Original Title: "A New Perspective on the Bitcoin Ecosystem: From Cornerstone to Bridge"

Introduction

1. The Four-Layer Structure of Bitcoin (Main Chain, Layer 2, Side Chains, Cross-Chain)

The main chain primarily handles the value system of Bitcoin, particularly embodying the decentralization and security of Bitcoin as well as the value orientation represented by the Bitcoin community. Layer 2, represented by the Lightning Network, focuses on enhancing the payment experience of Bitcoin. The smart contract functionalities are mainly placed on side chains. Finally, almost all mainstream public chains have introduced Bitcoin into their ecosystems through cross-chain bridges, and within their ecosystems (especially ETH), they are developing Bitcoin-related DeFi projects.

2. From Electronic Currency to Crypto Asset

In the white paper, Bitcoin is described as "peer-to-peer electronic cash." However, given the current technological developments and regulations, it is currently difficult for Bitcoin to be widely adopted as a regular currency to replace fiat money. Bitcoin is more often regarded as an emerging virtual financial asset. If Bitcoin abandons the task of replacing fiat money and instead accepts the positioning of a crypto asset, it may bring new perspectives and prospects for Bitcoin.

3. New Perspective: Bridge

Bitcoin currently has a dual identity. In the real world, transactions between Bitcoin and fiat money allow Bitcoin to become an asset for hedging risks and a means of resisting inflation. Meanwhile, in the crypto world, Bitcoin is undoubtedly hard currency. This bridging function currently appears to be unique. It can be inferred that applications that consolidate and develop Bitcoin's bridging function will have a broad market in the future.

The "Ecosystem" of Bitcoin

On November 14, Bitcoin block 709632, Taproot was officially activated.

"The biggest reform in the BTC community in four years," "a significant enhancement of BTC's privacy and scalability," opinions vary, and there are even wishes for smart contracts to be loaded onto the Bitcoin mainnet.

Bitcoin has always been an unavoidable topic in the crypto world. Multiple studies have shown that other mainstream cryptocurrencies maintain a high correlation with Bitcoin's price movements. However, Bitcoin is a magical exception in the crypto world. While other ecosystems (ETH, BSC, SOL, AVAX) are desperately developing projects within their ecosystems, the Bitcoin ecosystem always seems to be lukewarm.

In the latest Messari annual report, TBI wrote, "But who can refuse the world's most unique computing power system, completely owned by users? Moreover, it has such rich returns and development prospects. It is far more than just digital gold. At the same time, it is completely different from Ethereum, just like the base currency M0 is different from a tech company called Google."

What is the development prospect of Bitcoin? TBI did not say. However, some people are indeed trying to turn M0 into a tech company.

According to statistics from DeFi Prime, there are a total of 23 DeFi-related projects associated with BTC. This is far less than many other public chains, not to mention Ethereum. Most of these projects, aside from some centralized exchange wallets on the main chain, are distributed across Layer 2 and several side chains. Even cross-chain bridges have contributed to this ecosystem.

Setting aside the halo of Bitcoin, just from the number of projects, this seems like a second-tier public chain.

This is unscientific, but this is Bitcoin. Market capitalization indicates its correctness.

Thus, unlike the project ecosystem logic of other public chains, Bitcoin's value ecosystem must have its own logic. This is also the core question this article attempts to answer.

The following sections of this article will revolve around three points: first, analyzing the four-layer structure of the Bitcoin ecosystem, which corresponds to Bitcoin's four current functions: value, payment, contracts, and cross-chain; second, the shift in Bitcoin's positioning, in other words, Bitcoin has transformed from a payment tool at its inception to a virtual asset today; finally, the current Bitcoin can be seen as a bridge linking the real world and the crypto world, its dual identity both imposes limitations on Bitcoin and provides possibilities for its future development.

## I. Four-Layer Structure

The four-layer structure of Bitcoin resembles a set of concentric circles. At the center, the main chain undertakes the overall value construction of Bitcoin, and it is the various attributes of the main chain that confer Bitcoin's globally recognized value. The next outer layer is the Layer 2 network represented by the Lightning Network, which primarily handles Bitcoin's transaction payment functions and has already seen numerous applications in the real world. The outermost layer consists of several Bitcoin side chains, whose most important function is to introduce smart contract applications into the Bitcoin ecosystem. The outermost ecosystem is the cross-chain protocols that interact with other public chains, helping Bitcoin enter the entire crypto field.
Such a structure has been more or less borrowed in the structures of other public chains. For example, ETH has a similar structure, and DOT's relay chain, parallel chains, and slot design also reflect this idea, or AVAX runs three chains in parallel (transaction chain X, platform chain P, contract chain C), which resembles combining the middle three layers of Bitcoin's structure into one.

1.1 BTC Main Chain: Value Storage

This chain is the origin of the crypto world and also the most controversial aspect. In philosophy, we cannot derive "ought" from "is." In this crypto world, it means we cannot derive values from technology. Values are inherent, which is why the "ought" of Bitcoin sparks repeated controversies in the community, and each major conflict ultimately culminates in a hard fork.

(Source: Investopedia, Circulating Market Cap: CMC, 2022.1.6)
Values are eternally contentious, but the market will determine the life and death of values. Among all Bitcoin forks, only today's BTC occupies the absolute mainstream of the market (about 40% market share). Among the remaining forks, only BCH maintains a market cap within the top 30.

In simple terms, the Bitcoin community will never give up the right for every user to run a full node, and for this, they have even opposed increasing block size several times, even at the cost of sacrificing scalability and transaction speed.

So this is BTC's value perspective. As long as the market does not abandon Bitcoin, it has a reason to exist and a function of aggregating the world's values.

Thus, Bitcoin continues to write its legend, and the story of Bitcoin remains the most valuable.

(Bitcoin price chart, 2013-2021, source CMC)

1.2 Payment: Lightning Network's L2 Eco System

Even Buffett and Munger expressed at their recent annual meeting that they dislike Bitcoin's success. However, it is almost universally acknowledged that Bitcoin's efficiency on the main chain is too low.

(Bitcoin gas fee chart, https://ycharts.com/indicators/bitcoinaveragetransaction_fee)

High gas fees may just be a minor issue; the inability to improve transaction speed due to mechanisms (block generation speed and block capacity) is the crux of the matter.

Thus, Layer 2 has emerged, and Bitcoin's payment function has now largely shifted to Layer 2, especially the Lightning Network. The only country in the world that recognizes Bitcoin as legal tender, El Salvador, has adopted the Lightning Network, and perhaps other developing countries will follow suit, but if nothing unexpected happens, they will also use the Lightning Network.

Bitcoinvisuals, 11.17, 3251BTC, $195m

According to statistics from Bitcoinvisuals, the usage and number of nodes in the Lightning Network have been steadily increasing. Through geographical statistics from 1ml, a significant portion of the nodes are located in the United States.

(11.29, node geographical distribution map https://1ml.com/location?type=country)

(Top 5 countries using the Lightning Network)

Arcane Research released a Lightning Network ecosystem map in September, clearly positioning the entire network to enhance Bitcoin's payment functionality. Almost all projects revolve around how to expand Bitcoin's application scenarios.

With payment methods in place, DeFi can emerge. Many projects revolve around the Bitcoin Lightning Network to create truly decentralized exchanges (DEX) without custodians, such as Kollider and Portal. Additionally, there are attempts to introduce smart contracts into the Lightning Network through RGB.

Kollider: The world's first derivatives exchange using the Bitcoin Lightning Network.

On Kollider, users can currently trade five crypto assets using fiat currency, with leverage up to 100 times. It employs a well-validated perpetual contract model. The project's trading volume is currently not large, and the community is not very extensive.

Portal: A peer-to-peer exchange using the Bitcoin Lightning Network.

Portal is currently in the development and financing stage, having just released a financing plan. According to their white paper, they are developing a cross-chain atomic trading application. Many well-known institutions are willing to invest in and endorse them.

Portal's community is thriving, with 120,000 Twitter followers and 65,000 Telegram group members.

RGB: Smart Contract Attempt

Inspired by the previous "colored coins," RGB aims to bring smart contracts into the Lightning Network. As RGB represents "real good for Bitcoin," it has been under development, but it cannot yet be directly deployed on the Lightning Network; however, smart contracts may not be far from the Lightning Network.

1.3 Side Chains: Smart Contract Applications

Although there are attempts at smart contracts like RGB on Layer 2, the vast majority of DApps in the BTC ecosystem are still developed on side chains. Notable examples include Stacks and Liquid.

1.3.1 Stacks: (https://www.app.co/) (24 Projects)

Stacks currently has the best ecosystem among all BTC side chains, with 24 projects covering almost every field.
1.3.2 Liquid Network (Blockstream)

Liquid Network is developed by the Canadian company Blockstream.

Its STO (Security Token Offering) attempts to create a platform for tokenizing securities and discounting future cash flows generated by Bitcoin's computing power, which was a novel attempt at the time.

On November 23, the El Salvador government planned to issue "Bitcoin bonds" on Liquid. The bonds are 10-year bonds priced at $1 billion, with a coupon rate of 6.5%. Half of the raised funds will be used to purchase Bitcoin and hold it for five years, while the rest will fund Bitcoin-related construction projects. By issuing bonds backed by Bitcoin as the underlying asset, El Salvador has indeed created a new approach to Bitcoin.

1.3.3 Other Side Chains:

Other side chain projects include RSK, Nomic, and Impervious, but they are still under development.

1.4 Cross-Chain Protocols

Currently, the outermost layer of the Bitcoin ecosystem is cross-chain, specifically various wrapped BTC. According to statistics from Dune Analytics, there are a total of 317,780 wrapped BTC assets on ETH (compared to 3,424 on the Lightning Network), with 80% being wBTC.

Total circulating supply of Bitcoin: 18.8 million

(Dune Analytics, 11.29)

There are also over 100,000 BTC being used on BSC. (As of December 15, BTCB's circulating supply was 105,115.46, CMC) There are also many BTC assets on Sol and Avax.

Additionally, a large amount of BTC circulates in centralized exchanges, which can also be considered a form of cross-chain BTC. As of November 29, the average daily trading volume of BTC on centralized exchanges like Binance, Huobi, OKEx, and FTX was 678,118 over the past 90 days.

Aside from the Bitcoin mainnet, cross-chain currently carries the most significant value of Bitcoin.

1.5 BTC-based Assets

With a large number of cross-chain BTC assets in existence, the DeFi Lego system on ETH has integrated these assets into its framework. Among the more mature projects are BadgerDAO and TranChess.

BadgerDAO

This is a project that brings cross-chain BTC into DeFi. Current products include Digg, which is pegged to the price of BTC, a series of Vaults, and liquidity mining in cooperation with DEX.

As of now (11.29), TVL: 1.185 billion, with some products offering relatively attractive yields.

TranChess

This is a project that increases yields for ETH and BTC through leverage. There are three products related to BTC. The total locked amount is 1.5 billion, with 22,000 BTC deposited.

1.6 Possible Reasons for Bitcoin's Inability to Form an Ecosystem

Technical Reasons. Before the Taproot upgrade, the Bitcoin mainnet had almost no capability to load smart contracts and did not support multi-signature, which indeed limited the space for developing complex applications.

Community Values. Bitcoin's path to decentralization is highly dependent. Decentralization has allowed Bitcoin to successfully pioneer a new era, but after the emergence of Ethereum, Bitcoin's decentralization has hindered its entry into the smart contract era. Multiple community disputes, even leading to hard forks, often end in the victory of conservatism. Thus, perhaps Bitcoin does not need to, nor can it, enter the smart contract era. Just as if blockchain loses decentralization, it has no advantage over traditional multi-point servers.

Lack of Incentives. This aspect resembles another side of Bitcoin's decentralization. Not to mention that public chain foundations like Sol, Avax, and Matic offer substantial rewards to developers for project development on their platforms. Even ETH rolled back blocks for a certain project in its early days. For blockchain decentralization, this is indeed a form of "evil," but for developers, it is tangible support and protection.

Summary of Part One:

Although BTC is the first blockchain, there are not many surrounding projects. The so-called "public chain ecosystem" has not developed. The existing directions are primarily focused on expanding payment concepts. Side chains capable of hosting smart contracts cannot be compared in security to the main chain. Moreover, even with the Taproot upgrade, there is still a considerable distance from other public chains.

In terms of decentralized design philosophy, due to the consistent principle of users running their own nodes, Bitcoin is prone to hard forks compared to other public chains. While voting with feet can prevent whales from doing harm, it inadvertently increases the costs for developers.

Thus, Bitcoin is different from other public chains and should not even be defined as a public chain in the general sense.

Its value does not lie in its "ecosystem."

## II. From Currency to Asset

Since we cannot find answers from the ecosystem, we need to delve deeper into Bitcoin's definition and identity to understand why a public chain without an ecosystem can hold such significant value, even if it is Bitcoin.

2.1 "Failed" Currency

At its inception, Bitcoin was designed as a peer-to-peer electronic cash. However, in many current studies, Bitcoin (especially Layer 2) is viewed as a payment tool comparable to banks, Visa, MasterCard, and PayPal.

However, Bitcoin's high volatility means it can only fulfill these two roles (electronic cash and payment tool) in limited scenarios. Tesla briefly accepted BTC payments this year but quickly canceled it. A few platforms accept Bitcoin payments, including Twitter and AMC, but they do not constitute the mainstream and seem more like promotional tools.

What excites BTC enthusiasts is that on September 7, Bitcoin officially became legal tender in El Salvador. However, an easily overlooked fact is that the US dollar remains the country's legal currency and is still widely used.

According to a tweet from the President of El Salvador on September 20, about a quarter of the 6.4 million people in El Salvador are using the Chivo Bitcoin wallet.

On September 30, Reuters published a follow-up report (https://www.reuters.com/article/el-salvador-bitcoin-poor-idUKL8N2QP4M4) tracking Bitcoin usage in El Salvador. It found that many people registered for the wallet for the $30 incentive. Among the 1,281 interviewees, 90% did not understand or were inclined to use Bitcoin. Even for many without smartphones, they still only accept US dollars.

Bitcoin and Banking (Unbanked or Underbanked)

The ability of Bitcoin to improve the financial services for people lacking such services may also be overestimated. Particularly, the reasons for the lack of financial services are too diverse, and Bitcoin is likely to meet only a small portion of those needs. Moreover, there are competing alternatives, such as Ethereum and other native assets on other chains, or stablecoins.

2.2 Successful Dollar Asset

The vast majority of Bitcoin in the world is priced in US dollars, so it can be safely said that Bitcoin is a dollar asset. The widely used U-based settlement system in the crypto space is also similar to the current oil system. Therefore, Bitcoin effectively expands the use cases of the US dollar. From several bull markets, aside from the natural halving effect on Bitcoin, the dollar's inflation has been a significant driving force for price increases.

(Source: "The Impact of Macroeconomic Monetary Policy on Bitcoin")

At the same time, other significant economies competing with the US may impose regulations on Bitcoin for foreign exchange reasons. They may also develop their own digital currencies to reduce the impact of BTC and various dollar stablecoins. Nevertheless, Bitcoin is one of the most successful dollar assets in the last decade, following gold and oil.

2.3 Crypto Asset

Compared to real-world payments, Bitcoin is hard currency in the crypto world. Among all native assets on chains, Bitcoin is unique. Even the article ("Only the Strong Survives") states that in the crypto world, those "productive" public chains, such as ETH and SOL, derive their value from Bitcoin's value. Bitcoin provides the value foundation and trust cornerstone for the entire crypto world. Its network security is essentially the value of the entire crypto world.

As for whether "productive" public chains will someday surpass BTC's market cap, it is possible, just as companies like Google, Amazon, and Microsoft surpassed GE. However, during the "Internet summer" of 2000, GE was also a very high-quality asset.

Summary of Part Two:

Bitcoin's identity has shifted from a payment currency to a dollar asset. It holds significant influence in both the real and virtual worlds. This also leads to reflections on Bitcoin's future path.

## III. Bitcoin Bridge: From Real Assets to Bitcoin and Bitcoin to the Crypto World

Although it may face challenges from stablecoins and CBDCs, Bitcoin still possesses very strong financial asset attributes. Hedging, risk management, asset allocation, and inflation resistance are many reasons why traditional finance would accept Bitcoin as part of their balance sheets.

On the other hand, Bitcoin remains hard currency in the crypto world. Even in the future metaverse, Bitcoin may be the only valuation unit recognized by everyone in the metaverse.

TBI states three reasons for the demand for Bitcoin:

1. Bitcoin will become collateral for assets on other chains
2. Cross-chain bridges will unlock more peer-to-peer trading applications
3. Concerns about certain stablecoins lead to the use of Bitcoin-backed digital dollar applications

Therefore, projects that leverage Bitcoin's bridging role will be worth paying attention to in the future.

Appendix One

Overview of the Bitcoin Ecosystem from DeFi Prime

Wallets (10):

Eidoo, Joule, Bitpie, Enjin Crypto Wallet, Huobi Wallet, imToken, Infinito Wallet, Token Pocket, Trust Wallet, ZenGo

DeFi (4):

Atomex: Atomex allows users to securely and anonymously exchange Bitcoin, Ethereum, USDT, and Tezos via its own desktop wallet and also provides low-level APIs for integration.

Bisq: Bisq is an open-source, peer-to-peer desktop application that allows you to buy and sell cryptocurrencies.

JellySwap: JellySwap is a cross-chain exchange powered by decentralized atomic swap technology.

Liquidity: Liquality is an interface that offers a secure way to swap cryptocurrencies between BTC, DAI, and ETH with minimal risk and fees, while maintaining control over your private keys.

Infrastructure (6):
Carbon Fiber: Carbon is an all-in-one fiat-to-crypto on-ramp API to help you retain new customers effortlessly, so you can focus on building.

MoonPay: MoonPay is a fiat on-ramp that enables web and mobile developers to let their users purchase virtual currencies using credit cards.

QuikNode: QuikNode is an RPC node service provider with APIs & dedicated nodes available.

Ren: Ren is an open protocol that provides access to inter-blockchain liquidity for all decentralized applications.

RSK: sidechain, evm

Lightning: payment

Stablecoins (3):

Money on Chain: Money on Chain provides a bitcoin-collateralized and dollar-pegged stablecoin

pTokens: pTokens are the ERC-20 token version of other, non-Ethereum blockchain currencies that enable liquidity to freely move from one blockchain to another.

WBTC: Wrapped Bitcoin (WBTC) is the ERC20 token backed 1:1 with Bitcoin.

Bitcoin Side Chain Stacks Ecosystem

Wallet:
Stacks Wallet for Web: Seamless access to Stacks apps in Chrome, Firefox, and Brave
Cerebro wallet: wallet
Xverse: Free Stacking provider and mobile wallet for mobile

DeFi:
Arkadiko: stablecoin and lending
Stackswap: DEX
Alex: open-source DeFi protocol built on DeFi

Blog:
Sigle: decentralized and open-source blog maker

NFT:
Stxnft: Discover top Bitcoin NFTs created by Stacks artists and builders.
This is number one (risidio): first NFTs on Bitcoin
Boom: Mint custom NFTs, send and store STX, and discover dapps
Stacks Art: NFT secured by bitcoin

Staking:
PlanBetter: Non-custodial Bitcoin reward pool powered by Stacking
Stacking Club: stacking insights, data, and stacking cycle tracker
Paycoin: Bringing 1.6m users STX & Stacking at Dominos & 70,000 retailers
CityCoins: CityCoins allow you to support your favorite cities and earn bitcoin yield.

Identity:
BTC.us: register for ".btc" domains
Jolocom: digital identity
Ryder: Your digital DNA secured by Stacks and Bitcoin

Privacy:
BlockSurvey: Collect and share form data with guaranteed privacy
Pravica: Multi-channel communication suite enabling end-to-end privacy

Citations:

1. Messari 2021 Annual Report; Crypto Theses for 2022: Key trends, people, companies, and projects to watch across the crypto landscape, with predictions for 2022; TBI

2. Only the Strong Survive: A Philosophical, Technical, and Economic Critique of Prospects in "Crypto" Beyond Bitcoin, Allen Farrington & Big Al, 2021

3. The State of Lightning, Arcane Research & OpenNode, 2021.9

4. The Impact of Macroeconomic Monetary Policy on the Cryptocurrency Market

Disclaimer: This report is prepared by Timestamp Capital based on publicly available information. Some information may be based on statements, estimates, and predictions regarding future circumstances. Timestamp Capital strives but does not guarantee the accuracy and completeness of the above information and assumes no responsibility for independent verification of any information or independent assessment of any entity's assets or liabilities. Under no circumstances does the information or opinions expressed in this report constitute investment advice to any person.
Article Link: https://www.defidaonews.com/article/6716230
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