Overview
Confidence in Bitcoin grew in 2023. Price usually tends to dominate the headlines when looking at Bitcoin and other cryptocurrencies. However, with the markets ups and downs, we can see the on-chain data revealing a positive trend of expanding mainstream adoption from small holders along with ever-growing conviction from whales and long term holders.
The number of addresses holding between 0.1 BTC and 0.01 BTC has gradually increased over the past year, indicating growing retail interest in bitcoin.
ETF Approval: Growing Inflows
Bitcoin surged past $70,000 in the first half of March, breaking its record for the fourth time in a week. The new record comes as Bitcoin is driving inflows into spot BTC ETFs.
Spot Bitcoin ETFs have been attributed as the key driver behind the strong, up only price action over the last few months.
If looking at Spot Bitcoin ETF flows, it can be clearly seen that over the past two months that inflows have been outpacing outflows.
A report from digital asset manager CoinShares showed on Monday that investment products tracking Bitcoin saw capital inflows of about $2.7 billion in the week to March 10.
For long-term believers, Bitcoin’s emerging narratives represent an early-stage opportunity. The foundations continue to grow stronger, edging closer to the asymptotic vision of decentralized money.
Scaling Bitcoin
Despite the above, there’s an aspect of Bitcoin that’s often overlooked in the broader financial conversation: the network’s ecosystem and technological advancements. While the external asset markets are abuzz with the approval of Bitcoin ETFs, a flurry of activity and innovation is taking place within the Bitcoin network, largely unnoticed by the wider market. For Bitcoin’s legitimacy as an asset, maintaining the network’s security is essential, and this hinges on the development of a long-term sustainable ecosystem.
Ordinals & BRC-20: New Horizons in the Bitcoin Network
In 2023, one of the most impactful developments in the Bitcoin network was the introduction of Ordinals. Ordinals turn individual satoshis into unique digital artifacts capable of holding rich data. Ordinals are instances of Bitcoin’s smallest subdivision that are inscribed with data such as text or images. Once inscribed, each satoshi becomes a unique digital asset.
The Ordinals Protocol, first proposed by protocol creator and developer Casey Rodarmor, was launched on January 21, 2023. It used the improvements brought by the 2021 Taproot upgrade, which enhanced Bitcoin’s functionality and allowed for larger data attachments of up to 4MB per transaction. This technical advancement, which leverages Bitcoin’s existing infrastructure, has opened up new possibilities for embedding richer data onto the blockchain while marking a departure from traditional digital assets and NFTs.
Growth was fast. In February, Yuga Labs announced the first-ever Bitcoin NFT collection based on ordinal inscriptions. By the end of 2023, there were over 50 million Ordinals inscribed on Bitcoin, with the peak volume occurring in May.
Bitcoin Layer 2 Landscape
Layer-2 networks are secondary frameworks built atop the main blockchain to enhance its scalability and transaction speed. These networks handle transactions off the main chain, reducing the load and increasing efficiency. They are pivotal in solving the trilemma of scalability, security, and decentralization.
At a glance, a Bitcoin L2 is a network that combines the security of the Bitcoin protocol with improved scalability, enabling greater access to bitcoin the asset. A trust-minimized L2 network must ensure a cryptographically secure means for participants to hold sovereign custody of their assets. Transaction security on these networks is maintained through proof-based consensus mechanisms like Bitcoin’s Proof of Work (PoW) or economic incentives derived from the network’s native asset like Proof of Stake (PoS).
Lightning Network
The Lightning Network (LN) is a payment protocol designed to facilitate fast and low-cost transactions by operating on top of the Bitcoin blockchain. It aims to resolve the scalability issues associated with Bitcoin’s main network by allowing transactions to occur off the main blockchain, thus increasing speed and reducing costs. The LN achieves this by creating payment channels between users, enabling them to conduct an unlimited number of transactions without needing each one to be recorded on the blockchain. Only the opening and closing balances of these channels are recorded on the Bitcoin blockchain, significantly enhancing transaction efficiency.
2023 saw over 5,400 BTC worth more than $230 million flowing through payment channels on the Lightning Network. LN micropayment channels establish a relationship between two parties, enabling them to continuously update their balances without broadcasting every transaction to the blockchain. These channels function by deferring the broadcast of the cumulative balance between the two parties to a later date, effectively netting out the total balance in a single transaction.
Rootstock
Rootstock leverages merged mining to achieve Bitcoin-level security assurances despite throughput exceeding the capacity of Bitcoin’s base layer.
Merged mining allows Bitcoin miners to simultaneously process and validate BTC and RSK transactions within the same block. In merged mining, a miner mines both the parent chain (larger blockchain, like Bitcoin) and the child chain (smaller blockchain, like RSK) at the same time. The miner assembles a block for both chains and performs valid work on both networks.
The Rootstock Infrastructure Framework (RIF) is a comprehensive suite of open and decentralized infrastructure protocols designed to enable the rapid development of dApps on the Rootstock (RSK) blockchain, a smart contract platform secured by the Bitcoin network. RIF aims to provide developers and fintech innovators with the tools and resources necessary to create decentralized products for a more equitable financial system. It operates on top of Rootstock, offering a range of decentralized services, including payments, storage, and naming systems to simplify the user experience in interacting with blockchain technologies.
However, despite these advancements, RSK has encountered certain challenges. RSK has struggled to garner significant user uptake beyond a small contingent of loyal supporters. The complexity and novelty of its merged mining mechanism also present risks.
Stacks
Stacks is a Bitcoin layer-2 for smart contracts designed to bring decentralized applications and smart contract functionality to the Bitcoin ecosystem.
Stacks takes a pyramid approach, where you have the foundational settlement layer at the bottom (Bitcoin), and then a layer on top of that to add smart contracts and programmability (Stacks), and then layers on top of that for scalability and speed (Hiro’s Subnets).
Recent Developments
Several crucial network upgrades shipped this year, including Stacks 2.1, which introduced decentralized mining and bridges to Bitcoin. These bridges enable protocols like sBTC to port Bitcoin liquidity into sophisticated Stacks applications incorporating features impossible on Bitcoin natively.
The year also saw new blockchain tooling enter testing, like Clarity and Hiro’s contract deployment platform, priming additional functionality. Major upgrades like Nakamoto and sBTC — introducing faster block times and decentralized bridges enabling Bitcoin liquidity flows, respectively — remained on track for planned developer releases.
Stacks has already onboarded top tier validators to support its growth and infrastructure, and we’re proud to be part of that cohort.
B² Network
BSquared (B²) Network is a Layer-2 solution that significantly enhances transaction speed and expands application diversity on the Bitcoin blockchain, all while prioritizing security. The network employs zero-knowledge proof technology alongside gate commitment and challenge-response, ensuring transactional privacy and security during confirmation on the Bitcoin blockchain.
In January, B² announced the successful completion of its seed round of financing, with investors including HashKey Capital, OKX Ventures, IDG Capital, Kucoin Labs, ABCDE, Waterdrip Capital, OGs FUND and Antalpha Group.
Comprising two fundamental layers, Rollup Layer and Data Availability Layer, B² Network seeks to redefine the way we perceive Bitcoin Layer-2 solutions. Some notable updates over the last few months
- Creating a stablecoin cross-bridge between B² Network and other chains with Meson
- Collaboration with Polyhedra to construct ZK bridge
- Partnership with DEGO which will deploy its launchpad on B2
- AltLayer cooperation to deploy and operate its rollup
- Integration with Polygon Chain Development Kit (CDK), a codebase dedicated to the zero-knowledge rollup.
Rollup Layer
B² Network employs ZK-Rollup as Rollup Layer. ZK-Rollup Layer adopts the zkEVM solution, responsible for the execution of user transactions within the Layer-2 network and the output of related proofs.
Users’ transactions are submitted and processed in the ZK-Rollup Layer. The users’ state is also stored in the ZK-Rollup Layer. The batch proposals and the generated zero-knowledge proofs are forwarded to the Data Availability Layer for storage and verification.
Data Availability Layer
On the 15th of January, announced B² Hub was announced, their Bitcoin Data Availability layer. This layer is responsible for permanently storing copies of rollup data, verifying rollup zk proofs, and ultimately performing the final confirmation on Bitcoin.
A pivotal aspect of B² Network, the decentralized storage serves as the repository for the ZK-Rollup’s user transactions and their respective proofs. By decentralizing storage, the network inherently enhances security, reduces single points of failure, and ensures data immutability.
BOB — Build on Bitcoin
BOB is a new BTC L2 stack with full EVM compatibility, combining Bitcoin’s security and power as the most widely adopted digital asset with Ethereum’s programmability, scalability and user experience. BOB is designed to be a Bitcoin co-processor, enhancing Bitcoin’s functionality and using the Bitcoin L1 for settlement, custody and storage:
- Bitcoin security. BOB allows to inherit Bitcoin PoW security, with the long-term goal to achieve optimistic rollups on the Bitcoin L1 via on-chain fraud proofs using mechanisms like BitVM.
- Support for the Bitcoin stack. BOB supports the existing Bitcoin tech stack, incl. Ordinals, Lightning and Nostr, powered by cross-chain light clients, a universal Bitcoin smart contract SDK, and a Rust zkVM
- EVM smart contracts. BOB smart contracts are powered by the EVM, ensuring full compatibility with best-in-class infrastructure and tooling.
- ETH rollup support. BOB supports rolling up to Ethereum as an OP stack rollup to unlock Bitcoin use cases for web3 power users. This way, BOB benefits from native support for all ERC20 tokens (incl. USDC, USDT, ETH), access to DeFi liquidity, and as easy on/off-ramps from major exchanges and institutional platforms.
The team announced that Mainnet will go live at the Bitcoin halving
Data availability
Nubit
Nubit is a scalable, cost-efficient, data availability layer secured by Bitcoin for the Bitcoin community. Nubit enables the scaling of Bitcoin’s data capacities, empowering applications like Ordinals, Layer 2s, and price oracles, thus broadening the scope and efficiency of the Bitcoin ecosystem.
The recent surge in demand for Bitcoin inscriptions has led to over 14GB of data being stored on the Bitcoin blockchain, incurring significantly high costs. This development underscores a critical need within the Bitcoin ecosystem: In a more expansive Bitcoin ecosystem, the inherent data throughput limitations of Bitcoin itself could pose a bottleneck. Consequently, there’s a need for deploying a data availability solution that aligns with the fundamental principles of Bitcoin.
Nubit expands data handling capabilities while upholding Bitcoin’s trust principles. It leverages Bitcoin’s economic security for enhanced scalability, enabling large-scale data availability at reduced costs for the Bitcoin Ecosystem.
The project has recently partnered with Yala, the modular and programmable layer for Bitcoin; and Bouncebit to enhance its Data Availability Capabilities.
Bitcoin Staking and Re-Staking
For many of today’s BTC asset holders, the allure is growing to seek profit outside of the confines of simply hodling BTC. This is evidenced by the sustained demand for Bitcoin-inscribed art, strong developer activity for building Bitcoin L2s, and continued expansion of Bitcoin DeFi.
BounceBit
BounceBit is building a BTC restaking infrastructure that provides a foundational layer for different restaking products, secured by the regulated custody of Mainnet Digital and Ceffu. The BounceBit chain, designed as a showcase of a restaking product within the BounceBit ecosystem, is a PoS Layer 1 secured by validators staking both BTC and BounceBit’s native token — A dual-token system leveraging native Bitcoin’s security with full EVM compatibility. Critical ecosystem infrastructure like bridges and oracles are secured by restaked BTC. Through an innovative CeFi + DeFi framework, BounceBit empowers BTC holders to earn yield across multiple networks. BounceBit closed a $6M funding round in February, led by Breyer Capital and Blockchain capital.
BounceBit is tackling the following challenges:
- Tackling under-utilised Bitcoin assets
- Enhancing Bitcoin utility and expanding use cases
- Unifying BTC across multiple chains by integrating diverse forms of wrapped BTC scattered across various networks
Babylon
To realise the vision of a Bitcoin-centric decentralised world, Babylon developed a suite of Bitcoin security-sharing protocols. To dive deeper into Babylon, we wrote an overview piece onthe project here.
Timestamp Protocol
This protocol timestamps events from other blockchains onto the Bitcoin network, allowing these events to benefit from Bitcoin’s timestamp, similar to Bitcoin transactions. This effectively leverages the security of Bitcoin as a timestamp server.
Bitcoin Staking Protocol
This allows Bitcoin holders to stake their assets in a trustworthy manner without the need to bridge to PoS chains, providing complete and slashable security guarantees. Babylon’s innovative protocol eliminates the need for bridging, encapsulating, and custodianship of already staked Bitcoins.
Babylon’s Bitcoin staking protocol achieves the following security properties:
- Fully Slashable PoS Security: In the event of a safety violation, 1/3 of the Bitcoin stake is guaranteed to be slashed.
- Staker Security: Staked bitcoins are guaranteed to be safe and withdrawable, as long as the staker (or the validator it delegates to) follows the protocol honestly.
- Staker Liquidity: Unbonding of the staked bitcoin is guaranteed to be secure and fast without the need of social consensus.
Looking ahead in 2024
Bitcoin’s continued growth has seen a continued trend of increased participation from both retail and institutional investors, driven by its scarcity and codified monetary policy. Such factors have significantly boosted Bitcoin’s legitimacy as an investment asset.
Technological advancements in scaling solutions have greatly enhanced the transaction capabilities of Bitcoin, enabling fast, scalable transactions, and encouraging broader utility in everyday transactions and even in gaming platforms.
Likewise, the introduction of Ordinals has altered the nature of Bitcoin transactions by turning individual satoshis into unique digital assets via the inscription process, and sparking significant market interest. Recursive ordinals further enhance Bitcoin’s functionality by enabling complex on-chain software operations.
Other technical Innovations, like Babylon’s remote staking concept, are creating new avenues for earning yield on BTC in a safe and ethos-aligned manner, facilitating its viability as both an asset and a store of value.
