to be centered on “decentralization”, and now BTCFi is centered on the “BTC public chain”? However, in order for isolated chain assets with a large community consensus to become a catalyst for activating the liquidity of the entire chain, those more advanced high-performance technologies are bound to compromise with the ancestor of BTC.

Given the special scripting language of the BTC chain and the programmable limitations of stateless storage, this makes sense. Therefore, in my opinion, the BTCFi concept should include three main features:

1) Inclusive asset inclusiveness. In addition to BTC Native assets, the protagonists of the BTCFi stage must include Runes, ARC 20, BRC 20 and other derivative assets on the BTC public chain. If BTCFi does not aim to activate more derivative assets in the BTC ecosystem, it will be difficult to distinguish the outflow of BTC assets from the existing DeFi ecosystem of Wrapped BTC.

2) Native cross-chain-free features can also become Bridgeless or trust-free mechanisms. Based on the native cross-chain feature, it can be ensured that there will be no centralized trust link in the inflow and outflow of BTC and derivative assets, which will provide an absolute technical prerequisite for the interest-bearing of BTC-related assets. Only in this way can the interest-bearing behaviors such as POS Staking and Restaking on layer 2 be maintained with absolute on-chain traceability and fairness, laying the foundation for a series of rich BTCFi interest-bearing gameplay.

3) Programmable complex programmable features, regardless of the UTXO Stack architecture or the underlying architecture of the zkVM protocol, the off-chain expansion environment they can access must have complex programmable features. In the short term, UTXO has the advantage of structured homology, which makes it easier to produce landing applications. In the long term, ZK technology can become a powerful interface for BTC to link into high-performance public chain environments such as EVM or MoveVM. By then, what kind of ecology BTCFi can develop and what kind of flowers it can grow, the imagination space is infinite.

For example: @GOATRollup builds the Native secure cross-chain and unified liquidity layer features based on the zkVM technical framework, and uses the GOAT Stack stack to provide a solid technical expansion solution for the BTC layer 2 market;

In addition, the aforementioned Rooch Network, whose Native technical solution aims to provide BTC with application scenarios (Utility) while providing BTC assets with the possibility of interest-bearing income (Yield); the RGB++ layer of the UTXO structure is even more so. The solutions they provide are as close to these three technical characteristics as possible.

However, before BTCFi came out, I was more inclined to regard it as a direction for ecological development. The current dull market environment is far from supporting BTCFi to stand out from DeFi. Therefore, technical standards are not a hard condition for judging whether a project is BTCFi. As long as there is a certain market consensus, it can be included in the scope of BTCFi. After all, in addition to technical methodology, the most important thing is to give answers to the market. For example, Blast has not been regarded as layer 2 by the mainstream population until now, but it does not hinder its impact on the layer 2 industry.

above.

Note: Although the BTC layer 2 market is still messy in terms of asset issuance, layer 2 standards, and interest-bearing schemes, I can actually see the signal of Keep Optimism. As for whether the inscription market boom will come back, whether layer 2 can have the same prosperity as Ethereum, and whether BTC interest can break the gap between virtual currency and the real world, the answers are all in your and my optimism.

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