Author: Kernel Ventures Jerry Luo

审稿：Kernel Ventures Mandy, Kernel Ventures Joshua, Kernel Ventures Rose

TLDR：

  1. With the popularity of the inscription track, the existing application layer of the Bitcoin main network cannot satisfy the inscription market, which is the focus of current Bitcoin network development.

  2. There are three mainstream Layer 2 solutions in Bitcoin at this stage, namely Lightning Network, Sidechain and Rollup:

    1. The Lightning Network realizes point-to-point payment by establishing an off-chain payment channel, and settlement is carried out on the main network after the channel is closed;

    2. The side chain locks the main network BTC assets through a specific address or a multi-signature address on the main network, and mints equivalent BTC assets on the side chain. Among them, Merlin Chain can support multiple types of inscribed assets across chains, and is closely connected with the BRC420 asset community. At this stage, the total amount of TVL on the chain exceeds 3 billion US dollars;

    3. The current BTC Rollup simulates smart contracts on the chain based on Taproot circuits, and completes packaging and calculation operations outside the Bitcoin main network. Among them, B2 Network is at the forefront of the implementation process, and the total amount of TVL on the chain has exceeded 200 million US dollars.

  3. There are not many cross-chain bridges designed specifically for Bitcoin. At this stage, more of them integrate multi-chain bridges and full-chain bridges from mainstream public chains. Among them, Meson.Fi has established cooperative relationships with many Bitcoin second-layer projects.

  4. The Bitcoin stablecoin protocol is mostly implemented in the form of over-collateralization, and other DeFi protocols are built based on the stablecoin protocol to supplement it to bring more benefits to protocol users.

  5. DeFi projects in the Bitcoin ecosystem vary widely. Some have migrated from other chains, some have been built on the Bitcoin mainnet during this development boom, and some have made their fortunes in the last bull market and deployed on Bitcoin side chains. Up. Overall, Alex has the most complete trading types and the best trading experience, but Orders Exchange has greater room for growth.

  6. The Bitcoin ecosystem will be an important narrative in this bull market, and you can pay appropriate attention to the trends of leading projects in each segment of the Bitcoin ecosystem.


1. Background

With the overflow of inscription assets brought by the Ordinals protocol, the Bitcoin network, which once lacked smart contracts, could only rely on scripting languages ​​for development, and had weak infrastructure and expansion functions, has ushered in a data on-chain boom (for related introductions, please refer to Kernel’s previous article Research report: Can RGB replicate the craze of Ordinals). Similar to what happened when the Ethereum network exploded, people were scrambling to write text, images and even videos into the 4MB Tapscript space that would never be executed. Although this on-chain boom has promoted the prosperity of the Bitcoin network ecosystem and the development of infrastructure, it has also brought a surge in transaction volume and huge storage pressure to the Bitcoin network. In addition, for various inscriptions, simple transfers can no longer meet everyone's transaction needs. Users are also looking forward to the introduction of various derivative transaction services on Ethereum to the Bitcoin network. Therefore, the development of the Bitcoin mainnet application layer has become a relatively urgent need in the current market.

Changes in daily transaction volume on the Bitcoin mainnet in the past year, picture source: CryptoQuant

2. Bitcoin Layer2

Unlike the relative consistency of the Layer 2 solution on Ethereum, Bitcoin cannot implement smart contracts based on its own scripting language, and the release of its smart contracts must rely on third-party protocols. The Rollup type Layer 2 of the Bitcoin main network cannot be as close to the security of the Bitcoin main network as the Rollup type Layer 2 on Ethereum is close to the security of the Ethereum main network. There are currently a variety of Layer 2 solutions on the Bitcoin mainnet, including Lightning Network, side chains, and Rollup based on TapScript.

2.1 Lightning Network

Lightning Network is the earliest Bitcoin Layer 2 solution. Gregory Maxwell first proposed the Lightning Network protocol stack - BOLT in December 2015. Lightning Labs released the alpha version of Lightning Network in January 2017 and subsequently developed it. Continuous upgrades and improvements have been made. By establishing a point-to-point off-chain payment channel between users, the Lightning Network allows users to transfer assets of any number and scale in the channel without paying fees. The previous transactions will not be settled until one party closes the Lightning Network and only Use to cover the cost of a transaction. Due to the use of off-chain channels, Lightning Network can reach up to tens of millions of TPS. However, off-chain channels carry the risk of centralization. At the same time, in order to achieve transactions between two addresses, an off-chain channel must first be established or interconnected through a third party that has established an off-chain channel, and both parties must be online during the transaction process. It is safe to trade.

Lightning Network Principle, Image Source: Kernel Ventures

2.2 Side chain

Bitcoin's side chain solution is similar to Ethereum's side chain solution. Its essence is to issue a new chain that achieves a 1:1 anchoring of on-chain tokens and Bitcoin. This new chain will not be limited by the transaction speed and development difficulty of the Bitcoin main network, and can transfer Bitcoin-anchored tokens at a faster speed and at a lower cost. Although the side chain solution inherits the asset value of the main network, it does not inherit the security of the main network. The settlement of transactions is carried out on the side chain.

2.2.1 Stacks

The current Stacks project is version 2.0 launched in 2021. Users can lock BTC on the Bitcoin main network and then obtain equivalent SBTC assets on Stacks, but their transactions on the side chain require paying Stacks’ native token STX as gas. . The Bitcoin mainnet does not have a smart contract address like the Ethereum mainnet that can effectively manage the locked BTC, so the locked BTC is sent to a specific multi-signature address on the Bitcoin mainnet. Since the Stacks mainnet can use Clarity language for smart contract development, the release process is relatively simple. You only need to initiate a request to the Burn-Unlock contract on Stacks to destroy the SBTC on Stacks and send the locked BTC back to the mainnet. Original address. The block production process of the Stacks main network adopts the POX consensus mechanism. The miners of the Bitcoin main network send BTC bids for block production opportunities. Miners with higher corresponding bids can obtain higher weights, and the winner is finally selected through a specific verifiable random function. Those who package and produce blocks on the Stacks main network will be rewarded with the corresponding Stacks native token STX. At the same time, this part of the BTC participating in the bidding will be distributed to STX token holders in the form of SBTC as rewards.

POX principle, image source: Kernel Ventures

In addition, Stacks is expected to undergo a Satoshi Nakamoto upgrade in April, which includes optimization of its development language Clarity to lower the development threshold for developers. Secondly, Stacks optimizes the security level of the network. Mainnet block transactions can be directly performed on Stacks and it has 100% resistance to Bitcoin reorganization. The confirmation of transactions in Stacks will be done on the mainnet, making its security side-stepped. The chain has been upgraded to Layer 2, which is equivalent to the Bitcoin mainnet. Finally, Stacks has also greatly accelerated the block generation speed, reaching a block generation speed of 5 seconds per block during the test phase (currently 10-30 minutes per block). If the Satoshi Nakamoto upgrade can be successfully completed, Stacks’ performance will be basically close to many Layer 2 on Ethereum, which should attract a lot of capital inflow and increase the development enthusiasm of the Stacks ecosystem.

2.2.2 RSK

RSK (RootStock) is a Bitcoin side chain without native tokens. At this stage, transactions on the side chain use Bitcoin as the handling fee. Users can exchange mainnet BTC for RBTC on RSK at a ratio of 1:1 through RSK’s built-in PowPeg two-way anchoring protocol. RSK is also a public chain with a POW mechanism, but it has introduced a merged mining mechanism. The mining infrastructure and settings of Bitcoin miners can be fully adapted to the RSK mining process, reducing the cost of Bitcoin miners participating in RSK mining. At this stage, RSK has a transaction speed three times that of the main network and a transaction cost that is 1/20 of the main network.

Performance comparison between RSK and Bitcoin mainnet, picture source: RSK white paper

2.2.3 BEVM

BEVM is a POS side chain whose underlying layer is compatible with EVM. It has not issued its own native token at this stage. Through Schnorr's multi-signature algorithm on the Bitcoin main network, the received assets can be stored in a multi-signature script address jointly controlled by 1,000 addresses. These 1,000 addresses correspond to 1,000 POS verifiers on BEVM. At the same time, automatic control of assets can be achieved by writing scripts in the form of MAST (Merkelized Abstract Syntax Tree) in the TapScript area. MAST uses many independent small blocks to describe the program. Each independent small block corresponds to a part of the code logic. However, there is no need to store a large amount of logic code on the Script script. It only needs to store the hash result of each part of the code block. , which greatly reduces the amount of contract code that needs to be stored on the blockchain. When a user transfers BTC to BEVM, this part of the BTC is locked by the script program. Only with the signatures of more than 2/3 of the validators can the locked BTC be unlocked and returned to the corresponding address. BEVM is compatible with EVM at the bottom level, and can migrate various dApps on Ethereum at no cost, trade the above BTC-anchored assets and use the anchored assets as gas expenses.

The growth rate of data volume with the number of subscripts in MAST and non-MAST forms. Image source: BTCStudy

2.2.4 Merlin Chain

Merlin Chain is an underlying EVM-compatible Bitcoin side chain that supports direct connection to the network using a Bitcoin address through the Particle Network, and will generate a unique Ethereum address from the address. You can also directly use an Ethereum account to connect through an RPC node. At this stage, Merlin Chain supports cross-chain migration of BTC, Bitmap, BRC-420 and BRC-20 assets. The BRC-420 protocol, like Merlin Chain, is developed by the Bitmap asset community based on recursive inscriptions. Based on recursive inscriptions, the entire community has also proposed RCSV's recursive inscription matrix, Bitmap Game metaverse platform and other projects.

How to connect BTC native account to Merlin Chain, picture source: Merlin documentation

Merlin Chain conducted its mainnet launch on February 5, followed by a round of IDO and staking rewards, allocating 21% of the governance token MERL. Direct and large-scale airdrops have attracted a large number of participants. Merlin Chain’s TVL currently exceeds $3 billion. Bitcoin’s on-chain TVL has also surpassed Polygon, ranking 6th among public chains.

Bitcoin TVL distribution, image source: DeFi Llama

In People’s Launchpad’s IDO, users who pledge Ally or more than 0.00025 BTC will receive points rewards that can be exchanged for MERL purchase qualifications. The upper limit of staking BTC that can accumulate rewards is 0.02, and the corresponding MERL tokens that can be obtained are 460. The allocation for this round was small, accounting for only 1% of the total token supply. But despite this, based on the current over-the-counter pricing of MERL of $2.9, its return rate exceeds 100%. In the second round of staking incentive activities, Merlin allocated 20% of its total token supply. Users can pledge BTC, Bitmap, USDT, USDC and some BRC-20 and BRC-420 assets on Merlin Chain through Merlin's Seal. The user's assets on Merlin will be snapshotted in USD every hour, and the final daily average price multiplied by 10,000 is the points earned by the user. The second round of staking activities adopts a team mode similar to Blast. Users can choose two identities: captain and member. Selecting the captain identity can get an invitation code, while selecting the player identity requires entering the captain's invitation code to bind the team.

Merlin has mature technology in the currently implemented Bitcoin Layer 2 solution, which can liberate the liquidity of Layer 1 assets. Bitcoins on the main network can flow on Merlin at low cost. The Bitmap ecological community behind it is very large and the technology is relatively complete. It should have good development in the long run. At this stage, staking on Merlin has a very high rate of return. In addition to the expected income of MERL, there is also the opportunity to obtain the corresponding Meme or other tokens airdropped by the project party, such as the official airdrop of Voya tokens. A single number pledge exceeds 0.01 BTC. You can get 90 Voya tokens airdropped. Since its launch, the currency price has continued to rise, reaching a maximum of 514% of the issuance price. The current quotation is 5.89 US dollars. When staking, calculated based on the average price of Bitcoin of 50,000 US dollars, the yield rate is as high as 106%.

Voya token price trend, image source: coingecko

2.3 Rollup

2.3.1 BitVM

BitVM is Bitcoin Layer 2 based on Optimistic Rollup. Similar to Optimistic Rollup on Ethereum, traders first send transaction information to Layer2 on the Bitcoin main network, then calculate and package the transaction on Layer2, and the results are sent to the smart contract of Layer1 for confirmation. This process needs to be left to The verifier challenges the prover's statements for a certain amount of time. However, Bitcoin does not have native smart contracts, so the specific implementation is not as simple as Ethereum’s Optimistic Rollup, which involves processes such as Bit Value Commitment, Logic Gate Commitment and Binary Circuit Commitment. BVC, LGC, and BCC are used below to implement these respectively. The three are referred to.

  • BVC (Bit Value Commitment): BVC is essentially a level result, with only two possibilities: 0 and 1. It is similar to Bool type variables in other programming languages. Bitcoin is a stack-based scripting language operation, and there is no such thing. Type variables are therefore simulated in BitVM using a combination of bytecodes.

    • 
      OP_IF
      OP_HASH160 //Hash the input of user
      
      OP_EQUALVERIFY //Output 1 if Hash（input）== HASH1
      
      OP_ELSE
      OP_HASH160 //Hash the input of user
      
      OP_EQUALVERIFY //Output 0 if Hash（input）== HASH2
      

    • In BVC, the user first needs to submit an input, and then hash the input on the Bitcoin main network. The script will be unlocked only when the input hash result is equal to HASH1 or HASH0. When the hash result is HASH1, The output is 1, and when the hash result is HASH2, the output is 0. In the following description, we will package the entire code segment into an OP_BITCOMMITMENT opcode to simplify the description process.

  • LGC (Logic Gate Commitment): All functions in the computer can essentially correspond to a combination of Bool gate circuits, and any gate circuit can be equivalent to a combination of a series of NAND gate circuits after simplification, that is to say , if we can simulate the NAND gate circuit through bytecode on the Bitcoin main network, we can essentially reproduce any function. Although there is no operation code that directly implements NAND in Bitcoin, there are AND gate OP_BOOLAND and NOT gate OP_NOT. The function of the NAND gate can be reproduced by the superposition of these two opcodes. For the two output levels obtained through OP_BITCOMMITMENT, we can form a NAND output circuit through the OP_BOOLAND and OP_NOT opcodes.

  • BCC (Binary Circuit Commitment): Based on the LGC circuit, we can build a specific gate circuit relationship between the input and the output. In the BCC gate circuit, this input comes from the corresponding hash preimage in the TapScript script. Different Taproot addresses correspond to different gates, which we call TapLeaf. Many TapLeafs constitute a Taptree, which serves as the input of the BCC circuit.

8-input NAND gate circuit and its corresponding Taproot circuit, picture source: BitVM white paper

Ideally, BitVM's prover would compile and calculate the circuit off-chain, and then return the results to the Bitcoin mainnet for execution. However, since the off-chain process is not automatically executed by smart contracts, in order to prevent the prover from doing evil, BitVm needs to be challenged by the verifier on the main network. During the challenge, the verifier first reproduces the output of a TapLeaf gate and then uses it as input to drive the circuit along with other TapLeaf results provided by the prover. If False is output, the challenge is successful, indicating that the prover is cheating; otherwise, the challenge fails. However, to complete this process, the challenger and the verifier need to share the Taproot circuit in advance, and at this stage, only the interaction between a single verifier and a single prover can be achieved.

2.3.2 SatoshiVM

SatoshiVM is an EVM-compatible Zk Rollup Bitcoin Layer2 solution. The implementation of smart contracts on SatoshiVM is the same as that on BitVM. Taproot circuits are used to simulate complex functions, so no details will be given. SatoshiVM is generally divided into three layers, namely Settlement Layer, Sequencing Layer and Proving Layer. Settlement Layer is the main Bitcoin network, responsible for providing the DA layer, storing the Merkle root and zero-knowledge proof of transactions, and verifying the correctness of Layer2 packaged transactions through the Taproot circuit for settlement. The Sequencing Layer is responsible for packaging and processing transactions, and returning the transaction calculation results and zero-knowledge proofs to the main network. The Proving Layer is responsible for generating zero-knowledge proofs for the Tasks passed by the Sequencing Layer and passing them back to the Sequencing Layer.

Overall structure of SatoshiVM, picture source: SatoshiVM official documentation

2.3.3 BL2

BL2 is a Zk Rollup type Bitcoin Layer2 designed based on the VM universal protocol (the official default virtual machine protocol that is compatible with all mainstream virtual machines). Similar to other Zk Rollup Layer 2, its Rollup Layer mainly uses zkEvm to package transactions and generate corresponding zero-knowledge proofs. The DA layer of BL2 introduces Celsetia to store batches of transaction data and only uses the BL2 network to store zero-knowledge proofs. Finally, a small amount of verification data, including the verification of zero-knowledge proofs and BVC, is returned to the main network for settlement.

BL2 network structure, image source: BL2.io

BL2’s At this stage, the project is relatively niche compared to other Bitcoin Layer2 and is in an early stage. It has introduced recently popular concepts such as Celestia and Bitcoin Layer2, and is conceptually very popular. However, its official website has no practical functions, only expected demonstrations, and no project white paper. At the same time, the goals set are too high, such as the account abstraction on Bitcoin and the VM protocol compatible with mainstream virtual machines, which are very difficult to achieve. It is not certain whether the team will be able to complete this goal in the end, so it is difficult to predict at this stage. Make an accurate assessment of the project.

BL2 roadmap, image source: BL2 official X

2.3.4 B2 Network

B2 Network is a zkRollup Layer 2 with Bitcoin as the settlement layer and DA layer. The structure can be divided into two layers: Rollup Layer and DA Layer. User transactions will first be submitted and processed in the Rollup Layer. The Rollup Layer uses the zkEvm solution to execute user transactions and output relevant certificates, and also stores user status in the ZK-Rollup layer. The batch-packaged transactions and generated zero-knowledge proofs will be forwarded to the DA Layer for storage and verification. DA Layer can be subdivided into three parts: decentralized storage node, B2 Node and Bitcoin main network. After receiving the Rollup data, the decentralized storage node regularly generates time and space zero-knowledge proofs based on the Rollup data, and sends the generated zero-knowledge storage proof to the B2 Node. The B2 Node is responsible for off-chain verification of the data. After the verification is completed, the transaction data and corresponding zero-knowledge verification are recorded on the Bitcoin main network in the form of TapScript. The Bitcoin mainnet will be responsible for confirming the authenticity of the zero-knowledge verification and conducting final settlement.

B2 Network network structure, picture source: B2 Network white paper

B2 Network has good attention among major BTC Layer2 solutions. It has 300,000 fans on At the same time, the project has received seed round financing including OKX and HashKey, which has attracted much attention. At this stage, the TVL on the chain has exceeded 600 million US dollars.

B2 Network participating companies, picture source: B2 Network official website

B2 Network has launched the main network B2 Buzz. To use B2 Network at this stage, you must obtain an invitation link and cannot participate directly. B2 Network draws on Blast's communication model to create a strong two-way interest binding between new entrants and existing entrants, giving those already in the game sufficient motivation to promote the project. After completing simple tasks such as following the official Twitter, you can enter the staking interface. At this stage, it supports the use of assets on the four public chains of BTC, Ethereum, BSC and Polygon for staking. In addition to Bitcoin, the assets of the Bitcoin main network, Inscription ORDI and SATS can also be pledged. If you pledge BTC assets, you can transfer the assets directly. If you want to pledge inscription assets, you need to go through the inscription and transfer stages successively. It is worth noting that since the Bitcoin main network does not have smart contracts, in the current BTC Layer2 cross-chain transfer, the assets are essentially locked in a specific BTC address by multi-signature. At this stage, the assets pledged on the B2 Network will not be released until April this year at the earliest, and the points obtained during the pledge can be exchanged for mining machine components for virtual mining. The BASIC mining machine only requires 10 components to start, while the ADVANCED Mining rigs require more than 80 components.

The official announced a partial token plan, using 5% of the total token supply to reward virtual mining, and allocating another 5% to ecological projects on the B2 Network for airdrops. At this stage, the project team is in a situation where the fairness of Tokenomics is intertwined with each other. B2 Network only allocates 10% of the total token supply, which makes it difficult to fully mobilize the enthusiasm of the community. It is expected that B2 Network will have other plans for staking incentives or LaunchPad in the future.

2.4 Comprehensive comparison

Combining the three second-layer network forms of Bitcoin, the Lightning Network has the fastest transaction speed and the lowest transaction cost, and has more applications in the process of real-time payment of Bitcoin and offline purchase of items. However, if you want to realize the development of the application ecosystem on Bitcoin, it is difficult to support the stability and security of building various types of DeFi or cross-chain protocol Lightning Network logistics. Therefore, the competition in the application layer market is mainly between side chains and rollup types. . Relatively speaking, the side chain solution does not require transaction confirmation on the main network. It also has a more mature technical solution and difficulty in implementation. Therefore, it currently has the highest TVL among the three. Due to the lack of smart contracts on the Bitcoin mainnet, the confirmation scheme for data returned by Rollup is still under development at this stage, and the specific implementation may take some time.

Comprehensive comparison of Bitcoin Layer2, image source: Kernel Ventures

3. Bitcoin cross-chain bridge

3.1 Multibit

Multibit is a cross-chain bridge specifically designed for BRC20 assets on the Bitcoin network. At this stage, it supports the migration of BRC20 assets to four chains: Ethereum, BSC, Solana and Polygon. During the cross-chain process, users first need to send assets to a BRC20 address designated by Multibit. After Multibit confirms the transfer of assets on the main network, users will have the authority to mint corresponding assets on other chains. The final cross-chain needs to be completed The user pays gas in Mint on another chain. At this stage, among the cross-chain bridges that can provide cross-chain for inscribed assets such as BRC20, Multibit has the best interactivity and has the largest number of BRC20 assets, including more than ten BRC20 assets including ORDI. In addition, Multibit has also actively expanded the cross-chain of assets beyond BRC20, and currently supports the farming and cross-chain of governance tokens and stablecoins of Bitstable, the BTC native stablecoin protocol. Among the current cross-chain bridges that provide cross-chain services for BTC derivative assets, Multibit is the most cutting-edge presence on the track.

Multibit can support cross-chain BRC20 assets. Image source: Multibit's X Account

3.2 Fixed

Sobit is a cross-chain protocol established between Solana and the Bitcoin mainnet. The current cross-chain assets are mainly BRC20 tokens and Sobit’s native tokens. Users pledge BRC20 assets to the designated Sobit address on the Bitcoin main network, and after waiting for Sobit's verification network to pass verification, the user can then mint the assets mapped at the designated address on the Solana network. The core of the SoBit verification network is a validator-based framework that requires multiple trusted validators to approve cross-chain transactions, providing additional security against unauthorized transfers. This measure can significantly improve the security of the system. performance and robustness. Sobit’s native token is Sobb, which can be used to pay cross-chain fees for Sobit’s cross-chain bridge. The total amount is 1 billion. Sobb allocated 74% of its assets in a Fair Launch manner. Different from the situation after the launch of other DeFi protocols and cross-chain protocol tokens on Bitcoin, Sobb currency prices entered a downward cycle after a brief rise, and the decline exceeded 90%, and there has been no obvious enthusiasm for the rise of BTC recently. Starting momentum, this may have something to do with Sobb's choice of track. The service objects selected by Sobit and Multibit are highly overlapping, but at this stage Sobit can only support cross-chain for Solana, and there are only three BRC20 assets that can be cross-chained. Compared with Multibit, which also provides cross-chain BRC20 assets, Sobit is far behind in terms of ecology and completeness of cross-chain assets, making it difficult to gain an advantage in the competition with Multibit.

Sobb token price trend, image source: Coinmarketcap

3.3 Meson Fi

Meson Fi is a cross-chain bridge based on the principle of HTLC (Hash Time Locked Contract). At this stage, it has realized cross-chain interaction between 17 mainstream public chains including BTC, ETH, and SOL. During the cross-chain process, the user signs the transaction information off-chain and submits it to Meson Contract for confirmation and locks the corresponding assets in the original chain. Meson Contract broadcasts the message to the target chain through Relayer after confirming the message. Among them, Relayer has three situations: P2P nodes, centralized nodes and no nodes. P2P nodes have better security, and centralized nodes have higher efficiency and availability. Without going through nodes, users need to be on both chains. Holding certain assets, users can choose according to actual conditions. After verifying the correctness of the transaction through Meson Contract's postSwap, the LP on the target chain also calls the Lock method on Meson Contract to lock the corresponding assets, and then exposes the address to Meson Fi. The next operation is the process of HTLC. The user specifies the LP address and creates a hash lock on the original chain. The assets are taken out on the target chain by exposing the hash lock preimage. The LP then uses the preimage to take out the assets locked by the user on the original chain.

HTLC process on Meson Fi. Image source: Kernel Ventures

Meson Fi is not a cross-chain bridge specifically designed for Bitcoin assets, but is more similar to a full-chain bridge like LayerZero. However, the current mainstream BTC Layer2 such as B2 Network, Merlin Chain and Bevm have established cooperative relationships with them and recommend the use of Meson Fi for cross-chain assets during the staking process. According to official disclosures, Meson Fi processed more than 200,000 transactions and cross-chain pledges of approximately 2,000 BTC assets during the three-day event of Merlin Chain staking, accounting for almost all cross-chain transactions to Bitcoin from mainstream chains. As Layer 2 on Bitcoin continues to release and launch staking incentives, Meson Fi can attract a large number of cross-chain assets, which should bring a lot of promotion to its subsequent ecological growth and increase in cross-chain revenue.

3.4 Comprehensive comparison

Overall, Meson Fi and the other two cross-chain bridges fall into two categories. Meson Fi is essentially a cross-chain bridge in the form of a full chain, but it has just reached cooperation with many Layer 2 of Bitcoin to help it bridge assets from other networks. Sobit and Multibit are cross-chain bridges designed for Bitcoin’s native assets, serving BRC20 assets and other DeFi and stablecoin protocol assets on Bitcoin. Relatively speaking, Multibit provides a wider variety of BRC20 assets, including dozens of assets including ORDI and SATS, while Sobit still only supports three BRC20 assets. In addition, Multibit has also established cooperative relationships with some Bitcoin stablecoin protocols to provide related cross-chain services and pledge income activities, with a more comprehensive service type. Finally, Multibit also has better cross-chain liquidity, providing cross-chain services for a total of 5 mainstream chains, including Ethereum, Solana and Polygon.

4. Bitcoin Stablecoin

4.1 BitSmiley

BitSmiley is a series of protocols built on the Bitcoin mainnet based on the Fintegra framework, including stablecoin protocols, lending protocols and derivatives protocols. Users who over-collateralize BTC through its stablecoin protocol can mint bitUSD. When users want to withdraw their mortgaged BTC, they need to send bitUSD back to the Vault Wallet for destruction and pay a certain handling fee. When the value of the collateral falls below a certain threshold, BItSmiley will enter the automatic liquidation process of the pledged assets. The calculation formula for the liquidation price is as follows:

$$𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛 𝑃𝑟𝑖𝑐𝑒 = \frac{𝑏𝑖𝑡𝑈𝑆𝐷𝐺𝑒𝑛𝑒𝑟𝑎𝑡𝑒𝑑 ∗ 𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛𝑅𝑎𝑡𝑖𝑜}{𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 }
$$

It can be seen that the specific liquidation price is related to the real-time value of user collateral and the amount of minted bitUSD, where Liquidation Ratio is a fixed constant. During the liquidation process, in order to prevent losses caused by price fluctuations to liquidated persons, BItSmily designed a Liquidation Penalty for compensation. The longer the liquidation time, the greater the amount of compensation. The liquidation of assets adopts a Dutch auction bidding method to achieve the purpose of completing asset liquidation in the shortest possible time. At the same time, the BitSmiley protocol's own surplus will be stored in a designated account and auctioned regularly. The auction format is a British auction with BTC bidding. This method can maximize the value of the surplus assets. For this part of the surplus assets, the BitSmiley project party will use 90% to subsidize on-chain pledgers, and the remaining 10% will be allocated to the BitSmiley team as daily maintenance costs. In BitSmiley’s lending protocol, some settlement mechanism innovations for the Bitcoin network are also proposed. Due to the Bitcoin mainnet's block generation speed of 10 minutes, it is not possible to introduce oracles to make real-time judgments on price fluctuations as easily as Ethereum. Therefore, a third-party insurance mechanism is introduced in BitSmiley to prevent the other party from failing to make timely decisions. In the case of delivery, users can choose to pay a certain amount of BTC to a third party in advance as transaction insurance (both parties need to pay). When one party fails to complete the transaction on time, the guarantor will compensate the other party for the loss.

Third-party insurance mechanism in BitSmiley, image source: BitSmliey WhitePaper

BitSmiley provides a wealth of DeFi and stablecoin functions, and has also made many innovations in the clearing mechanism to better protect user interests and improve adaptation to the Bitcoin network. Regardless of the settlement mechanism or mortgage mechanism, BitSmiley is an excellent stablecoin and DeFi model. Not to mention that the Bitcoin ecosystem is still in its infancy, BitSmiley should be able to occupy a considerable market share in the competition for stablecoins.

4.2 BitStable

BitStable is also a Bitcoin stablecoin protocol based on an over-collateralization design. It currently supports Ordi and Mubi assets from the Bitcoin mainnet and Ethereum’s USDT mortgage. Based on the volatility of the three assets, BitStable sets different over-collateralization ratios, USDT is 0%, Ordi is 70%, and Mubi reaches 90%.

BitStable’s token minting model, image source: Bitstable.finance

BitStable has also deployed corresponding smart contracts on Ethereum, and the DALL stablecoins obtained by pledging can be exchanged for USDT and USDC on Ethereum at a ratio of 1:1. At the same time, BitStable adopts a dual-currency mechanism. In addition to the stable currency DALL, it uses BSSB as its governance token. Through BSSB, you can participate in the voting governance of the community and share the benefits of the network. The total amount of BSSB is 21 million, which is distributed in two ways. The first is to earn corresponding BSSB governance tokens by staking DALL tokens on the Bitcoin network. The project team will gradually distribute 50% of the BSSB tokens through staking rewards. The second way is the two rounds of LaunchPad conducted on Bounce Finance at the end of November last year, which distributed 30% and 20% of BSSB through Auction pledge auction and fixed price auction respectively. However, a hacker attack occurred during the Auction pledge auction, resulting in more than 3 million BBSB tokens being destroyed.

BSSB currency price trend, image source: coinmarketcap

However, during this process, the project team responded to the hacker attack in a timely manner, and the remaining 25% of tokens that were not affected by the hacker attack were still issued. Although higher costs were incurred, this measure allowed for a better recovery. This enhanced the confidence of the community and ultimately did not lead to a flash crash after the opening.


5. Bitcoin DeFi

5.1 Bounce Finance

Bounce Finance consists of a series of DeFi ecological projects, including BounceBit, BounceBox and Bounce Auction. It is worth noting that Bounce Finance was not originally a project serving the BTC ecosystem, but an auction protocol set up for Ethereum and Binance Chain. It only moved its position in May last year, taking advantage of the Bitcoin development boom. BounceBit is an EVM-compatible Bitcoin POS side chain, and the assets used to select validators are Bitcoins pledged from the Bitcoin main network. At the same time, BounceBit has introduced a mixed income mechanism. By staking BTC assets on BounceBit, users can not only earn income on the chain through POS verification and related DeFi protocols, but also earn corresponding income on CEX through the on-chain mirroring mechanism. Finally, the assets can be safely transferred and transferred out. BounceBox is similar to the app store in Web2, where publishers can custom-design a dApp, that is, a box. After completion, it will be distributed through BounceBox, and then users can choose their favorite box to participate in DeFi activities. Bounce Auction is the original main part of the project on Ethereum. It mainly conducts auctions of various assets and provides various auction methods including fixed-price auctions, British auctions and Dutch auctions.

Bounce's native token Auction has been issued in 2021, and has been used as the designated pledge token to receive point rewards in multiple rounds of token LaunchPad on Bounce Finance. The pledge reward activity has driven the recent continuous increase in the price of Auction tokens. What deserves more attention is the newly built pledge chain BounceBit after Bounce switched to Bitcoin. At this stage, it has launched on-chain pledge points and test network interactive points activities. The X account of the project also clearly stated that points can be redeemed in the future. Tokens and the issuance of tokens will be carried out in May this year.

Auction price trend in the past year, picture source: Coinmarketcap

5.2 Orders Exchange

Orders Exchange is a DeFi project completely built on the Bitcoin network. It currently supports limit and market price order transactions for dozens of BRC20 assets, and plans to launch Swap between BRC20 assets in the future. The underlying technology of Orders Exchange consists of three parts: Ordinals Protocol, PSBT and Nostr Protocol. For an introduction to Ordinals Protocol, please refer to Kernel’s previous research report Kernel Ventures: Can RGB replicate the craze of Ordinals. PSBT is a signature technology on Bitcoin. The user signs the PSBT-X format content composed of Input and Output through SIGHASH_SINGLE | ANYONECANPAY. Input contains the transaction that the user will execute himself, while Output contains the content that the user executes the transaction. The prerequisite is that another user needs to execute the Output content and sign SIGHASH_ALL and publish it on the main network before the content in the Input finally takes effect. In the pending order transaction of Orders Exchange, the user completes the pending order through PSBT signature and waits for the other party to complete the transaction.

PSBT order placement method, picture source: orders-exchange.gitbook.io

Nostr is an asset transfer protocol set according to NIP-100, which improves the interoperability of assets between different DEXs. All 100 million tokens of the project have been fully released. Although the project team emphasized in the white paper that the token is only an experimental token and does not have any value, the project team’s carefully designed airdrop plan still shows an obvious token economy. intention. There are three main distribution directions of the initial tokens. 45% of the tokens were distributed to traders on Orders Exchange, 40% of the tokens were airdropped to early users and promoters, and 10% were distributed to Developer. However, it is worth noting that 40% of the airdrops did not have a detailed distribution method on either the official website or the official tweet. At the same time, there was no discussion on Twitter or the Orders community of Discord after the official announcement of the airdrop. Therefore, the actual airdrop Distribution is questionable. Overall, the buy and sell order page of Orders Exchange is intuitive and clear. You can see the prices of all buy and sell orders arranged in order. Among the platforms that currently provide BRC20 trading, the quality is high. The subsequent launch of the Swap service between BRC20 tokens should help capture the value of the protocol.

5.3 Alex

Alex is a DeFi Protocol built on the Bitcoin side chain Stacks. It currently supports Swap, Lending, Borrow and other transaction types. At the same time, Alex also innovated the traditional DeFi trading model. The first is Swap. The traditional Swap pricing model can be divided into two types: x*y=k for ordinary currency pairs and x+y=k for stable coins. However, in Alex, you can freely set the trading rules of currency pairs according to a certain ratio. Set to be the linear combination of the two models x*y=k and x+y=k. At the same time, Alex also introduced OrderBook, an order book model that combines on-chain and off-chain, allowing users to quickly cancel pending orders at zero cost. Finally, Alex provides fixed-rate lending activities and establishes a diversified collateral pool for lending services instead of the traditional single collateral. The collateral is composed of risky assets and risk-free assets, reducing the risk of lending.

Implementation principle of Alex OrderBook, picture source: Alexgo documentation

Unlike other DeFi projects in the Bitcoin ecosystem that only entered the market after the Ordinals protocol sparked the Bitcoin ecosystem, Alex started laying out the Bitcoin DeFi ecosystem as early as the last bull market and received seed round financing. Whether in terms of transaction performance or transaction types, Alex is at a relatively leading level in DeFi in the current BTC ecosystem. Even many DeFi projects on Ethereum cannot match Alex's trading experience. The total supply of Alex's native token Alex Lab is 1 billion, and 60% of the total supply has been released at this stage. You can earn part of the tokens by staking or providing liquidity on Alex, but the corresponding income is difficult to reach when it was launched in the early stage. level. As the most complete DeFi project on BTC at this stage, Alex’s market value is not high, and in this bull market, the BTC ecosystem should be an important or even main narrative, and should bring a lot of premium to the entire BTC ecosystem at this stage. In addition, the side chain Stacks recently deployed by Alex will also receive an important Satoshi Nakamoto upgrade. By then, Stacks will be greatly optimized in terms of transaction speed and transaction costs, and its security will also be backed by the Bitcoin main network, becoming a real chain. Layer2. This upgrade can also greatly reduce Alex's own operating costs and improve its transaction experience and security. More funds flowing into the Stacks chain can also provide Alex with greater market and transaction demand, bringing more benefits to the protocol.

6. Summary

The application of the Ordinals protocol has changed the Bitcoin main network's inability to implement complex logic and issue assets. Drawing on or improving the ideas of Ordinals, various asset protocols have also been launched one after another on the Bitcoin network. However, the application layer of the Bitcoin main network is not prepared to provide services in this area. With the explosion of inscription assets, the functions that Bitcoin applications can achieve are quite backward. Therefore, the development of applications on the Bitcoin network at this stage has become a problem for various industries. Hotspots that the party has seized. In the development of various applications, Layer 2 has the highest priority, because no matter how other types of DeFi protocols develop, they will only improve the transaction experience. However, if the transaction speed of the main network and the transaction cost cannot be improved, the Bitcoin main network will Asset liquidity has always been difficult to release, and the chain is mostly filled with new transactions for speculation. After the Bitcoin mainnet has completed improvements to transaction speed and cost, the next step is to improve transaction experience and transaction diversity. Various DeFi or stablecoin protocols provide traders with a variety of financial derivatives transactions. Finally, there is the cross-chain protocol that enables the Bitcoin mainnet and other network assets to circulate with each other. The cross-chain protocol on Bitcoin is relatively mature, mainly due to the rise of the development boom of the Bitcoin mainnet. Many full-chain bridges and mainstream The cross-chain bridge was designed to provide cross-chain services to the Bitcoin network from the beginning. For dApps such as SocialFi and GameFi, due to the high gas and high latency limitations of the Bitcoin main network, there are no phenomenal projects at this stage. However, with the speed and expansion of the second-tier network, in the future, on the second-tier Bitcoin network The possibility of development will be greater. It is almost certain that the Bitcoin ecosystem will be at least one of the hot spots in this bull market, and may even become the mainstream narrative. With sufficient enthusiasm and a huge market, although the various Bitcoin ecosystems are still in the early stages of development, I believe that this bull market will see the emergence of outstanding projects in various tracks.

Panorama of Bitcoin application ecosystem, image source: Kernel Ventures

Kernel Ventures is a crypto venture capital fund driven by the research and development community with over 70 early-stage investments focused on infrastructure, middleware, dApps, especially ZK, Rollup, DEX, modular blockchains, and onboarding Vertical areas for billions of crypto users in the future, such as account abstraction, data availability, scalability, etc. For the past seven years, we have been committed to supporting the growth of core development communities and university blockchain associations around the world.

reference

  1. BEVM white paper: https://github.com/btclaer2/BEVM-white-paper

  2. What is a Bitcoin Merklized Abstract Syntax Tree: https://www.btcstudy.org/2021/09/07/what-is-a-bitcoin-merklized-abstract-syntax-tree-mast/#MAST-% E7%9A%84%E4%B8%80%E4%B8%AA%E4%BE%8B%E5%AD%90

  3. BitVM white paper: https://bitvm.org/bitvm.pdf

  4. Bitcoin script principle: https://happypeter.github.io/binfo/bitcoin-scripts

  5. SatoshiVM official website: https://www.satoshivm.io/

  6. Multibit's Docs：https://docs.multibit.exchange/multibit/protocol/cross-chain-process

  7. Alex White Paper: https://docs.alexgo.io/

  8. Merlin technical documentation: https://docs.merlinchain.io/merlin-docs/

  9. Sobit white paper: https://sobit.gitbook.io/sobit/