The consensus within the Bitcoin ecosystem will still need 3 to 5 years to establish, and the next breakout point is more likely to be Bitcoin-native lightweight assets like inscriptions and runes, supported by liquidity from centralized exchanges.
Host: Joe Zhou
Guests: Joshua, Chief Growth Officer at exSat; Sunny, Merlin Chain Infra Lead; Director Zhao from the Jewish community; Old Bai, Investment Partner at ABCDE; Chen Jian, Independent Researcher.
The Bitcoin ecosystem, as one of the main narratives of this round, has garnered significant attention. We are fortunate to invite the Chief Growth Officer of exSat and industry OGs to discuss how to find the next breakout point in the BTC ecosystem, leveraging the opportunity of exSat's mainnet launch.
Host: Please briefly introduce yourselves and share the latest progress of the projects you are involved in.
Sunny: I am Sunny, serving as the Merlin Chain Infra Lead. Merlin is a BTC L2 that launched its mainnet at the beginning of the year, and we have some exploratory collaborations with exSat.
Director Zhao: I have been following the Bitcoin ecosystem for a long time. At TOKEN2049 in 2023, we discussed many future opportunities for the BTC ecosystem and proposed a concept that if Bitcoin is gold, then the Bitcoin ecosystem and the inscription ecosystem are like gold products.
Old Bai: Hello everyone, I am Old Bai, serving as the investment and research partner at ABCD. We might be one of the VCs that invest the most in the Bitcoin ecosystem, especially in the infrastructure field, in Asia and even worldwide. We have invested in about 10 projects, including Merli, Babylon, and Bitlayer.
From the VC perspective, the future of the Bitcoin ecosystem is unpredictable because each main line has its own rationale for existence, and the Bitcoin ecosystem does not have a directional tuning like the Ethereum Foundation. The Bitcoin ecosystem is entirely diverse, and who can ultimately succeed may take another 3 to 5 years to settle.
Chen Jian: I am Chen Jian. My involvement in the Bitcoin ecosystem has not been particularly deep, as I mainly focus on Ethereum. However, I have previously participated in some Bitcoin ecosystem projects and have maintained long-term attention on Bitcoin's ecosystem.
Host: Merlin has become a validation node for exSat; can you briefly discuss the reasons and cooperation details?
Sunny: This year's main narrative around Bitcoin L2 has been about how to increase the application layer, which raises the question: what kind of chains can be considered as the application layer for Bitcoin, or how can we obtain a secure application layer? There are many different types of verification mechanisms. Merlin's current approach is to enter from a specific angle, finding projects that can serve as a middle layer and ultimately marrying Merlin to Bitcoin.
From the beginning of the year to now, we have seen different proposals. For example, there is a significant trend to turn Bitcoin into a POS to gain yield. The mechanism of exSat is quite special; it employs a dual mining mechanism that combines the mature PoW Bitcoin mining pool system with Ethereum's POS, so we anticipate participating in that and exploring a balance between the two methods.
Host: exSat is launching on the mainnet today; can you share the project's progress and how ordinary users can participate?
Joshua: I am the Chief Growth Officer at exSat. exSat is a Bitcoin expansion solution because we believe that Bitcoin expansion solutions should be diverse, so exSat is not limited to just an L2 or side chain solution. We have designed three major scenarios for BTC: one scenario is the issuance of assets on the Bitcoin main chain, the second is BTC itself for payments and applications, and the third is how BTC can safely enter the BitcoinVM or EVM ecosystem. Currently, in the consensus phase, the first thing we are doing is synchronizing Bitcoin's original data to exSat to establish data consensus. Data, assets, and users are the three key elements of blockchain. Mastering data equates to mastering asset flow, allowing you to operate on those assets. However, the Bitcoin network does not have the account system technology like Ethereum, so we aim to develop an account model system based on the UTXO model for Bitcoin. Based on the UTXO model, we can establish an index of assets on the BTC chain, facilitate secure liquidity for BTC, and issue BTC assets, thus achieving truly decentralized custody of BTC assets. This is precisely what exSat aims to accomplish.
As for how users can participate in the exSat network, there are two aspects to consider. Firstly, both ordinary users and institutions can participate in the consensus layer through staking. Because partners have built many nodes, ordinary users can also participate through the nodes built by partners. At the same time, ordinary users can enter our ecosystem through the cross-chain bridge solution we will issue next week. Users can participate in staking first, and later we will also launch a new asset issuance protocol; this is our short-term plan.
Host: Is the shift of BTC from value storage to ecosystem development a necessity? Where do you think the next breakout point for the BTC ecosystem might be?
Sunny: We can usually categorize Bitcoin holders into two types. One type consists of holders who entered the space relatively late; their belief in Bitcoin is purely based on its value. These individuals hope to move Bitcoin onto the chain for some hedging or stable returns or to participate in some DeFi activities in other ecosystems, which may favor the development of the ecosystem. The other type is the old Bitcoin OGs, who hold Bitcoin more like traditional market forces hold gold, focusing on Bitcoin's value storage. They may lack interest in the Bitcoin ecosystem and prefer simply holding it. We have different strategies to serve these two distinct groups.
Based on Bitcoin's market data, the breakout point for the Bitcoin ecosystem is likely to be in some lighter assets, while the development cycle for the underlying protocol of Bitcoin may take a bit longer, as previously mentioned by Old Bai, potentially needing 3 to 5 years or even 10 years to establish the underlying consensus of the Bitcoin ecosystem.
But if we look at it from a slightly smaller breakout point, I think it will still start with lighter assets. For example, the rune ecosystem has recently shown some speculative signs. Runes can hold more resources and can fully describe a sentence or have labels placed on them. We are currently investing considerable effort into runes. Additionally, the combination of the Bitcoin ecosystem and Telegram might also be a great breakout point.
Director Zhao: Recently, market liquidity has been lacking. The entire industry generally recognizes three types of liquid assets: BTC, ETH, and USDT. Therefore, the overall market growth primarily comes from the issuance of USDT. Aside from direct USD fiat deposits in compliant countries, most entries into the crypto market occur through USDT. However, USDT's issuance has reached around 120 billion dollars, leading to a relatively slow pace of stablecoin issuance compared to the rapid issuance witnessed in 2021.
Since the last cycle began, when people were developing applications on various chains, we returned to a state where Bitcoin and Ethereum were used for pricing. People noticed that various inscriptions, runes, and NFTs in the Bitcoin ecosystem are essentially pricing Bitcoin itself. When people rush to memes on Solana, it again returns to a state of pricing on Solana. Each ecosystem has started to transform into a relatively closed environment rather than everyone using USDT to price all assets. In such circumstances, the inherent applicability emerges, no longer merely existing as pure value storage. Developing the Bitcoin ecosystem essentially means creating more pricing scenarios for Bitcoin. Because once it starts pricing other assets, its circulation will increase, and when people begin using Bitcoin to purchase other items, it will enhance the potential applications of Bitcoin itself. To increase Bitcoin's pricing power, we must build its application scenarios within the entire market ecosystem, including BTC L2, etc.
People will also notice that the willingness to hold USDT has gradually decreased compared to 2021. Now, people are more willing to hold other pricing currencies, including BTC, SOL, and ETH. The Ethereum and Solana ecosystems are now very mature, and Bitcoin also needs to build different ecosystems continuously, increasing its own pricing scenarios. BTC as a pricing asset and yield-generating asset is a significant direction.
Old Bai: The development of the Bitcoin ecosystem is essential. Back in 2019, I supported the large block technology route, which is straightforward logic. After 5 or even 10 more halvings, if there aren't enough transactions on-chain, Bitcoin's security model will be threatened. Ultimately, Bitcoin has no other options apart from increasing issuance. Therefore, we believed that large blocks could stimulate more transactions on-chain. After BRC-20 gained popularity, many thought Bitcoin was saved because the inscription transactions on-chain generated sufficient block transaction fees, and there was a period when transaction fees exceeded block rewards, but later it turned out this hype only lasted about five months.
From the VC perspective, we have seen four different routes. As for which route is the core of the Bitcoin ecosystem, it is now entirely uncertain. The first route is the issuance of assets we mentioned earlier, such as inscriptions and runes issued on the Bitcoin main net. The second route is the recently popular BTCFi, which strengthens Bitcoin's status as digital gold and connects this digital gold to various public chains to participate in DeFi, somewhat like the decentralized version of wBTC. The third route is the expansion route, which leans towards EVM, ZKVM, or other VM versions, using familiar languages and tech stacks to bring Bitcoin into these strategies and redevelop the ecosystem. The last route is the most native and challenging, but we've recently seen some positive momentum, all based on UTXO's native route. For example, UniSat launched Fractal Bitcoin last month, which is equivalent to a mirror point of Bitcoin, merely modifying the block time and difficulty while adding much flexibility. Additionally, many projects are deeply engaging with the Lightning Network. Previously, the Lightning Network struggled to take off due to the complexity of setting up a node for ordinary users, the absence of stablecoins, and the insufficient number of nodes requiring more participants to build these nodes. So we now see different teams working on this, including those starting to create incentives for the Lightning Network, even getting people to set up devices similar to routers at home to incentivize them to participate as Lightning Network nodes. Some projects aim to completely abstract the entire node setup for the Lightning Network, allowing users to deploy nodes almost with one click.
The technical challenges or ecological dilemmas faced by the Lightning Network are now showing signs of resolution. If these can be resolved, the theoretical TPS for the Lightning Network is limitless because it is a channel technology. Therefore, the Lightning Network is a line I personally view favorably, although it is a technically challenging line that may take three to five years to mature.
Chen Jian: 58% of all assets in the crypto space are on Bitcoin. All entrepreneurs and VCs are trying to leverage this massive amount of assets to release its liquidity, which greatly helps increase and boost the inherent liquidity within the entire crypto space.
This logic is straightforward and sounds appealing. The Bitcoin ecosystem or BTCFi must continue to strive for new heights. The most suitable direction for the current Bitcoin ecosystem is how to allow holders to safely release their liquidity without locking or custodial requirements. People are generally reluctant to consume Bitcoin; I think this is an important reason. Bitcoin holders still hope to find more stable ways to release their Bitcoin's liquidity. If we talk about gaming or social activities on Bitcoin, I simply cannot imagine how such a track can be established given Bitcoin's current state; this exceeds any technical issues.
If Bitcoin holders can ensure sufficient safety, they would be very willing to have stable yield-generating returns similar to Ethereum's POS. In addition to yield generation, they also hope to release dual liquidity safely through a re-staking logic similar to Ethereum. Engaging in gaming or social activities on Bitcoin is challenging to align with the previously mentioned two closed-loop conditions.
However, engaging in stablecoin and BTCFi related applications on Bitcoin seems logically feasible. Of course, I do not rule out social and gaming aspects on Bitcoin; if it is from a profit perspective, there are no issues, but establishing the logical support is very difficult.
Joshua: A few days ago, we discussed a question: if SpaceX takes you to Mars, what assets can you use there? If we consider asset categories, first, production means on Earth like land cannot be taken away. How much gold could you bring to Mars? It remains uncertain whether there is more gold on Mars. Essentially, digital assets are the most suitable. This means that in the next era of exploration, the most suitable assets to use are digital assets. From a long-term perspective, we believe that BTC must not only be a value storage tool; it must have usage scenarios and be a necessity. Additionally, considering BTC's attributes, while people define it as digital gold, it differs from digital gold in several ways. First, both gold and BTC can be preserved long-term, but BTC can last even longer because it is data; as long as the data exists, the asset exists. Secondly, gold's past liquidity as currency has geographic limitations, while BTC has ample liquidity when delivered on-chain, and its delivery is quite easy. Therefore, BTC surpasses gold's past flow scenarios in usability. If we step outside the USD-defined ecosystem, BTC could potentially exist as a real currency.
The BTC ecosystem has always had two types of users. One type treats BTC as an asset, so all its scenarios revolve around preserving and increasing the value of that asset. Since 94% of BTC has already been mined and only 6% remains, it resembles many previously issued NFT assets, having a phase of explosive growth before maintaining the existing market. The only demand of all users in the existing market is value preservation and appreciation, leading to a surge in products similar to deposits or fixed income. The other type treats BTC as a consumable. From the perspective of younger individuals, BTC and ETH, like many MEMEs, do not differ significantly in their eyes; they simply view them as consumables. I can use BTC to exchange for higher-yielding inscriptions or other items, thus turning it into a consumable. When you use BTC for consumption, a consumption logic emerges.
From a consumption logic perspective, BTC may develop social aspects. I view it as a platform similar to Pinduoduo or Taobao, where I use BTC to exchange for a particular asset or service within Taobao. In this scenario, various demands could emerge, indicating that the Bitcoin ecosystem itself may generate scenarios for gaming or searching.
BTC relies entirely on liquidity bursts; it is an interest-free asset, and it differs from many assets in that it is a completely zero-interest asset. Hence, its price volatility differs greatly from gold's, which has low volatility, while BTC's price volatility is large and entirely dependent on liquidity. The current staking of Bitcoin essentially injects BTC liquidity into other public chains, effectively raiding the liquidity of other public chain ecosystems. All tokens within public chain ecosystems will be absorbed by BTC's liquidity, and ultimately Bitcoin holders will redeem this liquidity back into BTC.
We believe that in Bitcoin staking, besides the ongoing discussions about issuing on-chain assets, BTC is likely to have a significant correlation with RWA assets. When you have stable income in real-world assets, essentially following the logic of buying fixed-income products, you can truly access a stable income RWA product, which can potentially bring long-term asset appreciation to BTC. Firstly, it excludes the growth of BTC's own value, providing you with additional stable interest that does not rely on liquidity bursts.
BTC's consumer user base essentially wants to earn liquidity and information arbitrage. Its model is very similar to what we see with Douyin now. The faster the information flows, the better the liquidity, and the better the asset prices. Currently, the assets of inscriptions and runes have not experienced a liquidity explosion because they have not received support from centralized exchanges. For Bitcoin-native assets to explode, they must first gain liquidity support from centralized exchanges.
Host: Does Bitcoin have the potential to become the next major platform for DeFi? What conditions are limiting its current development?
Sunny: Currently, there are still no technical conditions to do this. The Bitcoin network does not support smart contracts, and there are limitations on block sizes, making it impossible to conduct overly complex programming. Of course, the biggest limitation is also the greatest security guarantee of the Bitcoin network. Projects wanting to use the Bitcoin chain as a platform face challenges in consensus because Bitcoin holders, including these mining pools, may not agree, which I think is an important factor limiting the development of the Bitcoin network. In fact, there are already more and more BTCFi applications on various chains, and their gameplay is gradually becoming like the re-staking that emerged after Ethereum's POS launch, using it as collateral to leverage. I saw a report today stating that only 2% of BTC is actually involved in DeFi activities, with 98% of BTC assets still not entered. I believe this represents a direction of high potential and upper limits for development. Since there isn't much that can be done on the Bitcoin chain itself, Merlin has created an application layer to meet user needs.
Joshua: Bitcoin, as an asset, is already widely present in the current public chain ecosystem and is participating in DeFi activities. Only 2% of assets are involved in protocols, meaning that 98% of BTC assets are still on the sidelines or locked in wallets, indicating a huge potential for its development. The main reason for this 98% of assets being restricted is that holders do not feel secure enough to participate in the ecosystem. The various versions of BTC at the base layer that we see now are primarily managed in a centralized or relatively centralized manner, and users trust centralized institutions. Centralized institutions have their advantages; for example, the compliant development methods in the U.S. allow people to confidently deposit assets into these custodial institutions. However, the so-called centralization must comply with many complex regulatory requirements, which greatly limits the participation of truly anonymous BTC holders in these projects. Therefore, we believe there are two ways to manage assets: one is for users to participate in projects through trusted centralized institutions, and the other is through decentralized methods that allow BTC holders to engage in DeFi.
At the start of exSat's design, when synchronizing UTXO data, we considered building a decentralized custody platform within the next six months, hoping to construct the BTC ecosystem in a more decentralized manner and help the Bitcoin native chain transition to a broader public chain path. In the absence of significant restrictions from centralized institutions, answering how to achieve truly secure transfers for BTC with untraceability and anonymity is crucial to opening the door to BTCFi.
Host: Is there any differentiation between players in the BTC ecosystem and those on other chains? What direction do they lean towards regarding on-chain applications and interactions?
Chen Jian: The demands of Bitcoin players can be divided into two types. The first is the demand for yield from holding coins. The other is to release the second layer of liquidity from Bitcoin assets safely and without needing to lock liquidity, which involves staking Bitcoin securely and exchanging a certain proportion for stablecoins. Additionally, treating Bitcoin as a consumable, burning gas to inscribe, can potentially evolve into community and game scenarios; I do not deny this scene's possibility.
Director Zhao: Recently, there has been a trend where more institutions or larger players are actively or passively participating in the construction of the Bitcoin ecosystem. This is due to Bitcoin's increasing market share. Secondly, as an index product for the underlying industry, the first choice for allocation is BTC or BTC ETFs, which have brought in significant incremental funding. All risk assets are priced based on marginal pricing mechanisms, meaning they are priced according to the last transaction price. The market has seen significant changes due to the approval of BTC ETFs, with BTC prices attracting a lot of liquidity when they were around 50,000 to 60,000.
It is precisely because of the liquidity brought in by BTC ETFs that Bitcoin's price is relatively stable and does not exhibit significant price bubbles. In contrast to meme tokens, which have significant price bubbles - for instance, the recently popular GOAT has a market cap of 600 million dollars, but if a large-scale cash-out occurs, how much of that 600 million market cap can actually be realized? People have seen that around 1.2 million dollars of liquidity can prop up a market cap of around 30 million dollars for a meme, meaning that only 1 million dollars was invested to price a 30 million dollar asset.
However, the current price bubble of Bitcoin is still relatively small, and many addresses have become permanently dormant due to lost keys. Some strong-belief holders no longer engage in any selling behavior, so the market value of Bitcoin is gradually increasing, or the overall market's holding cost is continuously rising. How to make this stagnant money more liquid and how to further expand Bitcoin's network effects are questions many entrepreneurs are considering.
Old Bai: We categorize Bitcoin holders into three types. The first type is the old OGs who hold their coins without moving them. Generally, they entered the space relatively early, and some of them missed the DeFi bull market; they don't care about this matter. Even if there are sufficiently secure yield-generating tools, these OGs still won't move their Bitcoin for a 5% or 10% API, or they simply don't need the money and won't care about these few points of profit.
The second category is the players involved in inscriptions and runes last year. These players are somewhat similar to those currently participating in Pump.Fun meme launches on Solana. These individuals do not regard Bitcoin as a belief; they do not hold much Bitcoin, generally viewing it merely as initial capital or tools for inscriptions and runes.
The third category includes many regular trading players, myself included. Many players, including myself, used to prefer buying altcoins and holding Ethereum among the mainstream. However, they didn't prefer Bitcoin, thinking its market cap was too high and its price growth was too slow. After this cycle, they suddenly realized that aside from memes, there are hardly any sectors that can outperform Bitcoin, forcing them to allocate to Bitcoin. This group of players views Bitcoin purely as a value target and part of their investment portfolio, without being particularly concerned about what can be done with Bitcoin.
