#33 - Bitcoin's Panda Renaissance

Making Bitcoin More Capital Efficient and Programmable

Stanford Blockchain Club

and

Catrina

Dec 19, 2023

Stanford Blockchain Review
Volume 4, Article No. 3

📚Author: Catrina Wang – Portal Ventures
🌟 Technical Prerequisite: Moderate

Summary: An institutional-grade asset, a global remittance system, and soon-to-be-programmable blockchain network, the identity of Bitcoin (BTC) has been the subject of intensifying debate. While BTC has been the de-facto store of value, there are numerous technological, institutional, and market catalysts propelling it toward something more productive than just a "lazy" digital gold. In this article, we present our perspectives on the history of innovations & controversies surrounding Bitcoin, the latest initiatives, and Portal's thesis to make Bitcoin more “capital-efficient” versus “programmable”.

Introduction

We all love pandas. They are adorable and of limited supply due to their genetic reproductive problems. They are also excellent stores of value as the most expensive animal in the world, generating an annual “yield” of $1M/panda/year in rental fees.

Today we keep pandas in zoos, mainly to watch them being cute. There isn't much they can do due to their biological design: they eat bamboo, sleep, defecate, and repeat. And one day, someone came up with an idea: what if we train or genetically modify pandas to make them more useful to our society? Such an innovation would increase world GDP to have panda workers contributing more to the workforce.

Panda = Bitcoin

This brings us to an interesting parallel. If we equate pandas with Bitcoin, the concept becomes clear: enhancing pandas' societal utility is akin to increasing Bitcoin’s programmability, much like the Ethereum Virtual Machine (EVM).

In this article, we explore the unexpected parallel between Bitcoin and Panda to demonstrate our overarching interest in the BTC ecosystem. The article outlines the following:

The “why” question, along with the latest catalysts in the Bitcoin ecosystem
Our thesis: Evaluating Bitcoin as a capital efficient asset vs. its potential as a programmable platform
An analysis of various approaches to Bitcoin’s productivity
Summary of our findings and perspectives

To differentiate the taxonomy in the context of this article, we will use “BTC” to represent the digital asset, and “Bitcoin” the layer one blockchain network. With the following in mind, let’s proceed to the first section of our analysis:

Section One: Why Bother?

The attempt to make BTC more useful than just sitting cold in hard wallets is nothing new. Its glaring dominance has sparked waves of curiosity and endeavors - some stronger than others, and we are currently in the midst of the strongest yet.

First, let's revisit some popular arguments against making BTC productive:

BTC should be a store of value, a belief most widely held among some clamorous and unyielding “BTC OGs,” but there’s been a significant shift in community sentiment lately due to catalysts that will be discussed later.

Wrapped BTC (WBTC) has a lukewarm product-market-fit: WBTC is an ERC-20 token on the Ethereum blockchain that represents BTC, backed 1:1 with BTC that’s held by a centralized custodian, BitGo. The market cap of WBTC is currently approximately $5B and topped at approximately $15B, a minuscule fraction of BTC. However, we believe the lackluster WBTC activity level is far from being indicative of the public’s interest in making BTC more productive. Rather, it only shows that a centralized + EVM-centric approach to BTC is perhaps inadequate.

The Bitcoin chain is not designed for programmability: Bitcoin's smart contracts are implemented using Script, a programming language that is not Turing-complete, which was a design choice to maximize the security of the network by limiting attack surface (e.g. there’s no Reentrancy Attack using the Script language).
Contrary to popular belief, the Bitcoin chain does support smart contracts, although in a more basic form compared to other blockchains such as Ethereum or Solana. Available smart contract types on Bitcoin today include:
1. Pay-to-Public-Key-Hash (P2PKH): This is the most basic Bitcoin smart contract and allows BTC to be sent to an address in a way that only the owner of the corresponding private key can spend the BTC.
2. Multi-Signature Scripts: This allows multiple parties to hold money cooperatively. For example, we could have 3 people with access to a wallet, and the funds in the wallet can only be traded if 2 out of the 3 people sign a transaction with their public key.
3. Time-Locked BTC Transactions: These enable us to spend BTC only after a set time has passed. For example, a script could require 3 signatures to spend the BTC before a certain time, after which only 1 signature is required.
4. Pay-to-Script-Hash (P2SH): Enables the creation of addresses that can receive or send transactions in which a series of instructions must be followed to unlock the balances in those addresses.
5. Pay-to-Taproot (P2TR): Leverages the privacy upgrades from Taproot and provides more flexible mechanisms to authorize transactions.
6. Partially Signed BTC Transaction (PSBT): a Bitcoin standard that facilitates the portability of unsigned transactions, unlocking use cases like offline signing, multi-sig, multi-party transactions.
7. Discreet Log Contracts (DLC): a type of Bitcoin transaction that utilizes an oracle to execute smart contracts on the Bitcoin blockchain, enabling two parties to create and execute private agreements off-chain, with the Bitcoin blockchain acting as the final settlement for the agreements.

However, questions still remain regarding Bitcoin’s purpose: should we not simply maintain its role as the store of value that it was intended to be? We have categorized the arguments for BTC’s enhanced productivity into six categories below:

The lure of liquidity influx into DeFi from BTC
BTC has consistently dominated the crypto market with a market share between 40%-70% for the past five years [1]. In contrast, ETH, even with all the thriving L2s and dapps on top, has only reached a market share of 20% ATH [2].
It's simple math: by unlocking just a third of the potential liquidity on BTC, we could theoretically double the size of the DeFi liquidity today. Of course, one should not assume that the liquidity injection into DeFi will be commensurate with the market size of BTC - after all, most BTC holdings belong to institutions unlikely to ever “degen” their assets. Such nuances will be discussed later in the article.
To counterbalance the erosion of network security from each Bitcoin halving
Bitcoin halving refers to the reduction in the reward given to miners for verifying transactions on the network every four years. Currently, the block reward is 6.25 BTC per block, with the next halving being in April 2024. While halving is integral to Bitcoin's design to control its supply, it could potentially impact security in two ways:
1. Declining number of miners: halving directly reduces the profitability of mining, leading some miners to shut down their operations if the cost of mining surpasses the rewards.
2. Lowering costs of 51% attack: the costs to bribe miners to carry out a 51% attack are also cut in half with each halving. This means if someone wants to take a massive short position on BTC, each halving makes the attack “easier” as the hash rate falls, the number of miners decreases, and the costs (equivalent to miners’ block reward amount) to bribe miners become cheaper.
There are two levers to counter this abrasion to the Bitcoin network’s security budget:
1. First lever (not so reliable): scarcity of BTC total supply pushes up the token price. However, BTC's maximum supply of about 21M is well known and priced in - the real-time price of BTC is much more driven by macro & crypto market sentiment.
2. Second lever (the point of discussion here): the assumption that fees from increasing network/on-chain activity on the Bitcoin network will grow over time to compensate for the diminishing block rewards. Aside from the Ordinal inscription craze earlier this year, this lever has not been utilized - but this is poised to change.
Generating demand for Bitcoin’s blockspace to boost fees to miners is a non-negotiable quest for the longevity & security of the Bitcoin network.
Macro Catalysts
1. 12 Spot BTC ETF Filing: the world’s largest asset manager, BlackRock Inc., filed an application for a spot BTC ETF in June [3]. Following suit is a flurry of similar ETF applications from issuers including Fidelity Investments, Invesco, and WisdomTree. The significance is multifold:
1. Market Accessibility: 80-90% of the wealth in America is controlled by financial advisers or institutions, and the primary way they access the market today is through ETFs. The approval of spot ETFs will have a significant impact on market demand, far exceeding a mere doubling.
2. Price Impact: Spot ETF actually requires financial institutions to buy & hold the underlying asset vs. BTC future ETF that’s contract-based.
3. Regulatory Comfort: The ETF would come under SEC regulation, potentially adding investor confidence and market stability.
4. Industry Signal: Launching a spot BTC ETF marks a significant step in legitimizing and integrating cryptocurrencies into traditional finance.
2. Impact of the Next Halving in April 2023: Historically, Bitcoin halving events have correlated with substantial price increases as shown in the chart below by Cointelegraph:

4. Merits of Bitcoin’s UTXO model over the Account model for certain use cases

Parallelism for Zero-knowledge Proofs (ZKP): The UTXO model is naturally a better fit for running ZKP than the account model. UTXO's explicit dependency tracking makes it advantageous for ZKPs by enabling parallelism. In contrast to the account model's sequential execution, UTXO allows for smaller, more manageable computations to be run in parallel.
Privacy: The UTXO model improves privacy by ensuring that each UTXO is unique. This makes it more difficult to trace transaction history compared to Ethereum's account model, which is significantly more transparent.
Simplified Verification: With UTXOs, verifying transactions is simpler. Each transaction refers to specific UTXOs as inputs and outputs, making it easier for nodes to validate transactions without needing to compute the entire state of the network.
Security: The UTXO model offers certain security advantages. In the case of a network compromise or attack, the UTXO model might contain the damage to a specific UTXO, whereas an account-based model could potentially expose a broader account and its associated assets.
Atomic Swaps and Smart Contracts: The UTXO model is also suitable for atomic swaps, where transactions on different blockchains can be executed simultaneously. Additionally, while Ethereum's account-based model is more conducive to complex smart contracts due to its Turing complete language, Bitcoin's UTXO model is more effective at executing simpler, more deterministic smart contracts.

5. There's an insatiable demand for the Bitcoin blockspace that the status quo just cannot support

During the Ordinal mint craze, Binance had to integrate with the Lightning Network to reduce transfer costs [4]. Users in places like El Salvador reported on crypto Twitter that transaction fees were close to $20 for a $100 transaction. Anecdotally, the gas fee for my experimental BRC-20 mint several months back was 800 dollars - something has to change.

6. Bitcoin’s Brand Equity

The concept of "Panda Diplomacy" has prevailed since the Tang Dynasty as a symbol of friendship with the recipient countries, even though pandas arguably rank low in the criteria for "survival of the fittest." Similarly, despite its low throughput and limited programmability, Bitcoin (BTC) still stands out as a premier blockchain because of its brand.

While it may take years for this prediction to materialize, in a future where major layer one blockchains all eventually achieve the Power Law of performance - where incremental speed improvement from a TPS of 100,000 to 5M no longer matters to most customers - how will the largest, most high-end customers choose? For the same reason that consumers choose to buy Gucci sunglasses vs. a generic pair from Target, brand equity will matter when blockspace & performance become more commoditized in the future.[credit to jason sora]

Section Two: Our Thesis - Programmable vs. Capital Efficient

In contrast to Ethereum, which has a clear mission of becoming the internet computer designed for programmability, the interpretation of Bitcoin has always been a subject of intense debate. What will be the identity of Bitcoin going forward: a "lazy" digital gold as a store of value, a currency for payments especially in emerging markets, or a programmable and performant layer one?

In our view, such ambiguity is a feature rather than a bug. The lack of consensus regarding what Bitcoin should be is precisely the catalyst we need to build towards a diverse and vibrant Bitcoin ecosystem, in which we see two diverging schools of innovation: making Bitcoin more "programmable" vs. "capital efficient."

Making Bitcoin more "programmable" involves developing Bitcoin towards an Ethereum-like ecosystem. This includes addressing the limitations of Bitcoin's native smart contracts and scaling capabilities (speed & cost-effectiveness). The scope of this development encompasses various verticals, which include:
- Interoperability with other chains, such as bridging and EVM integration
- Complex DeFi and trading features, including swapping, various DEX platforms, synthetic assets, and LSD.
- Support for Ordinals, BRC-20, and other future token standards.
- The ability to issue new assets on the Bitcoin chain using specific token standards.
- Layer 2 solutions that utilize Bitcoin as a data availability layer, such as VM, rollup, and other scaling solutions.
Making BTC more "capital efficient" involves primarily treating BTC as a store of value and creating basic financial products on top of it. The capital efficient thesis does not prioritize scalability or the versatility of the Bitcoin chain. Instead, it solely focuses on financializing BTC to enable sustainable yields and similarly foundational financial products, thereby increasing BTC's capital efficiency while balancing risks. This approach is a progressive extension of the "BTC as a store of value" ethos. The scope of this thesis includes:
- Trustless BTC staking and yields.
- Native stablecoins on Bitcoin, or BTC-backed stablecoins.
- Insurance on Bitcoin, either on-chain or off-chain.
- Solutions to address MEV (Miner Extractable Value) on Bitcoin (currently, transactions frequently get stuck in the mempool if miner fees are low, and there is already MEV frontrunning during the Ordinal mint frenzy).
- Layer 2 solutions, defined in this context as any scaling solutions that speed up transactions and lower fees on the Bitcoin Network (could include virtual machines, rollups, use Bitcoin as DA, etc.).

The L2 scaling solution falls into both categories because it serves as the foundational infrastructure that enables Bitcoin to be more programmable and capital-efficient.

Out of the two theses mentioned above, we believe in the latter and are seeking out products that can make BTC more capital-efficient as a digital asset rather than programmable/general-purpose. We have outlined the reasons for such a stance below:

BTC’s evident product-market-fit as a store of value: From a ten-thousand-foot view, who has the most definitive product-market-fit across the entire crypto industry? For a native DeFi user, the answer might be Ethereum. But for the non-crypto-native population, it's BTC as a store of value.
Why not leverage and expand on this proven PMF as the one and only digital gold, but instead play into others' strengths? After all, there are a plethora of use case-specific solutions (Solana, ETH L2s, new EVM scaling solutions like Monad) outside of the Bitcoin ecosystem that are "genetically" designed to be better suited than the Bitcoin chain for speed and scalability.
Source of net-new demand: the DeFi “non-degens”: As we get excited about the possibility of unlocking liquidity from BTC, an important question to consider is: where is this new liquidity coming from? In our opinion, institutional BTC holders and non-crypto-native retail holders are the main contributors. Unlike proficient DeFi users, or the colloquial "degens," both institutions and retail investors have a similarly-low risk appetite and tolerance for complexity.
What will be attractive to these new customer segments is the simplicity of BTC products that make their BTC more "capital efficient," and generate sustainable and reliable yield without complicated operations and counterparty risks?
Mentality of spending, using, and risking BTCs: The psychology of transferring BTC is quite different from ETH due to their respective perceptions and characteristics. Realistically, what would it take for someone to transfer their BTC out of their hardware wallet? The most important consideration is security and risk above all else. Enhanced programmability comes with the cost of expanded surface areas of vulnerabilities, which could discourage risk-averse institutional miners and holders from participating.

To summarize using the panda analogy, our focus is on finding projects that contribute to the reproduction of more baby pandas, rather than altering pandas' DNA. In this regard, we are particularly excited about the following verticals:

Scaling solutions on Bitcoin (Rollups/L2s)
BTC-backed stablecoins
Insurance products on Bitcoin
Solutions to address MEV on Bitcoin

To name a few projects in the above space,

Trust-minimized Staking on Bitcoin:
- Babylon: A bridge-less and trust-minimized BTC staking platform. BTC stakers can earn yields in the currency token of their chosen PoS chain. It is similar to Eigenlayer for Bitcoin, but with an additional layer of cryptographic innovation that enables "slashing" on the unslashable Bitcoin chain.
- Papaya: A platform that enables BTC staking using STX & sBTC's underlying infrastructure.
- Atomic Finance: Utilizes DLC to allow users to earn a self-custodial yield on Bitcoin.

ACRE: another “Lido for BTC” using Threshold Network sidechain
BTC-backed stablecoin: eBTC (a BTC-backed stablecoin on EVM by the founding team of BadgerDAO)
Bitcoin L2s & Rollups: see below section

Section Three: an Analysis of the Bitcoin Renaissance

The Taproot Upgrade has been a major technological catalyst this year [5]. Activated on-chain in November 2021, the Taproot upgrade made the Bitcoin network more private and secure via Schnorr Signatures (BIP 340); more scalable via the introduction of BIP341 - Pay-to-Taproot (P2TR) and Merklized Alternative Script Trees (MAST), and more Programmable via modifying Bitcoin's scripting language to read Schnorr signatures.

Enabled by the Taproot upgrade, various groups of developers have emerged with their own ideologies regarding the future of Bitcoin. These new initiatives exist alongside the latest advancements from more established and long-standing innovators such as STX and Lightning Labs. We have grouped the eight major "tribes" in the Bitcoin ecosystem as follows:

1. Stacks Ecosystem (STX)

We have been tracking the STX ecosystem for over a year at this point. The merits of the project are multifold. Please note, this is NOT financial advice.

One of its kind: staking STX earns BTC: The fact that STX earns BTC yields makes it a unique and valuable asset as a "proxy" to BTC, especially considering the upcoming halving and institutional catalysts on BTC.
The dominant general-purpose Bitcoin L2: Stacks project started in 2017 as the brainchild of Princeton computer scientists, Ryan Shea and Muneeb Ali. Muneeb finished his PhD at Princeton in 2017 and Ryan and Muneeb went through Y Combinator earlier. Stacks has been making slow but steady progress to remain the largest ecosystem building on BTC [6].

Compliant token: STX was the first SEC-compliant token issuance and in 2021 released its decentralization framework (also filed with updates to the SEC as a non-security). While many other major tokens will still undergo the battle with the SEC to fight off the "security token" label, STX has achieved sufficient decentralization like Ethereum did in 2017 and will not have to be distracted by legal fights going forward.
Tokenomics (again, not financial advice, data as of Nov 27, 2023): As the dominant Bitcoin L2 on the liquid market, STX is at**~$1.2B** FDV (Fully Diluted Valuation) compared to more recent Ethereum L2s: Celestia $5.5B FDV, Optimism $7.4B FDV, Arbitrum $10B FDV. Don’t forget, BTC market cap is more than 2-3x that of ETH.
Additionally, STX’s vesting schedule (78% vested) - a major source of inflation by releasing additional token supply into the circulating - is on par with mature projects such as Solana (~75%), as contrasted with other newer chains such as Arbitrum (~13% vested), Optimism (~20% vested) and Celestia (~15% vested).

Major ecosystem catalysts: there are two upcoming ecosystem upgrades - Nakamoto Upgrade & sBTC, slated to launch in early 2024 [7].
- Officially becoming a Bitcoin L2 via the Nakamoto upgrade: post the Nakamoto upgrade, STX will inherit 100% of BTC’s hash power for the security of transactions (reorg resistance) on the Stacks network. This upgrade also marks Stacks’ transition from a sidechain to an L2 on BTC. Further read here
- sBTC will enable raw BTCs to be directly pegged in as sBTC to operate on Stacks. While it's trust-minimized (via multi-sig) versus completely trustless, it's as good as any solution on the market without changing the BTC ops codes.
- Becoming interoperable via EVM & Rust-VM subnets: a common critique of the STX ecosystem has been its lack of interoperability because of Clarity (its programming language). Post Nakamoto upgrade, Stacks will introduce new subnets that could support other programming languages and execution environments, such as EVM subnets and Rust VM. Further, there is already work on WASM support directly at Stacks L2, which will go live with the Nakamoto upgrade, opening the doors to other languages like Rust, Solidity, etc., directly at the Stacks L2 level.

From https://flagship.fyi/outposts/bitcoin-economy/everything-you-need-to-know-about-stacks-nakamoto-upgrade/

2. The “NFTs” and beyond: Ordinals, BRC-20, and other new standards

On November 7th, 2023, Binance listed the Ordinals (ORDI) BRC-20 token, which reached over $100M in 24-hour training volume. What is it, and what’s going on?

Ordinals were made possible by two updates to the Bitcoin Protocol: Segregated Witness (SegWit) in 2017 and Taproot in 2021. These updates expanded the data stored on the blockchain, allowing for images, videos, and other media - giving birth to Ordinals. Following the momentum shortly was DOMO's invention of BRC-20 token standard by inscribing JSON onto Ordinals [4].

BRC-20 has little fundamental value: it has none of the smart contract capability, programmability, or interoperability that you would expect from its Ethereum counterpart, ERC-20. New token standard alternatives are topical work-in-progress in the community, such as

BRC-721E: a collaboration between Bitcoin Miladys, Ordinals Market, and Bitcoin wallet Xverse, BRC-721E allows users to bridge NFTs from Ethereum to Bitcoin, opening the possibility of cross-chain interactions for ERC721 NFTs to migrate to the Bitcoin network

SRC-20: a token standard supporting Bitcoin Stamps for secure and tradeable art. It enables data embedding in Bitcoin transactions, resembling BRC-20 but with different approaches.
RUNES (not the same as Thorchain - just namesake): a potential alternative to the BRC-20 token standard to be more lightweight and reduce the clogs to the Bitcoin network. However, this is a very nascent & uncertain initiative from the creator, Casey Rodarmor.
ORC-Cash: a cash token system native to UTXO/Ordinals secured by 100% hashpower.

Regardless, the meteoric rise of BRC-20 & Ordinal mints earlier in 2023 increased the Bitcoin network fees to miners by 12,800%, totaling a whopping 44.5M in fees [8][9].

Galaxy also published research predicting that the Bitcoin Inscription and Ordinals market size will reach $5B by 2025 [10]. While some may argue that the Ordinals wave is nothing but a fad, the same can be argued for Ethereum NFTs. At least Ordinals come with the incremental improvement that buyers will never need to worry about being "rug-pulled" from the storage of their images.

Critics have been clamoring against Ordinals, citing that blockspace bloat from inscriptions can lead to long-term centralization. Indeed, the increased data storage requirements for miners to run a full Bitcoin node (see charts above) have increased dramatically since Ordinals. But as the Galaxy report pointed out, inscriptions on the blockchain can establish a minimum blockspace demand, which is actually a much-needed help for Bitcoin's security and fee market.

Net, we believe that Ordinals is a positive development for the Bitcoin community. Some projects in this space include the Ordinals lending protocol, Liquidium; Ordinal wallets such as Hiro/Leather, Xverse, Oyl; and leading marketplaces such as Ordinal Wallet, Magic Eden, Unisat, OKX, etc.

3. Side chains

Rootstock (RSK) is a Bitcoin sidechain that introduces the Ethereum Virtual Machine (EVM)-compatible smart contracts to the Bitcoin network. Unlike Lightning, which operates within the Bitcoin blockchain using native BTC, RSK utilizes a two-way peg, bridging BTC to RSK's derivative asset called smartBTC (or RBTC). RBTC maintains a 1:1 peg with BTC, but isn't trustless and relies on centralized custodians due to its security being based on merged mining.
Threshold Network uses threshold ECDSA signing to bridge Ethereum and the Bitcoin network. It mints ERC-20 tBTC from BTC & pegs BTC-tBTC via a multi-signature scheme among its validators with an honest-majority-assumption.
The Liquid Network is a Bitcoin sidechain that allows users to peg in their BTC to the Liquid Network, where it's converted into a corresponding token (L-BTC) and can be used for quicker and more confidential transactions. However, similar to RSK, it has a similar trust assumption on the "functionaries" such as reputable cryptocurrency exchanges and service providers.
Other sidechain proposals such as Softchain, Drivechains, Federated Chains; interop layer such as Interlay, etc.

4. Rollups or L2s on the Bitcoin chain

Urbit architecture for Bitcoin L2: Urbit offers a compelling architecture for building Bitcoin layer two solutions due to its integrated identity and networking system. Unlike other P2P protocols, which often lack a global ID system, Urbit provides a default schelling point for identity. In contrast to existing Bitcoin identity solutions that are simple but limited, L2 node implementations on Urbit come equipped with a shared identity system for recognizing, connecting with, and exchanging information with peers. This eliminates the need for bespoke integration and allows applications to interact seamlessly across different protocols, reducing the complexity associated with managing distinct identity formats and node RPC solutions. With Urbit, developers benefit from a baseline of integrated addressability, key compromise resilience, non-spam credibility, and the ability to maintain consistent identities across various applications and network layers. [Jake Hamilton of Volt]
Botanix Spiderchain: a PoS EVM second layer for Bitcoin using a distributed network of multi-sigs that enable Botanix’s two-way peg with Bitcoin (BIP not required)
ZK-rollups on Bitcoin
- Alpen Labs (BIP required)m
- Bison Labs (no BIP required): client-side ZK verification using DLC to achieve trustless bridge
- Chainway: ZK rollups on Bitcoin with the open-sourcing of their data availability adapter
Kasar Labs: in partnership with Taproot Wizards, released a DA Adapter for Bitcoin that allows developers to plug a Madara stack into Bitcoin to run a Starknet Rollup based on the Cairo programming language created by StarkWare.

5. BitVM

So far, attempts by various sidechains have not yet achieved a fully trustless two-way peg solution that doesn't rely on a Bitcoin Improvement Proposal (BIP) to be approved. The latest new solution, BitVM by Robin Linus, although still in its infancy, seems to be a significant advancement. BitVM represents the initial step towards enabling Turing-complete Bitcoin contracts without modifying the ops code [11]. The main innovations in BitVM include:

Introducing State across different UTXOs or different scripts using Bit Commitments
Verifiability through Logic Gates: executions can be verified by de-constructing any program in question in the virtual machine and verifying the validity of execution by the prover. This ensures that any false claims can be quickly disproven
Keeping Bitcoin Network Lightweight: Similar to an Optimistic Rollup on Ethereum, BitVM doesn't execute extensive computations on Bitcoin. Rather, it minimizes the scope of the on-chain footprint to just disproving incorrect executions, functioning more as a solver and verifier. Only the output of the BitVM program is used in the Bitcoin transaction.

While the functionality of BitVM is extremely limited today - with only one workable function called the Zero Checking function - potential use cases in the future include two-way pegs with side chains for scalability. If a ZK verifier can be built in BitVM, then roll-ups on Bitcoin can be enabled without a soft fork. Here is a good listen on Stephan Livera’s podcast.

6. Lightning Network: It is a Layer 2 scaling solution for Bitcoin (BTC) that utilizes payment channels to combine on-chain settlement and off-chain processing. This approach aims to accelerate and reduce the costs of BTC transactions. The Lightning Network exhibits characteristics akin to an "app" chain designed specifically for payment use cases, distinguishing it from broader scope Layer 2 solutions like Arbitrum on Ethereum.

The network has enjoyed impressive growth of 1212% over the last two years with a TVL of about $160M at the time of writing [12] [13]. However, the off-chain component also brings its unique challenges such as Replacement Cycling Attacks threatening the network.

The drawbacks: Lightning Network is not entirely trustless as it requires peer-to-peer payment channels with sufficient liquidity and constant online presence. There's a risk of unilateral channel closures when users go offline, potentially resulting in intercepted funds. Congestion in these channels can expose the network to fraud and attacks.

7. Digital asset insurance on BTC

Taproot Assets: Taproot-powered protocol for issuing assets on the Bitcoin blockchain & works with Lightning Network for speedy & low-cost transactions.
RGB: client-side validated state and smart contracts system operating on Layer 2&3 of the Bitcoin ecosystem. Further read here for an analysis of the comparison between Taproot Assets and RGB, by Ben77 of Discoco Labs.

8. Integration with other ecosystems

Solana: SOLightning (Solana’s integration with Lightning Network)
CEXs & Dapp integrations: Binance, Coinbase, Cash App, etc.
Osmosis: NomicBTC
ICP ckBTC: claims to trustlessly peg ICP to the Bitcoin chain without off-chain intermediaries or bridges
Urbit Volt: Lightning implementation on Urbit. For those not familiar with Urbit, here is an exhaustive primer on its history, latest development, and why it is a necessary complement to blockchain written by Evan Fisher.

Additionally, the Bitcoin community has also seen numerous initiatives aimed at fostering a developer ecosystem and generating new ideas, namely: Bitcoin Startup Labs, Bitcoin Frontier Fund, Outlier Venture’s BTC base camp, Wolf Incubator, Bitcoin Builders Association, etc.

Summary

To conclude the article and refer back to our earlier panda analogy, we believe in innovations that enable the production of more baby pandas (i.e., making BTC more "capital efficient") instead of those that transform pandas away from their core strength - rarity & cuteness (i.e. being the one and only digital gold) - and compel them to assume societal roles like today’s EVM ecosystem.

The verticals that we are particularly excited about include:

Scaling solutions on Bitcoin (Rollups/L2s)
BTC-backed stablecoin
Insurance products surrounding Bitcoin
Solutions that address MEV on Bitcoin

About the Author

Catrina is a researcher & investor that uniquely combines her background in strategy consulting with crypto operating experience. Prior to Portal, she operated at Protocol Labs, invested at Hivemind Capital, and launched Deloitte's Blockchain Initiative in 2017. She also organizes the annual UPenn Blockchain Conference (PBC), helped launch Wharton’s crypto accelerator, and mentors numerous university accelerators such as Stanford, Harvard, and UT Austin.

Shoutout to the friends below for reviewing this draft and providing feedback: Aleksis Tapper of Token Terminal, Andre Serrano of Stacks Foundation, Sankha Banerjee of Babylon, Ben77 of Discoco Labs, Chelsea Jiang of Foresight Ventures, Evan Fisher of Portal Ventures, Jake Hamilton of Volt on Urbit, Jason Fang of Sora Ventures, Jay Yu of Stanford Blockchain, Jian & Haotian of Amber Group, Kevin Williams & Kyle Ellicott of Bitcoin Frontier Fund, Kyle Samani of Multicoin, Logan Allen of Zorp, Sami Kassab of Messari, Thomas of BadgerDAO, and Vikram Singh, summer intern of Portal Ventures