More Than Digital Gold: Why the Bitcoin Ecosystem Has Upside Potential [Part 2]

Unpacking the Bitcoin ecosystem landscape

L1 asset issuance

Our observations: Key priorities in a fast-moving environment

As the Bitcoin ecosystem is evolving fast, we’ve found that agility is important and priorities can quickly change. As a result, investing in the space requires a different mindset to other niches. Below are some of our primary observations: 

• Community is everything: As introducing new assets successfully depends on community building and consensus, technology takes a back seat. 
• Retail outpace bigger players due to the fair launch revival: Fair launches benefit retail investors over VCs. The staggering wealth effect created by tokens like ORDI and SATS is proof that the Bitcoin ecosystem’s growth has helped retail win. 
• Narratives change because the ecosystem is growing fast: BRC-20 is the ecosystem’s most popular asset issuance standard but its attention peaked in December last year. As BRC-20 hype has faded, the market has embraced new narratives like Runes and L2s. 

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Scaling Bitcoin on L2

Ethereum has introduced two main approaches to scaling: 

• Scaling L1 with shard chains: First proposed in the early Ethereum roadmap, sharding is now expected to take 5+ years if it is implemented. 
• Scaling on L2 with rollups: With the L2 roadmap, computation moves off the base layer and Ethereum functions as a settlement layer. L2s execute transactions at a high speed and low cost while inheriting Ethereum’s security. 

Bitcoin’s L2 scaling capabilities differ from Ethereum’s: 

• Bitcoin L2s ≠ Ethereum L2s: Bitcoin L2s are unlike Ethereum L2s because they cannot inherit Bitcoin’s security or settle transactions on the base layer. 
• Bitcoin L2s aim to help Bitcoin assets prosper: Bitcoin L2s have different security properties. But they are unified by a collective goal to help Bitcoin assets flourish by offering enhanced liquidity, rewards, and utility. In that sense, Bitcoin L2s are defined as the chains focused on improving the Bitcoin ecosystem. 

Bitcoin L2s also differ in their technical implementations. They fall into three different categories: 

• State channels: This approach establishes a channel between two points and locks funds within it. Transactions happen offchain between the two points, which means they are cheap. The final settlement result gets sent to the chain. 
• Sidechains: This approach introduces a new chain that operates in parallel with the base chain. Sidechains can continue to operate even if the main chain fails. 
• Rollups: This approach carries data offchain, using either zero-knowledge proofs or optimistic fraud proofs designs to settle transactions. The dominant Ethereum L2s take the form of rollups. 
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Below is a list of some of the Bitcoin ecosystem’s leading state channels, sidechains, and rollups. 

Our observations: Comparing the Western and Asian markets

We have identified several differences between Western and Asian Bitcoin projects, particularly those building L2s. These can be summarized as follows: 

• Asian projects have a first-mover advantage, but Western projects are catching up.
  • Since the emergence of Ordinals and BRC-20, the Asian community has been leading the way in the Bitcoin ecosystem. This has meant that Asia’s most active builders have been ahead of Western competitors, answering users’ demands first.  
  • The most successful Asian BTC staking programs leveraged the abundance of whales and mining resources located in the region. This helped them attract billions of dollars in TVL. 
  • CEX listings have also shone the spotlight on the Bitcoin ecosystem. ORDI secured a Binance listing in November 2023, around the time BRC-20 was catching on. In the L2 space, OKX listed Merlin and Binance listed BounceBit in Q2, 2024. These projects focus on the Asian market and they captured users’ attention due to the wealth effect in the ecosystem. 
  • Western builders are chasing Asia’s lead. Many projects have received backing from major institutions, securing funds for protocol development and marketing. Western builders have started to prioritize ecosystem building after seeing that technical innovation alone does not guarantee success. Many have established partnerships and launched programs focused on attracting TVL as part of this goal.  
• Asian teams have unique insights into operations and GTM strategies, with many boasting successful track records.
  • Leveraging resources: As this market is still young, it still has relatively few resources and industry stakeholders. When teams leverage resources effectively, they can accelerate their growth. For example, Bitcoin L2s could attract BTC held in CEXs and some EVM chains on the basis that the holders are comfortable with taking risk in exchange for yield. Additionally, teams can potentially benefit from collaborating with miners and custody providers if they find ways to work effectively. 
  • Staking programs: Merlin and BounceBit are the first two Bitcoin-related chains that have attracted over $1B in TVL and they did so in a short time period. Both teams have been focused on building vibrant ecosystems with innovative GTM strategies. 
  • Capital efficiency: To enhance users’ yield, staked BTC could be deployed in another ecosystem to double up on points (this approach shares some similarities with restaking but has some key technical differences). Many Asian projects have successfully adopted such strategies to improve capital efficiency for users.  
• As Western teams tend to be more academic, they often focus on making technical breakthroughs for L2s.
  • Transitioning BTC from L1 to L2: This is still the biggest challenge for teams building Bitcoin L2s. Emerging technologies like RGB and zkRollups can help, as well as BitVM and BTC Foundation updates like OP_CAT. However, there is no simple solution. Many Western teams have technically adept engineers that are working to solve the problem. 
  • Leveraging the EVM and parallelization to scale BTC: Some projects like Arch Network have drawn inspiration from Solana and the SVM, which does not rely on bridging or L2s. Arch uses a parallelized PoS network with zero-knowledge proofs to enhance Bitcoin’s programmability. Botanix, meanwhile, has proposed a decentralized chain on Bitcoin L1 that uses Lightning Network’s fundamentals to run an EVM chain. 
  • Due to technical challenges, ecosystem building has taken focus: For many Asian builders, solving technical issues is a lower priority because building a true Bitcoin L2 is such an enormous challenge. These teams have opted for alternative approaches like building EVM-compatible sidechains. Moreover, due to the space’s unclear future, teams have an inclination towards investing in ecosystem building today. These teams are hoping to establish communities and develop their tech once the winning approach becomes clearer.  

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The key Bitcoin dApps

If the Bitcoin ecosystem follows a similar path to Ethereum, it could host many different types of applications. These could cover niches like DeFi, NFTs, SocialFi, and their supporting infrastructure. The table below details some of the key projects in each sector that have been built to date. 

Our observations: DeFi dominance and finding PMF

We’ve found that it’s still early for Bitcoin’s dApp scene. For this reason, most live dApps focus on DeFi today. Below are some targets that we think dApps must focus on to stand out from their competitors: 

• First-mover advantage is key. 
  • As there is little competition in many sub-niches in the Bitcoin ecosystem today, it takes less for projects to gain traction. Verticals like DeFi and gaming are still unexplored today.  
  • New L2s will prioritize their partnership with projects who have already demonstrated real traction in the BTC ecosystem.
  • Projects like BitSmiley show how moving fast can lead to success. BitSmiley shares similarities with MakerDAO, employing a simple product design that has been tried and tested in Ethereum. As it became Bitcoin’s first stablecoin protocol, it established many partnerships early on. This trend is likely to play out across many sub-niches. 
• Teams should choose an ecosystem to collaborate with and leverage its resources to build effectively. 
  • Several L2s are growing fast with rising TVLs, funding, and community attention. But they still lack applications, which leaves space for projects to collaborate with them. 
  • Many mature products have successfully migrated to the Bitcoin ecosystem and experienced growth by taking advantage of the available resources.
  • Established Ethereum projects are expanding on Bitcoin. As an example, MesonFi was a cross-chain bridge for EVM ecosystems, but it took advantage of the advent of Bitcoin L2s to become the ecosystem’s biggest bridge. Stacks’ recent growth is also worth noting here. ALEX Lab is an example of a Stacks DeFi project that has benefited, with surges in TVL and user activity. 

• Teams should focus on product-market fit as user demands have not yet been met. 
  • As it’s still very early for this ecosystem, very few teams have found PMF. To do so, they need to build products that answer users’ real needs and concerns. There are still many pain points to address and some builders have responded with products, as detailed below:
    • Attracting BTC from Bitcoin L1 is hard.
      • While Bitcoin L1 holds huge value in BTC, the number of holders willing to use L2s is still relatively small. This is especially true of whales and institutions, who prioritize security. 
      • The difficulty in attracting BTC TVL suggests that L2s and teams building on them should try to focus on coins held in CEXs and EVM chains. 
    • Institutions are hesitant to participate. 
      • Institutions and whales care about security, so they need to feel comfortable to deploy capital in projects. 
      • Custody is a crucial point here. Some innovations such as mirror technology have given institutions an appetite for experimentation. 
      • DeFi is the main draw for institutions. A safe, stable yield is more of a selling point for them than niches like NFTs, gaming, and SocialFi. 
    • Capital efficiency can help attract users. 
      • Users have many opportunities to earn yield, so they are incentivized to find the most efficient options. 
      • Some protocols have employed a “double-count” mechanism for staked BTC, allowing users to earn points in two projects with the same deposited asset. Some projects also offer additional rewards by leveraging strategies like basis trading yield. 

Our final conclusions 

• The advent of the first spot BTC ETFs in early 2024 has unlocked a tsunami of institutional interest in the world’s top cryptocurrency. If BTC’s ETF trajectory follows the success of gold’s following its 2004 approval, the asset should have huge upside in the coming years and decades. 
• Amid the ETF boom, development across the Bitcoin ecosystem is happening at a rapid pace. The arrival of protocols like Ordinals, Runes, and the first Bitcoin L2s has laid the foundations for an ecosystem to flourish and some sectors have created a huge wealth effect. However, despite the growth achieved in 2024, we are confident that this ecosystem is still in its infancy. 
• If BTC is to grow, it will need a robust ecosystem around it. Mirana believes that we are entering a golden period for building and participating in this ecosystem. We intend to follow developments in Bitcoin L2s and dApps particularly closely over the coming years. 
• We are confident that there will be many opportunities ahead despite challenges in addressing centralization issues and user caution. Stay tuned for more updates on the Bitcoin ecosystem and areas we’re watching closely to come soon!

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