Understanding the new Bitcoin ecosystem

The Bitcoin ecosystem is experiencing rapid expansion, evidenced by the remarkable growth of Bitcoin L2s and sidechains, which have increased to over 25 in less than a year. For context, compare this growth rate to Ethereum’s ecosystem, where it took three years to develop 48 L2 solutions, as listed by L2BEAT.

We at Inception are diligently monitoring these developments. However, there are challenges in evaluating the incoming projects as documentation and information tends to be sparse or highly technical.

Here, we focus on Stacks and its imminent Nakamoto hard fork. Then, we compare and contrast a variety of newer projects entering the scene that have been on our radar including RGB++, Merlin, Build on Bitcoin (BOB), BEVM, Bsquared, and Nostr Assets.

Through these case studies, we intended to bring clarity to ourselves around the nuances of different Bitcoin scaling solutions and infrastructure. In doing so, we developed a comparison system for each of these projects, which we hope will also bring clarity for you.

Bitcoin Ecosystem Categories

First, let’s look at the emerging Bitcoin ecosystem as a whole and break down how it can be categorized:

1. Stacks: Unique for its BTC yield via STX staking, Stacks is advancing as a significant Bitcoin L2 platform, achieving SEC compliance and notable decentralization milestones. Its upcoming Nakamoto and sBTC upgrades underscore its growth potential.
2. NFTs & other new standards: Includes Ordinals, BRC20, the upcoming Runes launch at halving, and other new standards. Despite criticisms, developments like Binance listing Ordinals (ORDI) BRC-20 token late last year, BRC-721E, and SRC-20 suggest a growing market here, supported by significant network fees for miners as an alternative revenue stream to block rewards.
3. Sidechains: Platforms like Rootstock and the Liquid Network extend Bitcoin’s functionality with EVM-compatible smart contract, faster transactions, or more confidentiality though they rely on some level of trust in custodians. See also RGB++, Merlin, BOB, BEVM, and B2 below.
4. Rollups & (Partial) L2s: Innovations like Urbit architecture and Botanix Spiderchain propose L2 solutions enhancing Bitcoin’s scalability and utility, though some require Bitcoin Improvement Proposals (BIPs) for full functionality. L2 node implementations on Urbit come equipped with a shared identity system to communicate easily with peers. Botanix Spiderchain is a PoS EMV-compatible L2 uses a distributed multisig network to enable a two-way peg with Bitcoin. For a fuller list of incoming Bitcoin L2s and sidechains, see this list compiled by DWF Ventures.
5. BitVM (computing paradigm): BitVM proposes a novel approach to Turing-complete smart contracts on Bitcoin without altering its opcodes. While functionality is very limited, it is a promising avenue for enhancing Bitcoin with state across different UTXOs, verifiability through logic gates, and offloaded computation and verification.
6. Lightning Network: Positioned as a payment-focused L2 solution combining off-chain compute with on-chain settlement (payment channels), the Lightning Network exemplifies targeted efforts to enhance Bitcoin’s transaction speed and affordability. Despite facing challenges around trust and security, it has seen significant growth and utility in the payment space.
7. Digital asset issuance: Protocols like Taproot Assets and RGB are developing asset issuance and smart contract support on Bitcoin. These developments point in the direction of a broader Bitcoin ecosystem in the future where Bitcoin can support a variety of assets (e.g., RWAs). See also Nostr Assets below.
8. Ecosystem integrations: Collaborative projects like SOLightning (Solana integration) and NomicBTC (Cosmos integration) suggest Bitcoin will have increasing connectivity with the wider blockchain space. Ecosystem integrations can increase Bitcoin’s utility and relevance in web3.
9. Data availability (DA): Projects aiming to enhance Bitcoin data availability scalability and cost-efficiency have started emerging. Projects like Nubit and Spice Network aim to address the challenges posed by the increasing block and storage demands due to developments like Inscriptions.

Stacks: Becoming a “true” Bitcoin L2

One of its kind: Staking STX earns BTC yield via a novel consensus mechanism, creating a unique direct link between Stacks and Bitcoin. AFAIK, no other project does this.

How does it achieve this? Proof-of-Transfer (PoX) Consensus

• “Miners” on the Stacks network transfer BTC as part of the mining process, ensuring they have a financial stake in securing the network (sharing some features of a PoS-system where economic security is derived from Bitcoin L1 to Stacks L2). It gives them a reason to do correct work to earn back larger rewards later.
• The transferred BTC is sent to STX holders who are participating in “Stacking” (akin to staking), essentially rewarding them for locking up their tokens to support Stack’s network security and consensus.

PoX vs. PoW and PoS

• Costs: In PoW, the cost is energy; in PoS, the cost is opportunity cost + potential slashing; and in PoX, the cost is opportunity cost + potential loss of rewards.
• Similarities to PoW: PoX miners compete to validate transactions and mine new blocks by bidding BTC to reward stackers, similar to how PoW miners consume energy to solve computational problems to win BTC block rewards.
• Differences to PoW: PoX doesn’t involve computational puzzles; also it gives direct rewards to participants (stackers), not only miners.
• Similarities to PoS: Like PoS, PoX miners stake Bitcoin as an economic security module for the Stacks PoS chain. PoX stackers stake STX tokens to add value to the network and are rewarded with a portion of the BTC bid by PoX miners, resembling how PoS validators lock up funds to validate transactions and earn block rewards — both without the need for energy-intensive mining. Furthermore, Both PoX and PoS allow indirect participation of stakers, where PoX stakers earn BTC from miners and PoS stakers earn from staking pool block rewards, transaction fees, and MEV.
• Differences to PoS: In PoX, non-validating participants are rewarded in a different currency (BTC) than that staked (STX). PoS rewards stakers in the same currency (e.g., ETH, SOL) that is staked.

In summary, PoX is an elegant mechanism to derive economic security from the Bitcoin network to the Stacks network, with some properties resembling PoS and others resembling PoW.

Nakamoto upgrade — Deployment Imminent

Stacks’ Nakamoto upgrade is a hard fork that will make Stacks a “true” Bitcoin L2 in the sense that STX will inherit 100% of BTC’s hash power for achieving transaction finality on the Stacks network (chain reorganization as hard as reorganizing Bitcoin). In addition, it’s expected to bring several key upgrades to the Stacks network, including faster transactions and the introduction of sBTC.

1. Faster transactions: Nakamoto reduces transaction confirmation times from the standard 10 minutes to just a few seconds by increasing block production rate, crucial for building DeFi on Bitcoin. It achieves this by decoupling Stacks block production from Bitcoin block times, allowing Stacks miners to produce blocks at a fixed cadence. After Nakamoto, a Stacks miner can produce many Stacks blocks per Bitcoin block instead of one, then the next Stacks miner will confirm all of them. PoX stackers will use miner elections to determine when the current miner should cease block production and when a new miner should commence.
2. 100% Bitcoin finality: Previously, while Stacks transactions were recorded on the Bitcoin blockchain, it did not apply Bitcoin’s finality standards to individual Stacks transactions. The Nakamoto release merges these paths, applying Bitcoin finality standards to individual Stacks transactions. Even in the rare case of a Bitcoin reorg, valid Stacks transactions will remain confirmed, and only transactions dependent on lost Bitcoin state will require re-mining.
3. sBTC: The introduction of Stacks BTC (sBTC) will enable a 1:1 Bitcoin-backed asset offering developers a programmable version of Bitcoin. It’s expected to unlock $500 billion in latent capital by enabling Bitcoin programmability, and enables trust-minimized movement of BTC between L1 and L2 via a multisig bridge.
4. Solving for interoperability: A common critique of Stacks is its lack of interoperability because of the use of Clarity programming language. The Nakamoto upgrade aims to address this limitation by introducing EVM (Ethereum ecosystem) and Rust-VM (Solana, NEAR, Polkadot, etc.) subnets. There’s also ongoing work to support WASM on the new Stacks, enabling various programming languages like Rust, Solidity, etc. directly at the Stacks main layer (see below).

Stacks’ scaling through subnets and different VMs. Source: Stacks Whitepaper

RGB++

A Bitcoin L2 protocol that leverages the security and immutability of the Bitcoin blockchain to enable smart contracts and asset management.

Category: Sidechain/Partial L2 — UTXO-based

Description: RGB++ is an extension protocol (not blockchain) extends the RGB protocol by moving “smart” components such as p2p networks, virtual machines, and smart contracts onchain, specifically to the Common Knowledge Base (CKB) — the UTXO-based L1 blockchain of the Nervos Network. It enables verification and execution of RGB++ contract assets and logic on CKB, addressing interaction, smart contract execution, and proof provision issues.

Core tech / VM: RGB++ is based on the RGB protocol, which uses single-use seals and client-side validation to manage state changes and transaction verification. It leverages the RISC-V virtual machine used by CKB. Compiling RGB++ to RISC-V allows off-chain execution on RISC-V. RGB++ and RGB differ in design routes, with RGB striving for a post-blockchain purely client-side validated world and RGB++ aiming to add more blockchains to the Common Knowledge Base (CKB) and creating L2 scaling solutions on CKB.

By being UTXO based, RGB++ can bind the state and smart contracts on the CKB to Bitcoin UTXOs using single-use seals and client-side validation. Single-use seals ensure that a transaction can only occur once, making transactions unique and tamper-evident. Client-side validation means that transactions are confirmed locally by the user instead of on a centralized server or on the blockchain, which helps decentralize validation, reduce blockchain load, and enhance privacy. This approach makes the difficulty of double spending via RGB++ able to reach that of Bitcoin as shown in the chart below.

Note: Schematic diagram of PoW security after N confirmations (non-theoretical calculation)

Compatibility: RGB++ is backwards compatible with RGB operations and aims to address the slow progress of off-chain clients by adopting a PoW-based UTXO chain strategy. It introduces a mechanism for seamlessly migrating transactions from Bitcoin to CKB, to leverage CKB’s high-performance execution environment before migrating results back to Bitcoin. As the CKB is built on the basic RISC-V instruction set, the CKB-VM is flexible to support Turing-complete smart contracts and run various virtual machines, including the EVM.

Features:

• Performance optimization: UTXO framework allows transactions to “jump” from Bitcoin to CKB, increasing transaction efficiency and circumventing Bitcoin’s performance limitations.
• Security considerations: The jump mechanism prioritizes security by relying on direct bindings between two UTXOs (one on each layer) rather than trust-based cross-chain bridges or multisig mechanisms. Also the finality mechanism RGB++ uses adheres to PoW security standards, considering transactions on Bitcoin irreversible after 6 blocks, and on CKB, after approximately 24 blocks.
• Innovation: RGB++ approach doesn’t rely on EVM logic or cross-chain bridges, but rather leverages Bitcoin’s unique existing properties (e.g., UTXO model) to enable Bitcoin transactions to be processed in a more performant L2 environment.

Staking? Not specified, but it doesn’t seem like it based on their architecture (e.g., CKB is a PoW chain). However, the CKB network has “staking” in the sense that users can lock their CKB tokens and earn compounded interest from CKB token inflation.

BIP upgrade required? No, RGB++ doesn’t require changes to the Bitcoin protocol as it functions as a layer on top of Bitcoin’s existing infrastructure.

Degree of Bitcoin security inheritance? Claims to reach 100% potential (see above).

Merlin

A Bitcoin sidechain protocol that aims to improve the scalability and capital efficiency of the Bitcoin ecosystem.

Category: Sidechain/Partial L2 — EVM (ZK rollup)

Description: Merlin Chain is built on Bitcoin and aims to unlock the potential of Bitcoin through its users, protocols, and native assets. It has adopted an oracle network, on-chain BTC fraud-proof modules, and ZK rollups to improve Bitcoin’s scalability and efficiency.

Core tech / VM: Compatible with the EVM and supports Bitcoin native protocols including Bitcoin, BRC20, Bitcoin hashpower, BRC420, Atomicals, Pipe, and Bitmap. Developers can use Ethereum smart contracts to build dapps where transactions are executed on the Bitcoin blockchain.

Compatibility: Merlin Chain is simultaneously compatible with the EVM and various Bitcoin native protocols, allowing Ethereum users to interact with dapps on the Bitcoin L2 network without needing to switch to a Bitcoin wallet. Bitcoin wallet connection to the Merlin network is powered by Particle Network’s account abstraction protocol BTC Connect. BTC Connect assigns a Bitcoin wallet as a signer for a smart account on the Bitcoin L2/EVM chain. This could bring more users from the Bitcoin ecosystem to the Ethereum ecosystem, and vice versa.

Features:

• EVM-compatible dapps: Developers can use Ethereum smart contracts to build dapps whose transactions are executed on the Bitcoin blockchain.
• Ethereum users via BTC Connect: Ethereum users can interact with dapps on Merlin chain — and indirectly, on Bitcoin, without using a Bitcoin wallet. The use of BTC Connect account abstraction enables seamless interaction with Bitcoin assets via Merlin Chain and EVM-compatible wallets. However, under the hood, Bitcoin assets still need to be bridged from their base network to Merlin with 1:1 representation.
• More utility for Bitcoin native assets: Merlin Chain is exposing Bitcoin native assets to a much wider user base on Ethereum, which could inspire innovation in terms of dapps boosting Bitcoin utility.

Staking? Yes, yield is in assets on the Merlin Chain.

BIP upgrade required? Not specified, but probably not as this is an EVM chain operating on top of Bitcoin’s existing infrastructure.

Degree of Bitcoin security inheritance? Merlin claims to maintain the security level (or close to) of the Bitcoin network.

BOB (Build on Bitcoin)

BOB is a Bitcoin L2 protocol designed to bridge the gap between Bitcoin adoption and innovation with full EVM compatibility, focusing on DeFi and capital efficiency.

Category: Sidechain/L2 — EVM (optimistic rollup transitioning to ZK rollup); more like Merlin than RGB++

Description: BOB is an EVM rollup stack tailored to and secured by Bitcoin, aiming to onboard millions of new Bitcoin users. It seeks to close the gap between BTC adoption and innovation by providing a platform enabling Ordinals for Ethereum users, stablecoins for BTC users, and Bitcoin DeFi.

Core tech / VM: BOB uses an EVM rollup stack for usable decentralization and fast go-to-market. It’s secured by Bitcoin through merged mining and plans BTC staking in the future. Their roadmap also includes multi-rollup capabilities between Bitcoin and the EVM. Merged mining will allow Bitcoin miners to mine for Bitcoin and BOB at the same time, securing both networks without adding computation costs.

Compatibility: Initially bootstrapped as an optimistic ETH rollup to tap into liquidity, assets, and users; then, BOB plans to integrate Bitcoin security and ZK validation, transforming it into a Bitcoin ZK rollup. It is designed to be integrated with Bitcoin’s stack including Lightning, Nostr, Ordinals, BRCs, P2P, and more.

Features

• EVM core: Supports EVM smart contracts and wallets, infrastructure, and tooling.
• Merged mining: Strong security potential, assuming a significant portion of Bitcoin miners participate in merged mining.
• BOB SDK: Includes a BTC light client and “MetaMask for Ordinals” powered by BOB MetaMask Snap.
• Validity proofs: Roadmap includes upgrade from optimistic rollup to ZK validation via Risc Zero. Risc Zero is a ZK verifiable general computing platform based on ZK-STARKs and RISC-V microarchitecture. Its SDK supports conventional programming languages including Rust, C, and C++. By utilizing RISC-V, Risc Zero allows BOB to utilize ZKPs for general computation — complex operations and smart contracts within the BOB ecosystem will be able to be verified without compromising privacy.

Staking? Planned, but specifics wrt how it will work and what assets the yield would be in are not specified. Native EVM compatible.

BIP upgrade required? Not specified, but the use of merged mining suggests that no BIP upgrade is necessary. Merged mining doesn’t require interaction between the Bitcoin node and the BOB node software.

Degree of Bitcoin security inheritance? Not specified.

BEVM

BEVM is a Bitcion L2 that aims to bring EVM compatibility and dapps to the Bitcoin ecosystem.

Category: Sidechain/Partial L2 — EVM

Description: BEVM is another Bitcoin L2 with EVM compatibility, allowing for seamless and easy deployment of various dapps from the EVM ecosystem onto Bitcoin. It stands out for its use of BTC as gas, enabled by a cross-chain mechanism between Bitcoin and BEVM which requires the deployment of Bitcoin light nodes on the BEVM chain nodes for synchronizing data from Bitcoin mainnet to BEVM. The result is potentially far expanded use and consumption scenarios for BTC.

Core tech / VM: BEVM is based on technologies, such as the Schnorr signature algorithm (brought by Taproot upgrade) allowing for decentralized Bitcoin cross-chain operations. Together, they enable BEVM to function as a decentralized BTC L2 using BTC as gas while being fully EVM compatible.

Compatibility: EVM compatibility means BEVM supports the execution of any smart contract or dapp in the Ethereum ecosystem.

Features:

• EVM compatibility: Ethereum dapps and interactions between them, settled on Bitcoin.
• Cross-chain operations: BEVM ensured cross-chain data integrity and network determinism by synchronizing Bitcoin block headers and cross-chain transaction Merkle proof. The use of Bitcoin light nodes on the BEVM chain ensures real-time synchronization with the Bitcoin network.
• BTC as gas: The combination of Bitcoin light clients installed on BEVM nodes and the cross-chain integrity mechanisms allows BEVM transactions to use BTC for gas fees.

Staking? Not specified.

BIP upgrade required? Not specified, but likely no, as the architecture appears to work with existing Bitcoin infrastructure and upgrades like Segwit and Taproot.

Degree of Bitcoin security inheritance? Not specified.

B2 Network (Bsquared)

Bsquared is a Bitcoin L2 network aiming to enhance Bitcoin’s scalability and application diversity through ZK proofs.

Category: Sidechain/Partial L2 — EVM (ZK rollup)

Description: Bsquared attempts to solve Bitcoin’s scalability challenges by introducing a ZKP-based, EVM-compatible L2 aimed at increasing transaction speed and broadening application diversity without compromising security. The litepaper details a ZKP verification commitment rollup combined with Taproot integration on Bitcoin that is capable of running Turing-complete smart contracts for off-chain transactions. The result is increased transaction efficiency and cost reductions paired with enhanced privacy and security during confirmation on the Bitcoin network.

Core tech / VM: Bsquared utilizes ZKPs and adopts a zkEVM architecture for the execution of transactions within the L2 network and the output of related proofs. The capacity for Turing-complete smart contracts can enhance Bitcoin’s utility for applications across DeFi, NFTs, social, and more.

Compatibility: Fully compatible with the EVM and native Bitcoin assets via Particle Network’s BTC Connect.

Features:

• ZK rollup: Utilizes ZKPs for enhanced transaction privacy, security, and scalability.
• EVM & Bitcoin compatibility: Via BTC Connect (like Merlin Chain, see above), enabling interaction with the Bitcoin ecosystem from an EVM wallet.
• Turing-complete smart contracts & application diversity: Expands Bitcoin’s application potential beyond simple transactions to support complex decentralized applications.
• Efficiency and cost reduction: ZK rollup for faster transaction speeds, lower costs, and more capacity compared to Bitcoin mainnet.

Staking? Not specified, but as a ZK EVM with full EVM compatibility, it can issue its own protocol staking rewards.

BIP upgrade required? Not specified, but the design is like Ethereum ZK rollups, with off-chain compute and reliance on the base chain (Bitcoin mainnet instead of Ethereum mainnnet) for final transaction verification (settlement) and data availability. So, probably not.

Degree of Bitcoin security inheritance? Not specified.

Nostr Assets

Nostr Assets is a decentralized protocol for digital asset issuance and management on the Bitcoin network. It is built on Nostr but by a separate team.

Category: Digital asset issuance

Description: Nostr Assets integrates Taproot Assets (formerly Taro) and native Bitcoin payments (denominated in Satoshis) into the Nostr ecosystem, enabling the management of digital assets issued on Bitcoin. It aims to bridge the gap between social networking and financial transactions, with the Nostr ecosystem being a decentralized network for social networking and messaging. By leveraging the public and private keys of Nostr, users can send and receive Bitcoin-based assets via wallets linked to their Nostr accounts.

Core tech / VM: Nostr Assets operates by integrating Taproot assets (e.g., stablecoins, NFTs) and satoshis into the Nostr ecosystem. While Nostr Assets do not directly issue assets, it facilitates their introduction and transaction within the ecosystem. The protocol leverages Bitcoin’s Lightning Network for asset transactions for faster speeds and lower costs.

Compatibility: Nostr Assets adds a native asset layer to the Nostr protocol, which is compatible with Bitcoin’s Taproot assets and the Lightning Network. This compatibility expands the utility and applications of the Nostr protocol, and also could significantly increase adoption and usage of the Lightning Network.

Features:

• Integration with Taproot assets: Taproot assets enable digital asset issuance on the Bitcoin blockchain, including stablecoins and NFTs, which can then be transferred over the Lightning Network to the Nostr ecosystem.
• Social asset management: Nostr provides a social network in which users can trade and invest in different Bitcoin-based assets.

Staking? Not specified. Unlikely as Nostr is not a blockchain but a social networking protocol.

BIP upgrade required? No.

Degree of Bitcoin security inheritance? Not specified.

Summary Table

We conclude with a condensed table including key information from each section above.

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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice, or investment recommendations. This post reflects the current opinions of the authors and does not necessarily reflect the opinions of Inception Capital, its affiliates, or individuals associated with Inception Capital. The opinions reflected herein are subject to change without being updated.