Towards a Trustless Financial System on Bitcoin (4 of 4)

The Spartan Group
The Spartan Group
Published in
11 min readMar 25, 2024

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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 last of a series of four posts of the report.

Authors / Contributors

Kyle Ellicott , Yan Ma, Darius Tan, Melody He

The Bitcoin ecosystem in 2023 is buzzing with an excitement reminiscent of Ethereum’s community in 2017. Enthusiastic builders, investors, and community members are exploring various possibilities across Bitcoin Layers. Given Ethereum’s impressive trajectory, Bitcoin, with its industry-leading market cap and BTC dominance, stands on the brink of surpassing even those heights. Just as Bitcoin revolutionized trust when it debuted in 2009, the Bitcoin ecosystem is now at another crucial point where it is much closer to fulfilling its original promise, paving the way for a genuinely trustless financial system rooted in its core L1 technology.

The Bitcoin L2 market opportunity is by far the largest in the Bitcoin economy. To establish any case for the total Bitcoin L2 market opportunity, the focus would be on the existing market for Ethereum L2s. In the estimates below for the L2 market cap on Bitcoin, the guiding ratio of TVL for all Ethereum L2s to Ethereum’s overall market cap, which is approximately 5.62% at the time of writing, was utilized and applied to Bitcoin’s market cap.

  • Bear case. The bear case suggests that the Bitcoin L2 market cap can reach a market value of $4.8B, only ~10% (0.56%) of the total Ethereum L2 market at the time of writing.
  • Base case. The base case suggests that the Bitcoin L2 market cap can reach a market value of $24B, only ~50% (2.81%) of the total Ethereum L2 market at the time of writing.
  • Bull case. The bull case suggests that the Bitcoin L2 market cap can reach a market value of $48B, matching 100% (5.62%) of the total Ethereum L2 market at the time of writing.

With current market sentiment surrounding Building on Bitcoin, the projections are based on a two-year time horizon, with no additional YoY growth calculated, and assume Bitcoin L2s continue to expand. The accelerated development in Bitcoin L2s and protocol standards, correlated with existing infrastructure today provide key elements in estimating that the Bitcoin L2s will reach a $24B market cap by 2025. The potential roadmap and industry events described in the following section will likely impact our bear, base, and bull case scenarios.

Immediate Outlook: Sustained Cultural Influence of Ordinals

In the short term, the cultural impact of Ordinals remains a significant driver in the Bitcoin ecosystem. The unique allure of Ordinals, whose ability to integrate art and collectibles into the Bitcoin blockchain, resonates deeply with a community that values authenticity, creativity, and permanence. This cultural resonance cemented the place of Ordinals within the Bitcoin landscape and continually attracted and retained a diverse audience. By tapping into the zeitgeist of the digital age, they are expanding the reach and influence of Bitcoin far beyond its original confines.

As of the end of 2023, the rapid adoption of Ordinals has led to Bitcoin becoming the one of the largest NFT platforms, overtaking Solana, even without smart contract capabilities. Over the month of Nov., Bitcoin NFT (Ordinals) has seen a staggering 500% increase in sales volume, surpassing Ethereum’s and Solana’s figures for the same period. While Ordinals have only been around for about a year, data suggests that assets deployed on Bitcoin can also garner higher value due to its immutability and permanency when stored on the Bitcoin network.

NFT Trading Volume by Chain. Source: The Block, CryptoSlam
OnChain Monkey NFTs Double in Price After Creators Put Them on Bitcoin. Source: Metagood

The rising popularity of Bitcoin NFTs, exemplified by events like the doubling of OnChain Monkey NFT prices post-integration with Bitcoin, indicates a growing curiosity among users. This will naturally lead users to explore further within the Bitcoin ecosystem, eager to delve into other use cases such as DeFi and gaming. While this curiosity paves the way for significant shifts, many innovations are still happening on the protocol level, as there remain inherent limitations on the transaction speed, smart contract compatibilities, and scaling as mentioned.

  • Many early-stage projects in the ecosystem, for instance, are not able to issue tokens that have the same utility and governance capabilities as those on Ethereum (e.g., BRC-20 vs. ERC-20).
  • These projects then have to rely on equity fundraising and are unable to bootstrap the community by leveraging tokens of their own.
  • Solutions include issuing fungible tokens on Stacks, which provide smart contract capabilities with the SIP-10 fungible token standard, or other nascent token standards.
  • Dual-sided bridges, like MultiBit for cross-network transfers between BRC-20 and ERC-20 tokens, are emerging to address these gaps. Nevertheless, these solutions are not definitive.

Ongoing innovation is essential to overcome these challenges. As L2s continue to make progress toward reducing transactions and simultaneously inheriting 100% Bitcoin finality. In parallel, innovations are percolating through Bitcoin L1. Developers and enthusiasts are already experimenting with use cases despite these challenges.

Most of the innovations we see today still percolate through Bitcoin L1. Source: ALEX

Mid-Term: Breakthroughs in Bitcoin L2s and Emerging Use Cases

The Bitcoin ecosystem is poised for significant breakthroughs in the mid-term, primarily driven by advancements in L2 technologies like Stacks’ Nakamoto Release and the introduction of sBTC. These developments are not merely incremental but transformative, especially in the realm of Bitcoin DeFi and other applications.

A map of the growing ecosystem of Stacks and smart contracts for Bitcoin. Source: Stacks

The significant reduction in block times (from 10+ minutes to 5 seconds) and enhanced security are instrumental in crafting a smooth, ‘Ethereum-like’ user experience, which is essential for attracting new developers and catalyzing a cycle of adoption and innovation.

  • The implementation of fast blocks and sBTC will enable Stacks to offer high-performance, BTC-denominated applications such as a NFT marketplace, facilitating more efficient trading of Ordinals and unique L2 NFT collections.
  • The DeFi landscape on Bitcoin is expected to undergo considerable expansion, such as lending and borrowing, which are made possible with sBTC. The Zest Protocol team is already building this in advance on Stacks.
  • ALEX is preparing for all DeFi functionalities, having recently surpassed 500M transaction volume and has already built the foundation for an sBTC-denominated swaps market for other sub-tokens. Each of these different applications can be explored all while generating an automatic yield based on Stacks.

Unleash the Bitcoin market cap by creating user adoption flywheels like Ethereum. As infrastructure continues to mature, a range of new use cases across all Bitcoin layers will emerge, gaining traction with end-users. The Bitcoin ecosystem not only has the biggest potential TVL in the industry but also has a larger target audience — building for mainstream users. Some of the key developments that set up the ecosystem for success include:

  • Trust Machines is building Bitcoin applications with the objective of growing the Bitcoin economy by presenting new use cases for Bitcoin that can maximize the network’s value.
  • To prepare for the expected influx of developers, Hiro is enhancing developer tools across Bitcoin layers.
  • Wallets like Xverse, Leather, and Ryder among others are focusing on seamless user experiences for mass adoption, compatible with various assets across Bitcoin Layers.
  • Bigger centralized exchanges started Ordinal Marketplaces soon after it gained popularity, such as Binance, Magic Eden, and OKX. Other marketplaces also sprouted quickly, including Ordzaar, Gamma and more. On-chain Monkey also recently launched its own marketplace Osura.
  • Other notable developments include the launch of the first-ever Bitcoin-based game by Ordz Games, which introduced its BRC-20 token, $OG.
  • The friend.tech equivalent project New Bitcoin City, built on Bitcoin L2 NOS by Trustless Computer, which has surpassed $1M in TVL in October 2023.
  • StackingDAO brought liquid stacking functionality to the Stacks with the introduction of liquid STX (stSTX) in December 2023.
  • Additionally, Darewise, part of Animoca Brands, is pioneering a metaverse built on Ordinals, showcasing the expanding realm of possibilities within the Bitcoin ecosystem.
Snapshot of Bitcoin Applications as of Mar. 2024

Ultimately, this L2-driven Bitcoin ecosystem expansion is not only about adding new features and attracting new users but also about weaving Bitcoin more intricately into the global blockchain economy. Projects like ALEX are at the forefront of this movement, designing BTC-native permissionless yield-bearing stablecoins and BTC cross-chain bridges such as XLink to connect Bitcoin to Ethereum and other ecosystems. These initiatives are crucial in fostering a Bitcoin ecosystem that is not only more interconnected but also more productive, setting the stage for a wide array of financial innovations and services across the industry in the long term.

Additionally, the development of further scaling solutions on Stacks is set to significantly enhance the interoperability of the Bitcoin ecosystem with other blockchain networks on the L2 level. With the upcoming Nakamoto upgrade, Stacks will introduce new subnets that support a variety of programming languages and execution environments, including EVM subnets and Rust VM. Moreover, there is ongoing work to integrate WASM support directly at Stacks L2, which will be activated alongside the Nakamoto upgrade. In Dec. 2023, a working group within the Stacks ecosystem released details on the integration of the new ClarityWASM virtual machine. This integration will open the doors to a wider range of languages like Rust, Solidity, and others, directly within the Stacks L2 environment.

Stacks Scalability through subnets and different VMs. Source: Stacks Whitepaper

Long-Term Vision: Paving the Way for Institutional Adoption

The long-term outlook for Bitcoin reinforces it as the leader in institutional digital assets and DeFi adoption. The anticipated approval of the first Bitcoin Spot ETF stands as a pivotal milestone, potentially revolutionizing institutional engagement with Bitcoin. This approval is expected to catalyze a significant paradigm shift, with institutions increasingly focusing on Bitcoin-centric financial products and services. Recognized as a resilient and thoroughly vetted asset class, Bitcoin is on the brink of widespread institutional adoption.

With the approval of a Bitcoin Spot ETF, the demand for ‘Bitcoin-native’ trading and yield products is expected to surge, propelled by their security and tax efficiency. This burgeoning interest will likely spur the development of various regulated Bitcoin-based financial offerings. By recognizing this shift, traditional banks may begin integrating Bitcoin and these new products with their private blockchains, making them accessible to institutional clients on a large scale.

The significance of institutional integration into the Bitcoin DeFi ecosystem extends beyond mere capital infusion. It represents the creation of a unique synergy, blending the strengths of traditional finance with the revolutionary aspects of decentralized financial systems. This convergence, built on Bitcoin’s security and transparency, is set to redefine the landscape of institutional finance, blurring the lines between conventional and modern financial systems.

The culmination of these developments — from cultural shifts to technological innovations and institutional adoption — is set to significantly boost Bitcoin’s market capitalization and the Total Value Locked in its ecosystem. As we navigate this version of a decentralized financial future, it’s clear that Bitcoin emerges not just as a digital asset but as a cornerstone of a new, trustless financial paradigm.

Concluding Thoughts

The evolution of Bitcoin from a dormant asset to a dynamic, foundational technology for decentralized finance is being driven by its more than $850B market capitalization, underpinned by the network’s stability and security. However, a key challenge is the underutilization of the Bitcoin network’s functionalities, a result of the often-overlooked distinction between Bitcoin as a network and BTC as a digital asset. To activate this dormant capital and realize Bitcoin’s full potential, it’s essential to harness the network’s capabilities, transitioning Bitcoin from just a store of value to a core infrastructure within the Bitcoin Economy.

This transition is mirrored in Bitcoin’s development of “layers” over its core network (L1) to address the scalability problem, drawing inspiration from Ethereum’s scalability and flexibility, and catalyzed by the introduction of Ordinals, which signifies a cultural and developmental shift. While major L1 upgrades like SegWit and Taproot have mitigated some issues, the rising transaction fees underscore an increasing demand for more advanced L2 solutions like Stacks.

As we approach the 2024 halving event and anticipate the approval of a Bitcoin Spot ETF, Bitcoin’s development is shaping up a more scalable and secure ecosystem. This evolution is expected to foster significant institutional adoption, with Bitcoin at the forefront of a new financial paradigm that seamlessly integrates traditional and decentralized systems. The potential of Bitcoin’s smart contracts, particularly in the context of the cultural impact of Ordinals and the expanding use cases in DeFi and gaming, will likely draw increased interest and capital.

In the mid-term, breakthroughs in Bitcoin L2 technologies, especially with Stacks’ Nakamoto Release and the introduction of sBTC, promise to revolutionize the DeFi landscape. These developments are expected to create a smoother, more efficient user experience and open up new possibilities for Bitcoin-based NFT marketplaces and DeFi applications.

In the long term, Bitcoin is set to become a key player in the institutional adoption of digital assets and DeFi, especially with the potential approval of the first Bitcoin Spot ETF. This event could trigger a substantial shift in institutional investment towards Bitcoin-based financial products and services, enhancing the synergy between traditional finance and decentralized financial systems. This integration is not just a capital infusion but a convergence of strengths from both worlds, paving the way for a new era in institutional finance.

Overall, these developments are expected to significantly boost Bitcoin’s market capitalization and the Total Value Locked in its ecosystem, marking a new chapter in the journey toward a decentralized financial future. With innovations like Ordinals, the Nakamoto Release and sBTC from Stacks, and the potential for institutional adoption post-Bitcoin Spot ETF approval, Bitcoin is not just maintaining its relevance but actively reshaping the future of finance, emerging as a cornerstone of a new, trustless financial paradigm.

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The Spartan Group
The Spartan Group

Digital asset venture capital, hedge fund, investment banking advisory and venture studio