Author: Catrina Wang Source: Portal Ventures Translation: Shan Ouba, Golden Finance
In May 2023, we launched a three-month research project assuming a recovery in the Bitcoin ecosystem. This led to our paper, The Panda Renaissance, published in November 2023. Since then, interest and capital invested in this paper has grown exponentially. In this post, we will share updated thoughts and reflections from about a year ago.
1. Current status of BTC ecosystem: observations and comments
2. How our thinking has evolved
We still have a firm belief
Areas where our perspectives have shifted
3. A new chapter for BTC: What happens next?
predict
Blank: Sectors and verticals that excite us
For the sake of brevity, we will present our observations, opinions, suspicions, and predictions in bullet point format.
The State of Bitcoin: Observations and Comments on the Industry
1. Intense competition between EVM L2s/sidechains, with indistinguishable value propositions: Competition shifts from “who is the most trustless” to who can 1. execute the most complex airdrop games, and 2. access the deepest liquidity via Bitcoin “whales”. This shift also explains the geographic concentration of L2s emerging from the Asia-Pacific region.
2. Intense fragmentation
Liquidity and Scaling Solutions: 80+ sidechains/rollups, and 5+ meta-protocols.
Token standards: There is a duopoly between BRC20 and RUNE, followed by a long tail of other meta-protocols such as ARC, CRBC, RGB, etc.
Indexers: Each token standard requires its own indexer.
3. Sidechains and Rollups The expectation of BitVM is to re-anchor them to L1 without trust: I am quite skeptical of those “L2s” that are initially positioned as sidechains and claim to become “trustless” after integration with BitVM. My skepticism is two-fold:
Technical feasibility: The process of implementing "optimistic rollup" style verification on-chain involves developing millions or even billions of logic gates. This process is not only expensive to operate on the base layer, but also slow due to the limitations of BTC block time. In addition, it may take a considerable amount of time to complete this process. As far as I know (please correct me if I am wrong), BitVM has become a community project and faces the usual challenges of decentralization: no single entity is responsible for its development timeline, milestones, quality, and overall success.
GTM Timing: According to various sources, BitVM will not be ready for the next 18-24 months. Even if everything goes well with BitVM and they deliver on their promises, this means these L2s will remain centralized via multi-signatures for the foreseeable future. So what will they rely on to compete in the meantime?
4. Extensive trust assumptions between L2 (sidechains + rollups) and meta-protocols
It might be worth clarifying what the taxonomy of sidechains vs rollups is. Below is a table detailing the differences based on conversations we’ve had over the past few months — feedback welcome.
Trust assumptions of sidechains:
The anchoring between the BTC base layer and the second-layer solution is mainly managed by a multi-signature centralized system controlled by the core team.
The status and transaction finality are not verified by the BTC base layer, but by the project team.
Trust assumptions of ZK Rollups:
Currently, there is no way to perform zk-verification on Bitcoin. The orderer needs to be centralized (similar to ETH L2s), and there is a trust assumption that the decentralized network of validators will correctly verify the transactions checked by the prover.
Due to the need to transmit data back to Bitcoin, Rollups are limited in the number of transactions they can process.
Trust assumptions of BitVM (Optimistic Rollup):
The main use of BitVM is to promise a trustless bridge. The high level step is that the BitVM code can be broken down into logic gates for fraud provers to binary search and find points where the execution is inaccurate. While anyone can provide a fault proof to confiscate the operator's collateral (if the operator behaves maliciously), BitVM presents an economic challenge. The operator needs to match the amount of liquidity that is used as collateral. For example, if I bridge 10BTC through BitVM, the operator of BitVM needs to place 10BTC as collateral for this single transaction, which is difficult to scale economically.
Trust Assumptions of the Meta-Protocol: Indexers
BRC20, RUNE, PIPE, Trac, etc. all need their own indexers to convert the "state" of the account-based model from BTC's native UTXO model or vice versa. Ethereum has internalized the index because its virtual machine can calculate the state, and BTC's indexer is similar to Ethereum's GETH.
To understand the concept of an indexer, imagine all UTXO transactions like raw Excel data, where there are thousands of addresses transacting with each other. To understand who owns what and the final balance (account status), indexers act like pivot tables. They calculate increases and decreases and determine the final balance by address. Currently, indexers like BestInSlots, GeniiData, and ALEX Labs Oracle provide APIs for developers to directly pull balances or "account status" for meta protocols such as BRC20.
Discrete Logarithm Contracts (DLCs): Dependence on External Oracles
DLCs in Bitcoin rely on external oracles to determine the outcome of a contract. In a DLC, the role of the oracle is to sign a message indicating the outcome of an event. This signature is then used by the contracting parties to construct and broadcast a transaction that settles the contract on the Bitcoin blockchain. The security and trustworthiness of a DLC relies heavily on the reliability and honesty of the oracle, as its data directly affects the resolution of the contract.
5. Continued skepticism about VCs in the Western Hemisphere: I have had several discussions with other investors about the value of BTC L2s. While we agree that most Bitcoin “L2s” are considered “fake” because they do not necessarily inherit the security of BTC, and many are likely to disappear in the coming months, we believe that this vertical still has value because
Flawed, nascent, inevitable: The segment of BTC holders who want to put their BTC into a hard wallet and bury it in the backyard has been saturated over the past 10 years. While BTC’s second-layer solutions are inferior to its Ethereum counterparts in terms of security and trustlessness, the past year has only been the beginning of scaling and programmability solutions on Bitcoin.
There is already a trend towards Bitcoin becoming more general purpose and programmable, in addition to its existing identity as a store of value. This trend is evidenced by public enthusiasm for staking, trading, and the exponential growth of Bitcoin on-chain fees since 2023 (as high as $40 per transaction in December). With the emergence of OP_CAT and others, various rollups and sidechain solutions, use cases that were previously only the domain of Ethereum and Solana are now being explored on Bitcoin.
Making BTC capital efficient: BTC remains one of the most valuable assets among institutions. More financial instruments built or derived on Bitcoin are needed. However, limitations in base-layer design make such products difficult to implement. This highlights the need for second-layer programmable solutions.
This trend solves BTC’s existential crisis: more programmability creates demand for Bitcoin block space, which results in more fees as a net new incentive for miners to secure the network. This is especially critical at each halving. This is discussed in more depth in a previous article.
6. More and more creative ways to use Bitcoin block space
As a method of burning data in witness blocks and transaction blocks
As permanent on-chain data storage (this is an excellent product-market fit for luxury/collectibles use cases)
Reviewing the paper from one year ago: How our thinking develops or continues
Where we got it right: Overall trends, timing, and demand are related to issuing digital assets on top of Bitcoin (meta-protocols), programmability solutions (layer 2s, Rollups), and efforts to make BTC more capital efficient (Babylon, Lorenzo).
The jury is still out: BTC's future may be native vs. xVM. While this is not a consensus view, we maintain that BTC should develop its own native ecosystem rather than adopting the seemingly "convenient" Ethereum Virtual Machine (EVM) approach. While we fully recognize the benefits of the EVM approach (such as interoperability with the existing defi ecosystem, easy onboarding of Solidity developers, and Solidity being the most battle-tested language, etc.), having a BTC second-layer token exist in the ERC-20 format, just as Arbitrum released its token as Solana SPL, seems contradictory.
Changes in our stance: In the original article “Panda Renaissance”, two paths were proposed: making BTC more “programmable” like a general purpose L1, or making it more “capital efficient” to expand its functionality and become a more productive financial asset.
At the time, I leaned toward the latter. BTC’s inherent limitations from the Script language made it unsuitable for complex programmability. However, my view has changed over the past year. The market has shown demand for Bitcoin block space, transforming it from a dormant “digital gold” chain to a programmable, general-purpose chain. Ethereum is now effectively a “sandbox”: the Bitcoin community has learned from Ethereum’s DeFi development over the past 7 years to innovate on Bitcoin.
Ecosystem Chapter 2: Predictions and Blank Areas
1. Each approach will have 1-2 winners. This means 1-2 winners on EVM (like Botanix), meta-protocols (likely BRC20 or Rune), bridgeless base layer approaches (like Arch), ZK rollup, and STX (already a pioneer). There will be 5-6 major players in total in the next cycle, each with a valuation of over $50 billion at its peak.
2. Security Hedging: Currently, scaling solutions are competing for attention and access to liquidity. However, over time, especially after security-related incidents, liquidity will tend to favor the most secure L2/rollup with the least trust assumptions.
3. Most other Layer 2 solutions, sidechains, and rollups will not survive. Until this happens, competition will continue to heat up for the best airdrop programs, access to high-signal investors, and connections to Bitcoin whales.
4. Developers will gradually wake up from the BitVM dream and realize that the trust minimization requirements it provides to builders come too late, too slow, and too costly.
5.BTC DeFi will surpass ETH: I have long believed that Ethereum is a testing ground for BTC. Everything since 2017 has been based on the false belief that "BTC can't do it". However, this is no longer the case. If I am going to take the risk of my tokens (staking, farming, leverage), would I prefer to earn returns in a low-value currency or in BTC? I fully expect BTC to have an equally, if not more powerful, DeFi and infrastructure ecosystem compared to Ethereum in the future.
6. A Bitcoin-native "ERC-20" token standard will emerge: Bitcoin needs its own ERC20-like token standard that can operate on different L2s and base layers. One way to achieve this is a collaboration between Arch (a bridge-less programmability solution) and Auran (a native Bitcoin TSS (threshold signature scheme) based interoperability solution). Such a standard will become the main solution for the winners to eventually emerge in stablecoins, institutional adoption, on-chain yield products, etc.
White space we are interested in
1. Bridgeless experience (better suited for base layer use cases): Achieving full trustlessness on any scalable/programmable layer is unlikely - and frankly, it's not something most users care about unless a hack occurs. While keeping trust assumptions constant in most rollups/L2s, there will be a range of lower velocity use cases (like high value collectibles exchange, lending, native yield, staking, etc.) where users and developers would prefer to achieve the same level of programmability on the base layer (via solutions like Arch Network) without bridging to another L2.
Of course, the trade-off here is speed, as transactions will be limited by BTC block times. However, not all operations need to be extremely fast on-chain. Bridgeless solutions will unlock new “slow and stable” use case segments at the base layer, such as stablecoins, lending, prediction markets, etc.
2. Unify infrastructure by orchestrating states across various L2s (better suited for second-layer use cases): Provide a "one-stop" developer/consumer experience to solve the liquidity and functional fragmentation issues rampant in today's Bitcoin ecosystem. Auran Network is a pioneer in this field and we are excited about it.
“The formula for startup success: find a large, highly fragmented industry with a low NPS; vertically integrate the solution to simplify the valuable product” - Keith Rabois, Founders Fund
3. BTC liquidity output to other L1s: Many high-profile new/existing other L1s are exploring the use of BTC liquidity to promote their own ecosystem growth. Solutions like Zeus Network that create a messaging layer between Solana and BTC may gain attention.
4. Winners of Stablecoins: There are already more than 10 stablecoin projects. Deep cooperation with mainstream programmability and interoperability solutions will be the key to market dominance.
5.OP CAT: OP_CAT (BIP-347) is a Bitcoin improvement proposal that aims to simplify and expand Bitcoin's functionality to enable logical loops and conditional statements. It will allow the creation of rules or conditions on how Bitcoin is spent, opening the door to many development possibilities including second layers, smart contracts, etc. The expected timeline is more than 12 months.
6. Native Ordinals Trading Platforms: If history repeats itself, as we have seen on SOL and ETH, most of the trading volume will be dominated by native professional trading platforms like Blur or Tensor. So far, most of the Ordinals trading activity has been on Magic Eden and OKX. As the NFT winter subsides, we expect native Ordinals trading platforms like Ordinal Hive to flourish.
7. BitVM alternatives to achieve trustless, or at least minimal L2<> base layer bridging
8. On-chain BTC-on-BTC yield products for institutions: STX could be a winner given its BTC yield and regulatory compliance.
9. Liquidity staking on Bitcoin: skeuomorphic ETH, but LST-on-BTC projects such as the Lorenzo protocol have their advantages and can optimize the liquidity of BTC Defi
