Bitcoin Layers: Tapestry of a Trustless Financial Era (Part 1 of 4)

Bitcoin Layers: Tapestry of a Trustless Financial Era is a research report on developments occurring throughout the Bitcoin Ecosystem. The report was authored by the team at The Spartan Group, Kyle Ellicott, and a number of experts who offered their feedback and insights and generously gave their time reviewing the final version you read today. This segment is the first of a series of four posts of the report. The full report — linked here — was drafted in December 2023, which contains data accurate as of that date.

Authors / Contributors

Kyle Ellicott, Yan Ma, Darius Tan, Melody He

1. Most of the $850+ Billion Capital in Bitcoin Remains Unproductive. The stability and security of the Bitcoin network not only endow BTC with lasting value but also have enabled it to amass considerable capital, with an $850B+ market capitalization at the time of this report. Yet, the network faces significant challenges, in programmability, technical scalability, and cultural alignment within its developer community. These factors have historically hindered development efforts on the Bitcoin network, and underutilization has kept much of the capital remaining dormant.
2. Significant Shift in the Bitcoin Landscape Can Unlock Its Massive Potential. To activate this dormant capital, it’s essential to harness the potential and capabilities of the Bitcoin network fully. Efforts have been made to build technologies on top of, or adjacent to, Bitcoin that provide the smart contracts and scalable, fast transactions that can enable new use cases. Consequently, Bitcoin is evolving beyond its presumed role as a mere Store of Value (SoV) and becoming a foundational technology platform for the trustless financial system it was envisioned to be. These approaches have each had significant limitations, however, be it in their flexibility, performance, or security model.
3. Ordinals Brought a Renaissance of Bitcoin Builder Culture. At the same time, the introduction of Ordinals marks a significant cultural shift towards using the Bitcoin Layer-1 for applications other than a SoV, including “NFTs on Bitcoin” as well as further innovations upon the Ordinals protocol, including recursive inscriptions, BRC-20, and more. This additional usage of the L1 has stressed its performance and scalability limitations and increased Bitcoin fees substantially.
4. Bitcoin Layers Address Scalability. The concept of “Bitcoin Layers,” mirroring Ethereum’s layered architecture, represents a strategic response to Bitcoin’s limitations. These layers bring functionalities like programmability, increased transaction speeds, data availability, application functionality, and more. This approach leverages Bitcoin’s security and stability, while also unlocking Bitcoin’s vast capital. Lightning is already a type of Layer-2 protocol for fast payments, but other layers provide more sophisticated capabilities such as smart contracts in addition to fast transactions and scalability.
5. The Strategic Imperative of Bitcoin Layer-2 Solutions. The Bitcoin L1 will always — -by design, for security and decentralization — -have the limitations of lack of programmability via smart contracts, and slow transaction speeds. Significant past upgrades like SegWit and Taproot address some issues, but the need for smart contracts as well as the while rising gas fees (peaking at >280% this year vs Ethereum at >160%) and strong demand for Bitcoin blockspace highlight the need for more refined Layer-2 solutions like Stacks, which is releasing a significant upgrade (Nakamoto Release) in early Q2 2024. The Nakamoto Release promises to turn Stacks into the type of Bitcoin Layer-2 that is needed: one that supports smart contracts, allows applications to use BTC as their asset, inherits 100% of Bitcoin’s reorg security and finality, and provides fast transactions. Strategically, growing the available Layer-2 options will help drive innovation and scalability through competition and developer interest.
6. The Bitcoin Ecosystem is well-positioned for Institutional Adoption. Ahead of the 2024 halving event, Bitcoin’s ongoing development of Layer-2s is producing a more scalable and secure ecosystem. Boosted by increased institutional interests, as shown in the anticipated approval of multiple Bitcoin Spot ETFs, Bitcoin is at the forefront of a new, trustless financial paradigm that blends traditional and decentralized systems.

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