We believe this is likely to change and that we are already witnessing the green chutes that indicate a transition for the world’s largest and oldest decentralized economy from a digital-gold-equivalent to an ecosystem with a much broader offering to the consumer.

To date, Bitcoin is almost exclusively a value-storage network. That is, the primary use case for BTC and its ecosystem is the preservation and accrual of wealth, outside the traditional financial system.

There now exists a confluence of indicators that point towards a highly functional Bitcoin ecosystem. A platform that offers myriad use cases, beyond value storage, is emerging.

Market Developments

Institutional Funding/Interest:

The universe of well-funded, Bitcoin-specific projects and enterprises is small, and organizations like Trust Machines are looking to change that.

In Q1 of 2022, Trust Machines, established by the founder of Stacks and a Computer Science professor at Princeton University, raised $150 million with the aim of converting BTC from a passive to an active asset. Their investors include high-profile names with track records of building out ecosystems atop less established chains, such as Digital Currency Group, Hivemind, and Union Square Ventures.

Trust Machines’ MO is to build out Bitcoin’s functionality capabilities, and they leverage existing infrastructure such as Stacks and the Lightning Network.

Trust Machines announced $150 million in funding in Feb ‘22 with the aim of building out Bitcoin’s Web3 capabilities

Initial Consumer Use Case - Ordinals

On March 27 of this year, the leading marketplace for NFTs on Solana, Magic Eden, which achieved a valuation of $1.6 billion in mid-2022, launched its Bitcoin ordinals NFT marketplace.

Magic Eden, after long-holding the top spot for Solana NFTs, has since been threatened by rival Solana NFT marketplaces and sees the future of Bitcoin ordinals as its key to its future success.

Magic Eden announces the launch of its Bitcoin-centric product offering on Twitter

Surges in Bitcoin Ordinal Popularity

On May 7, Binance shut down all BTC withdrawals for approximately two hours - and it did so twice on the same day. Demand for ordinals-related transactions had pushed network fees to outside Binance’s set parameters.

The exchange’s immediate response was to simply increase the fees that they were willing to pay to push through transactions. However, the exchange also announced that its longer term solution to said issues was to explore the use of the Lightning Network - a Bitcoin L2 aimed at improving Bitcoin’s transactional scalability.

Binance responds to its Bitcoin withdrawal issues on Twitter.

On May 17, A Bitcoin ordinals projects (specifically, Bitcoin Frogs) outpaced all high-profile NFT collections, including BAYC et co., on other chains for 24-hour trading volume. The collection accrued more than $2 million in 24h volume and now possesses a cumulative volume of ~300 BTC, according to data from Magic Eden.

Bitcoin Frogs is currently the most popular Bitcoin ordinals collection.

Technological Backdrop

The well-known Bitcoin Taproot upgrade went live in November 2021 and was the culmination of a small handful of Bitcoin Improvement Proposals (BIPs). Though perhaps overshadowed by peak bull market conditions for the cryptocurrency markets, Taproot personified a massive leap forward to Bitcoin’s capabilities.

Not only did Taproot increase the scalability of Bitcoin itself, via the batching/aggregation of transactional signatures, but also laid the foundations for further use cases such as the aforementioned Bitcoin ordinals.

Taproot presented a new way for information and data to be stored and attributed. This was crucial in facilitating ordinals that effectively inscribed information within individual Satoshis.

However, ordinals would also not be possible were it not for Bitcoin technological developments dating back even further. In particular, 2017’s SegWit upgrade that introduced a ‘witness field’ to Bitcoin transactions allowing the data storage that Taproot built upon some four years later.

On this basis, the Bitcoin core updates and innovations that make possible a more functional BTC ecosystem have been in the works for upwards of 7 years and it is only now that Bitcoin’s Web3 capabilities are technically positioned to take full flight.

Going Forward

The above hints at what could become a burgeoning Bitcoin functionality ecosystem and it is via both existing and under development technological implementations that will make this possible at scale.

Certainly, current Bitcoin functionality focuses around Bitcoin-native NFTs, created by inscribing additional information on individuals Satoshis, and this does not yet constitute, for instance, a blossoming decentralized finance ecosystem on Bitcoin.

However, the surge in ordinals popularity is drawing attention to the fact that, if Bitcoin is eventually to become a true Web3 platform, further technological implementations, such as L2s, are required. For the first time ever, Bitcoin’s ecosystem is growing to support use cases that can be directly engaged with by the everyday consumer.

Recent history provides multiple cases of NFT popularity pushing network scale to the limit. Many of Solana’s technical outages in 2022 can be attributed to NFT-related transactions, and the surge in Ethereum layer-two popularity was sparked by the rise of NFT usage and interest through 2021 - a period which led to Ethereum L2 solution, Polygon, able to raise as much as $450 million.

Though the eventual future of Bitcoin ordinals is yet to be determined and will ultimately rest on developer ability to improve the functionality of said assets, their recent spike in popularity is expanding both developer and consumer interest in the future of Bitcoin functionality and L2 technology.

Bitcoin Ordinal Activity [Source: Dune Analytics]

The scale of the Bitcoin ordinals market is expanding, and rapidly so, and this expansion is driving network fees to what will soon reach unsustainable levels, when compounded with the general uptake in Bitcoin network activity that accompanies a bull market.

Bitcoin Network Fees [Source: Blockchain.com]

There exists an opportunity for investors in supporting the infrastructure that will afford Bitcoin the flexibility and functionality necessary to rival alternative smart contract networks. Specifically, infrastructure that allows the world’s largest decentralized network to continue its forward march as the de facto value storage network, but also expands its role to facilitate other smart contract enabled use cases.

Bitcoin-Native Hurdles

There remain Bitcoin-specific obstacles to the eventual realization of this aforementioned potential.

Below are just a handful of the headwinds that need to be overcome if Bitcoin’s functionality ecosystem is to take full flight.

Ease-of-Development

The universe of applications building on Bitcoin is, at present, still very small. To get the flywheel started, barriers to development need to be reduced.

Existing platforms like Stacks require developers to learn a new programming language. However, now that EVM has become the most robust and popular smart contract standard, it is logical that an EVM-compatible L2 on bitcoin would significantly reduce developers’ barriers to entry and jumpstart a fully functional Bitcoin functionality ecosystem.

Well-known Bitcoin smart contract project, Stacks, relies on its own, non-Solidity programming language, Clarity.

Wrapping/Bridging

The $4-4.5 billion in wrapped BTC (WBTC) currently active on non-Bitcoin networks is, in itself, evidence of the pre-existing demand to use Bitcoin in various applications that are not currently possible within Bitcoin’s ecosystem itself.

However, wrapping is by no means a perfect process.

There are both centralized and decentralized mechanisms that can be used to effectively convert Bitcoin-native BTC to a wrapped version that can be used on other networks such as Ethereum. However, currently, the majority of this BTC relies on trust in a centralized party - in many respects the antithesis of Bitcoin’s core purpose and thesis.

What’s more, consumer and institutional trust in bridging solutions has been irrevocably eroded by an extensive series of high profile security breaches, centered around bridging services.

In Q1 2022, Sky Mavis’ Ronin Bridge was exploited for $650 million

Consumers are looking for a way to leverage their BTC in highly-functional smart contract ecosystems that allows them to avoid the risks and trust involved in traditional wrapping and bridging mechanisms.

Q1 2022 also saw Solana bridging solution, Wormhole, hacked for $320 million

High Standards

Hardcore advocates and users of the Bitcoin network are famously uncompromising when it comes to network security and, by extension, decentralization. Indeed, given the compromises and issues faced by less decentralized ecosystems and infrastructure components, this is largely understandable.

However, the result is that any solution looking to provide additional functionality to Bitcoin, via the implementation of layer-two solutions (be they scalability or application-oriented) must adhere to a set of standards that does not exist around other ecosystems.

Cyber Capital founder, Justin Bons, points to Polygon centralization issues [Source: CryptoSlate]

Layer-two technologies that have, for instance, been used in Ethereum scaling (such as Zero-Knowledge Proofs), are unlikely to be accepted by the Bitcoin user. Any party looking to bring additional value propositions to the Bitcoin ecosystem must ensure that they can provide an acceptable degree of decentralization, and thereby network trust.

Botanix is a protocol that we have recently invested in at Metamatic and one that we believe is well positioned to capitalize on this emerging opportunity…

Botanix Labs - An EVM-Compatible L2 on Bitcoin

Value Proposition

• Facilitating the use of BTC in a fully-functioning Bitcoin-native smart contract ecosystem.
• Circumventing the need to use wrapping or bridging mechanisms in order to leverage BTC in a host of applications (across DeFi, gamification, NFTs, and more).
• Implementing a fully-compatible EVM execution client and thereby opening Bitcoin to the largest smart contract developer demographic in the industry.
• Leveraging a proof-of-stake consensus mechanism to allow for genuine decentralization over time, in contrast to existing L2 technologies.

Put simply, Botanix is a layer-two network built atop the Bitcoin parent chain. However, though its architecture presents scalability benefits to its parent chain, Botanix’ primary value proposition is the implementation of a full EVM execution client by which it can facilitate a fully functioning smart contract ecosystem, to rival those on other EVM compatible layer-one networks, all atop the Bitcoin network.

Whilst commonly seen layer-two components such as Zero-Knowledge or Optimistic rollups have their benefits, which have caused them to become commonplace within ecosystems like that of Ethereum, said primitives suffer from serious centralization concerns. This is, in part, why some specific Ethereum L2s have come under fire from decentralization advocates.

It is for this reason that Botanix has opted to implement a proof-of-stake consensus mechanism, in place of the aforementioned mechanisms. Botanix’ PoS mechanism will allow the network to become ever increasingly distributed and decentralized, the key aim of which is to provide peace-of-mind to the demographic of Bitcoin advocates for whom decentralization is of paramount importance.

However, in order to facilitate this PoS consensus mechanism, whilst simultaneously leveraging the underlying security and decentralization of the Bitcoin parent chain, Botanix is implementing a layer of their own design - The Spiderchain.

Under The Hood

As with layer-two solutions, it is the parent chain (in this case Bitcoin) that will act as the underlying settlement layer, with transactions and network state submitted to the parent chain via those validating Botanix. In this respect, ultimate finality is provided by Bitcoin itself and thereby leverages the unrivaled security and decentralization of Satoshi’s own network.

In this vein, the Spiderchain is the component at the heart of Botanix’ Bitcoin L2 product and it sits between the Bitcoin network and Botanix. Put simply, the Spiderchain is a distributed network of Bitcoin native multisig addresses. These addresses act as nodes on the network and it is via these nodes that Botanix’ own proof-of-stake consensus mechanism is facilitated.

Bitcoin is locked in these multisig address nodes, constituting validators’ stake which can be slashed. Nodes are further responsible for a 1:1 pegging mechanism from BTC to a synthetic form of BTC which can be used on the Botanix network. It is in this way that the risk involved in either wrapping or bridging is circumvented.

Botanix’ Team

The Botanix founding team is high caliber with ties to academic institutions, such as Harvard University and Massachusetts Institute of Technology.

The Botanix team possesses both technical understanding, Bitcoin-specific development expertise, and has contributed to academic research on Zero Knowledge scaling in a bitcoin context.

Our Outlook

We expect interest in nascent Bitcoin use cases, such as ordinals to continue for the time being, with eventual success being reliant on builder ability to bake additional functionality into said assets and their ecosystem. However, we expect this early interest to grow into a wider Bitcoin platform with genuine Web3 value propositions to the consumer.