Original author: NOTDEGENAMY, RAM JOMO
Original translation: TechFlow
introduction
In 2009, an anonymous person named Satoshi Nakamoto released Bitcoin, the world's first decentralized cryptocurrency. It enables peer-to-peer money transfers without the need for an intermediary, such as a bank.
Due to its early origins, anonymous founding team, large network of miners, and lack of traditional funding methods, Bitcoin has become the most decentralized cryptocurrency. It is extremely difficult for malicious actors to rewrite transactions on the Bitcoin network due to the lack of a single controller. Even if collusion occurs between multiple individuals, coordinating an attack to compromise the accuracy of the network is challenging due to its decentralization. To understand the degree of decentralization of Bitcoin, it is useful to consider the Nakamoto coefficient, which represents the degree of decentralization as a single number. The coefficient represents the number of participants/node operators that control more than one-third of the entire network. Bitcoin's Nakamoto coefficient is estimated to be around 7000. At the time of writing, the second most decentralized network is Mina Protocol, which has a coefficient of 151. Other notable networks include Solana, which has a coefficient of 18, and BNB, which has a coefficient of 7. Bitcoin is unique in that it is particularly decentralized.
In addition to decentralization, Bitcoin is special because of its fundamental properties. Bitcoin has a limited supply of 21 million Bitcoins/BTC, which makes it an attractive safe-haven asset against inflation and economic instability. For this reason, Bitcoin is often referred to as "digital gold."
In summary, Bitcoin:
Simple functionality - it enables peer-to-peer money transfers
Decentralization — It is far ahead of all other cryptocurrencies
Secure – It is protected from attacks and has been secure for over 15 years
These factors have given Bitcoin the highest regulatory clarity. It is classified as a commodity, which shows that institutions recognize its decentralized nature. Its ETF was also approved in January 2024, which introduced Bitcoin to the traditional financial market.
The bottom line is this: Bitcoin establishes a baseline level of trust that continues to grow. If we are able to build applications on top of Bitcoin, they will benefit from the secondary effects.
However, this is not an easy task. Bitcoin was not originally intended to be a base layer for other applications.
First, transactions on Bitcoin are expensive and slow
If I send you 5 BTC, this transaction must be recorded in the Bitcoin network. More precisely, the transaction must (1) be included in the ledger, and (2) the updated ledger must be distributed to thousands of computers. Including a transaction in the ledger requires many miners to compete to solve cryptographic puzzles to verify and confirm the transaction - a resource-intensive and expensive process. Ensuring ledger distribution also slows down the number of transactions we can process per second. The computers run by ordinary people do not have unlimited storage capacity. Here we observe that Bitcoin's focus on decentralization leads to a trade-off between cost and speed.
Second, Bitcoin is not friendly to smart contracts
Let's say we want to do something more complex that goes beyond peer-to-peer money transfers. For example: we want to program a vending machine on the Bitcoin network. Based on the value of the input, the vending machine outputs a product, and the number of products remaining in the vending machine is constantly tracked by the Bitcoin network. This vending machine is similar to a smart contract: a set of rules that are automatically executed based on specific trigger conditions.
Bitcoin does not directly support smart contracts, a limitation that stems from two intentional design choices.
Bitcoin uses a restricted stack-based scripting language that is intentionally not Turing-complete and lacks advanced features such as loops and complex conditions. In other words, it is difficult to write complex logic on Bitcoin. Only simple operations such as digital signatures and time locks are supported.
Bitcoin uses an unspent transaction output (UTXO) model to track state — the current state of all information on the blockchain — which is efficient for tracking wallet balances but less efficient for tracking the state of other types of transactions.
These architectural decisions sacrificed security and predictability for programmability. As a result, while Bitcoin excels at secure value transfer, it is not very friendly to the complex state-dependent logic required to support smart contract applications. Networks such as Ethereum later emerged as solutions to these limitations.
Early attempts to overcome these limitations — Segwit, Lightning Network, and Taproot
The first major upgrade to Bitcoin was called Segwit and was released in 2017. It enabled Bitcoin transactions to be processed much faster while allowing transaction IDs to be modified before they were confirmed on the blockchain. This made it possible to batch multiple transactions securely. Eventually, multiple transactions that occurred outside the blockchain could be combined into 1 transaction and then stored on-chain.
This led to the first Bitcoin Layer 2 (L2), known as the Lightning Network, which launched in 2018. L2 is a protocol that performs settlements on top of an underlying L1 (in this case, Bitcoin is L1).
Here’s a quick rundown of what’s happening in the Lightning Network:
If I send you 10 BTC and you send me 5 BTC, there would normally be 2 transactions. The Lightning Network creates a new mini-ledger between the two parties. It settles the net result (e.g. A sent B 5 BTC) after a while, reducing the transaction record on the main ledger from 2 to 1.
Lightning Network batches multiple transactions into one and records that single transaction on the Bitcoin blockchain. Although there are certain trade-offs in decentralization, Lightning Network offers significant flexibility. For small transactions, users benefit from its speed and lower transaction costs. Bitcoin transaction fees are approximately $1, while Lightning Network fees are only $0.001 per transaction.
The Lightning Network improves speed, but does not support programmability or other interesting use cases. Using the Lightning Network, I still can’t send you a stablecoin and have that transaction secured by the Bitcoin network, let alone program a smart contract on Bitcoin.
The Taproot upgrade, activated in 2021, lays the foundation for smart contract programming on Bitcoin. Basically, it relaxes the restrictions on the amount of arbitrary data that can be put into a Bitcoin transaction.
Introducing Ordinals
Thanks to Taproot, users can now burn data directly onto a single satoshi (100,000,000 satoshis equal 1 bitcoin). More precisely, a satoshi can (1) be assigned a specific number for future reference, and (2) be burned with data such as text, images, or complex files. This process effectively turns fungible satoshis into non-fungible satoshis, creating what is commonly referred to as a non-fungible token (NFT).
Ordinals has sparked mixed reviews.
On the one hand, Bitcoin Ordinals could be considered superior to NFTs stored on other blockchains.
Here’s why: When NFTs are stored on the Bitcoin network via burning, the actual data — images, videos, etc. — is stored on the blockchain. In contrast, non-Ordinals NFTs typically store metadata/URL pointers on the blockchain, not the actual data. As a result, Ordinals are more resistant to censorship, link failures, and data loss.
On the other hand, many in the Bitcoin community believe that forcing Bitcoin nodes to download and store images is a waste of resources. Below is a famous collection of Ordinals, the Taproot Wizards collection.
Some NFTs from the Taproot Wizards collection
In fact, Ordinals are currently attracting less attention than they were a few months ago. As you can see from the chart below, creating Ordinals consumes fewer resources, and fewer Ordinals are being created overall.
Efforts to create Bitcoin Ordinals have decreased over time (Source: Dune Analytics)
Concerns about whether Ordinals should take up block space on the Bitcoin network are the main driver of this slowdown, but it’s worth noting that this is not a phenomenon limited to Ordinals. Interest in NFTs may have declined due to oversaturation of the market.
This drop in popularity isn’t specific to Bitcoin Ordinals — it’s a downturn for the entire NFT space (Source: The Block)
So far, this article has repeatedly stressed that Bitcoin’s emphasis on security and decentralization makes it less scalable. This is why Ordinals have been criticized — many believe that images are not worth the additional congestion on the Bitcoin network. This brings us to Bitcoin’s L2.
Entering Layer 2 (L2s)
Understanding L2s
Before diving into Bitcoin, it is important to understand the basic concept of L2s. L2s can be confusing because different people have different definitions. In this article, we will classify L2s into two main types: sidechains and rollups. We at Ocular believe that rollups are the true L2 representation.
Sidechain
Sidechains are independent blockchains that do not settle their transactions on the main chain. In other words, not every transaction on L2 can be directly verified on L1.
Liquid Network is a great example of a Bitcoin sidechain. You can transfer BTC from the Bitcoin network to the Liquid Network via a bridge. This involves sending BTC to an address managed by the “Wardens” — a pool of about 65 trusted community-selected members, including representatives from exchanges, financial institutions, and Bitcoin-related companies. Then, for every BTC transferred to this Warden-managed address, the user receives a synthetic BTC called LBTC. This is a two-way peg.
The security of the Liquid Network relies on these caretakers and their continued reputation; the Liquid Network does not inherit security from Bitcoin L1. If a majority of the caretakers collude or are attacked, the security of the sidechain could be compromised. The main benefit of the Liquid Network is that it helps parties that need to transact quickly and privately without leaving the Bitcoin environment entirely - transactions are faster, and users can also trade stablecoins and other tokens on the network as well as LBTC.
rollups
We consider rollups to be true L2 because each transaction is backed by a proof submitted to L1; this proof can be verified directly on L1. In a rollup, several transactions are rolled up into 1 transaction. This transaction is then submitted to L1 along with a proof of validity. The proof of validity says, “Hey, I’ve checked these transactions and can confirm that they follow all the rules. You can check me and get cumulative certainty. You don’t need to check each transaction one by one!”
Explaining the connection between L1 and L2 (Source: Limitless Insights)
Each transaction is secured by a proof that can be checked, so rollups inherit the high security of the Bitcoin blockchain and we can consider them true L2. Rollups that help make Bitcoin more programmable include MerlinChain, BOB, BEVM, Bitlayer, and Botanix.
Other methods
Stacks demonstrates a non-rollups, non-sidechain approach that still inherits a level of security from Bitcoin L1.
How Stacks is intertwined with Bitcoin: Stackers receive BTC and Bitcoin miners receive STX, making the two blockchains intertwined (Source: Stacks Documentation)
Stacks is essentially a separate blockchain that calls on Bitcoin miners to validate its blocks in exchange for rewards. However, Stacks does not publish any proofs or hashes on the Bitcoin blockchain, so it is not directly tied to Bitcoin like rollups are.
Other exciting programming endeavors on Bitcoin
B² Network
The B² network is a true L2 example that we can use to explore rollups in depth. Transactions on B² are batched and a verifiable proof is generated that proves the correctness of the batch. This proof is then recorded on the L1 Bitcoin blockchain.
The proofs used by B² are called zero-knowledge (zk) proofs and are generally considered the best implementation because they allow on-chain verification of the validity of a batch without revealing its contents. In simple terms, zk proofs ensure privacy. The B² network is also compatible with the Ethereum Virtual Machine (EVM), meaning that code written for Ethereum can run the same applications on B². This makes B² attractive to developers.
L2s like B² expand the Bitcoin ecosystem by supporting user-facing platforms like the Master Protocol.
Master Protocol
Master Protocol is a financial platform in the Bitcoin ecosystem designed to facilitate interest rate swaps and yield farming of Liquid Staking Tokens (LSTs) and other yield-generating assets.
Master Protocol improves liquidity in the Bitcoin ecosystem in several key ways:
Asset Aggregation: Master Protocol is deeply integrated into the Bitcoin ecosystem as an aggregator of users and assets. It integrates various LST and yield-generating assets from different protocols and L2 solutions to create a centralized liquidity center.
Yield Market Platform: Master Protocol’s core product, Master Yield Market, packages Bitcoin ecosystem assets into Master Yield Tokens (MSY), which are then split into Master Principal Tokens (MPT) and Master Yield Tokens (MYT). This enables users to trade these tokens, create yield markets, and improve overall liquidity.
Simplified Access: Aggregating multiple assets and protocols allows Master Protocol to simplify interactions for users within the Bitcoin ecosystem. Users can access yield opportunities from different protocols without having to constantly switch, increasing participation and liquidity in the ecosystem.
Liquid Staking and Re-staking: Master Protocol allows users to stake Bitcoin on various L2 networks and receive LST as a pledge certificate. These LST can be reinvested or further staked to earn Liquid Re-staking Tokens (LRT), enhancing investment capabilities and asset liquidity without affecting the original pledge.
Interest Rate Swaps: As an interest rate swap market, Master Protocol facilitates trading of yield-earning assets, helping to manage liquidity risk and optimize capital efficiency.
Ecosystem Synergy: As a one-stop Bitcoin ecosystem revenue exchange center, Master Protocol not only improves its adoption rate, but also directs traffic and users to multiple Bitcoin ecosystem protocols, promoting overall liquidity.
Solving fragmentation: Master Protocol helps solve the fragmentation problem caused by the growth of Bitcoin L2 solutions, improving composability and operability within the Bitcoin ecosystem. The integration of various DeFi protocols and second-layer solutions enhances overall liquidity flow.
Master Protocol acts as a central hub that connects Bitcoin enthusiasts with various applications, supports the development of new applications, and enhances the overall utility of Bitcoin infrastructure. In addition, it solves the fragmentation problem caused by the growth of Bitcoin L2 solutions by improving composability and operability.
Babylon
Babylon is an innovative project that aims to extend Bitcoin’s unparalleled security to various Proof-of-Stake (PoS) chains, particularly those in the Cosmos Network.
By leveraging Bitcoin's powerful Proof of Work (PoW) consensus mechanism, Babylon improves the security of PoS chains through a process called "re-staking". This involves locking up Bitcoin on its network and using it to secure other PoS chains, thereby providing economic security and allowing Bitcoin holders to receive staking rewards. The protocol uses advanced cryptography and consensus innovations to facilitate this process without the need for complex smart contracts.
Babylon's architecture is based on the Cosmos SDK and is compatible with inter-blockchain communication (IBC), allowing seamless aggregation and communication between the Bitcoin chain and other Cosmos application chains. By combining the security features of Bitcoin with the flexibility of the PoS network, the Babylon protocol is expected to play a key role in the future of the Bitcoin ecosystem and promote a more secure, scalable and interconnected blockchain ecosystem.
The next frontier in Bitcoin programming and where we are focusing
The Ocular team closely monitors applications built on Bitcoin and has identified the following areas as areas to watch for innovative development:
More L2 Solutions: Improved L2 is needed to increase transaction speeds and reduce costs while maintaining Bitcoin’s security.
Smart contract platforms (remorachains): Initiatives like RSK (Rootstock) are becoming increasingly relevant by enabling Ethereum-style smart contract capabilities on Bitcoin. These platforms allow for the development of decentralized applications (dApps) and DeFi services on Bitcoin.
Cross-chain compatibility: Platforms that allow applications from other blockchains, such as Solana, to run on Bitcoin represent an exciting investment opportunity in the blockchain interoperability space.
DeFi on Bitcoin: As programmability increases, the potential for a robust DeFi ecosystem on Bitcoin also grows. Projects focused on lending, decentralized exchanges, and stablecoins built natively on Bitcoin could be interesting areas for investment.
Bitcoin-native application platforms: These platforms aim to enhance Bitcoin’s programmability while maintaining its core principles of security and decentralization.
Zero-Knowledge Proof Technology (ZK-Proof Technology): Bitcoin projects that implement zero-knowledge proofs may offer enhanced privacy and scalability features, making them attractive investment prospects.
Custody Solutions: As programmability increases, there will be a growing need for secure custody solutions to accommodate Bitcoin’s expanding functionality while maintaining the “not your keys, not your coins” philosophy.
Developer Tools and Infrastructure: As interest in Bitcoin programmability increases, there will likely be a surge in demand for developer tools, SDKs, and infrastructure to support this new wave of Bitcoin applications.
in conclusion
These areas represent the frontier of Bitcoin's evolution from a simple store of value to a more general and programmable platform. As the ecosystem grows, it is likely to attract more developers, users, and investors, driving the next phase of growth for Bitcoin and the broader crypto market.
