Dialogue with Merlin Chain founder Jeff: Why are retail investors feeling bad? Because they feel like they are being cut by institutions

Interviewee: jeff, Merlin Chain

Editor: Defioasis

Statement: This article does not provide any financial advice. Readers are advised to strictly comply with the laws and regulations of their location. The views of the interviewee do not represent those of Wu Shuo or the interviewer. Readers should discern clearly.

The following content is an excerpt. For the full text, please listen to the podcast (Xiao Yuzhou, Youtube)

As of February 23, the Bitcoin L2 network Merlin Chain's mainnet staking activity has surpassed a total TVL of $1.97 billion within 14 days of its launch. This is an interview with Merlin Chain founder jeff, lasting about 50 minutes. It includes jeff's personal experiences, macro judgments on the Bitcoin L2 ecosystem, Merlin Chain's positioning, and experience sharing.

Please introduce some of your past experiences.

jeff: I learned about blockchain relatively early. When I started my business in 2012, our investor IDG had invested in Coinbase and Ripple. At that time, the investors (IDG) were very enthusiastic about discussing blockchain with us young entrepreneurs. So I started to understand the Bitcoin white paper and began purchasing cryptocurrencies from that time. Back then, I bought a lot of BTC, as well as XRP and LTC later on. I was originally a tech person, and my belief in blockchain was established early on, including many offline chat gatherings with early OGs in China.

However, I continued to focus on Web2 entrepreneurship and did not join the Web3 wave. It wasn't until early last year (2023) that I looked for opportunities in Web3 due to the poor market conditions in the Web2 dollar market. At that time, Ordinals had just emerged, which gave us new ideas about the Bitcoin ecosystem. In early last year, many people in the industry had a rather pessimistic view of Ordinals; some said it was just a MEME or a short-term FOMO in the Bitcoin ecosystem.

However, we saw the opportunity as the opposite, with three points. The first is the bottom-up issuance method, community-driven assets, and a new narrative from assets to projects. This means that the asset itself is formed from the bottom up by the community. Once the community fully controls this asset, they can then build on it. Unlike traditional blockchain projects, where the project team has an idea first, allocates tokens, and develops products to attract more users, in Bitcoin, the community first identifies the asset, launches it, and then the community members build applications and ecosystems based on that asset. This includes many BRC-20 ecosystems we have seen recently, where the community is creating Launchpads, games, and even Layer 2 solutions. So I think the change in narrative is the first opportunity we see.

The second opportunity we see is the composability generated by putting all content on-chain. In the past, much of Ethereum's content was not on-chain, while in Bitcoin, all content, whether game content, application scripts, or social assets, must be inscribed on-chain and open-sourced. Therefore, the composability of on-chain content, including our work starting from BRC-420, is influenced by this philosophy of putting content on-chain, open-sourcing, and ultimately assetizing it.

The third opportunity is a macro opportunity, which is Bitcoin itself. Bitcoin has a very large capital volume, reaching trillions. However, under this trillion-dollar scale, there has not been a good ecosystem or financial yield, so most BTC holders just keep their money in cold wallets without a way to earn from it, but this demand cannot be ignored. Now many CeFi platforms are doing BTC lending and wealth management, and the potential of this capital volume is there. Even if we create a little ecosystem, I believe the financial impact it could have on this capital volume would be greater than creating numerous Ethereum L2s. This is our thinking when we were working on Ordinals and the Bitcoin ecosystem.

What opportunities prompted you to create Merlin, and what is the current composition of the Merlin team?

jeff: Actually, creating Merlin was both a coincidence and a necessity. Last year, not many people were talking about creating Bitcoin L2. We started developing applications in June last year, creating recursive doodles, recursive forums, on-chain voting, and later developing the Bitmap language and metaverse, Bitmap's game engine and editor, and then issuing the BRC-420 asset protocol, which has become increasingly rich in assets. Throughout this process, we interacted daily with developers and users in groups and on Twitter, including Twitter Spaces. A clear issue was that everyone found that the things that could be done on L1 were becoming increasingly limited. What does that mean? When you want to create a game on L1 to empower Bitmap, you find that the interactions on L1 are very few. If you want to create competitive user interactions, game logic, social features, or lunch chats and landings, everything you want to do is limited by L1, and you cannot implement smart contracts. So at that point, we gradually concluded that Bitcoin definitely needs a virtual machine environment; otherwise, no matter how many good ideas there are, they cannot be realized.

So this matter itself has its inevitability. Coincidentally, at the end of last year, many Bitcoin L2 concepts began to emerge. We had this idea all along, so we started to confirm and establish the project for Merlin around October last year.

Currently, Bitmap Tech Labs has several lines of development, and we are also keeping everything updated in sync. We have some external teams helping us, such as for the upgrade of the BRC-420 protocol, more application scenarios, and the open-source and incubation of the entire Bitmap game, including many game projects around Bitmap in our ecosystem. I might have more experience in the Merlin team, from chain to wallet to application Dapps. Generally speaking, our team has these business lines.

What is the approximate size of the team?

jeff: Our internal development team is about 30 people. Externally, there are also some teams working with us on on-chain infrastructure, on-chain DeFi infrastructure, including chain ZK upgrades, and market ecology, so there are about 30 external collaborators assisting our team.

From the internal team’s perspective, what role do you think the Bitcoin ecosystem, especially L2, will play in the next bull market?

jeff: I think it will activate Bitcoin's money and bring in new users. This is true in any industry, whether Web2 or Web3. It means that either the financial leverage of this matter is high enough, and there is a lot of money, such as in the US Treasury or stock market, or in China's foreign trade market.

The entire market has a lot of money, so Bitcoin first has this premise; Bitcoin itself has a very large financial volume. However, the financial utilization rate of Bitcoin is very low, possibly less than one percent or even one-thousandth.

I believe Bitcoin L2 aims to leverage this unused asset through financial leverage. Imagine this trillion-dollar market cap of BTC and the future Bitcoin-related BRC assets; if these assets are activated, it could leverage much more money than creating ten or twenty Ethereum L2s because Ethereum's assets mainly revert to Ethereum L1, and Ethereum L1 itself is a practical ecosystem.

The second is whether we can expand the innovations we saw in the Bitcoin application ecosystem last year. This bottom-up community-driven issuance method, the composability of on-chain inscriptions, and the entire narrative generated from Bitcoin block data can be followed to create applications, whether in the metaverse or AI.

So, simply put, I think Bitcoin L2 may play these two roles: one is to optimize the financial assets that have not been utilized well in the past, and the second is how to improve the native innovations on Bitcoin.

Now that there are many protocols and applications on Bitcoin, what opportunities are there for ordinary retail investors that have a high degree of certainty?

jeff: I think this opportunity is quite clear. I prefer to calculate this mathematically. When ETH's market cap was two to three hundred billion dollars, you would find that the total value of ERC-20 tokens was also in the range of two to three hundred billion dollars. Today, BTC's market cap is one trillion dollars, but the total market cap of BRC assets may be less than ten billion dollars. From this ten billion dollars to one trillion dollars, there is still a 99-fold space in between. Of course, I am not saying that this 99-fold space will definitely be realized or will be filled in the short term, but the trend and potential are relatively easy to calculate.

So, I think for retail investors, the key is this ten billion dollars of assets within the Bitcoin ecosystem, including Ordinals, Atomicals, etc. The process of moving from ten billion dollars in market cap to gradually chasing one trillion is essentially a so-called bull market.

According to statistics, there are now over 30 Bitcoin L2s, divided into several major categories such as sidechains, Rollups, and data availability. What distinguishes Merlin from other Bitcoin L2s, especially from a technical perspective?

jeff: From a technical standpoint, I believe there is currently no true Bitcoin L2. We have always approached this with a pragmatic attitude because Bitcoin L1 cannot perform settlement. The biggest difference from Ethereum L1 is that Ethereum has smart contract capabilities, so based on Ethereum, from the earliest Polygon Plasma to OP Rollup solutions to today's ZK solutions, this process has taken five years, and even today, many OP and ZK solutions are not mature. You will find that even though the Ethereum network itself has smart contract features, the entire Rollup process has taken five years or even more than ten years to stabilize and mature. Bitcoin L1 does not have smart contract capabilities and cannot perform settlements, so I believe that from a realistic perspective, there is currently no chain that can roll up to Bitcoin.

Now, the entire technical direction is, first, whether ZK Proof can be returned to Bitcoin L1 in the form of inscriptions, so that all users, nodes, and validators can obtain open-source and immutable ZK Proof to verify the security of this chain.

The second is to attempt to have Bitcoin L1 validate or to try to have a more decentralized network validate. Our current plan is to have a staking system on-chain, with a POS Stakers mechanism. They can verify all ZK Proofs, and they themselves stake a large amount of BTC to withdraw and claim against any malicious behavior or erroneous reports. At the same time, we are considering whether there can be a separate DA Layer below Bitcoin, like Celestia. Additionally, we have collaborated with and invested in several Bitcoin DA Layers, which can serve as Bitcoin's 1.5 layer to verify our ZK Proofs. If issues arise, the same mechanism applies for claiming against erroneous information or front proof, i.e., proving the existence of fraud, and then performing further settlements on L1 in some way. I believe this is a practical solution that can gradually be realized in the short term, within 12 to 24 months.

Ultimately, is it possible for the entire L2 to report and settle on L1? I think it is possible, but to be honest, the nature of this matter and its cycle, I believe it will be very difficult to achieve within five years.

Recently, there has been some debate about whether L2 should continue to adopt Bitcoin's UTXO model, with some arguing that constructing sidechains without UTXO is equivalent to abandoning Bitcoin's fundamental characteristics. How do you view these opinions?

jeff: I think this has reached a purely aesthetic debate. Bitcoin L2 does not change Bitcoin L1; it is an extension based on Bitcoin L1. Simply put, when BTC is transferred from L1 to an exchange, this BTC still exists in the exchange's L1 network, and the exchange does not change it; secondly, this BTC can be used for contracts and options in the exchange, which does not mean that contracts and options violate Bitcoin's UTXO model. So I think L2 is the same; L2 provides more application methods for funds on the second layer, a more decentralized ecosystem, and more applications to play with, but it does not change Bitcoin L1 itself. Therefore, I believe BTC whales or Bitcoin miners do not care about L2 because it does not change anything. On the contrary, the form of inscriptions has affected the UTXO and transactions on Bitcoin L1, which is what Bitcoin miners and Bitcoin maximalists care about.

Since there is no change, it is just an extension, so I think discussing these matters at this time is purely an aesthetic issue. It's like whether tangyuan is filled with meat or sesame, or whether zongzi is sweet or savory; there is nothing much to discuss.

Back to Merlin, in just two weeks since its launch, Merlin's TVL has exceeded $1.97 billion, surpassing Blast. How did Merlin achieve such rapid growth in such a short time?

jeff: For many who are not paying much attention to the Bitcoin ecosystem, they might feel this is a sudden emergence and may not understand it. For us, while it indeed exceeded our expectations, our long-term development on Bitcoin L1 has accumulated a very large community ecosystem and user traffic. This is something many people have not previously focused on; they did not know about Bitmap or BRC-420. Simply put, in the Bitcoin ecosystem, apart from BRC-20's ORDI and SATS assets listed on Binance and OKX, the second and third largest protocols by market cap are Bitmap and BRC-420.

So we already have the second and third largest user communities in the Bitcoin ecosystem, and the core development is done by us. Unlike BRC-20, which is a completely free token issuance protocol, Bitmap and BRC-420 are more vertical. Therefore, we have accumulated a lot of user traffic, and we understand what these users are engaging with, what assets they have, and their level of commitment to this community. With this foundation already established, it is actually quite predictable for this situation. Of course, for outsiders, this may seem like a rapid development; but for us, there is also some inevitability in this matter.

How to maximize the security of users' funds?

jeff: There may be pressure on users, but for us, this pressure is certainly greater. Simply put, the technical implementation of Bitcoin L1 assets involves storing these assets in one address. The storage of these assets only involves a multi-signature concept. It is different from Ethereum, which can implement smart contracts and many restrictions. Bitcoin addresses are quite simple; it is just about who signs. If you sign, the money is yours; if I sign, the money is mine.

So the solution we have implemented is a complete Bitcoin L2 solution we developed with Cobo and other security companies two to three months ago. This entire solution first ensures that users' assets on L1 are participated in by multiple signers, and the interests of these multiple signers are completely non-conflicting. The neutrality is primarily to ensure that users' assets will not be rug-pulled by any single party. Secondly, all assets are transferred on L1, and then on L2, this information is monitored, and the asset is minted through a contract; conversely, the asset is destroyed on L2, and then a transfer is initiated on L1. The different nodes on L1 and L2 are interspersed with Relayer data to monitor, record, and verify. This entire solution is what we have been working on with Cobo for a long time.

So I believe that making the signers on L1 more diverse while maintaining neutrality and compliance, and ensuring that information between L1 and L2 is not tampered with and can be verified from multiple perspectives, is what we consider to be the safest solution in the industry. Based on the Bitcoin ecosystem, it is somewhat like Newtonian physics cannot become quantum physics; it can only do very limited things.

Now that there are many participants, staking competition is also a game for large holders, and there are some voices in the community saying it is very competitive. Does Merlin have any more retail-friendly participation methods in the future?

jeff: I think it is twofold. First, I believe Merlin is already the most suitable for retail investors to stake among all L2s. We released 20% of the tokens, unlike other chains that release only 5%. The benefit of releasing 20% of the tokens is that if your TVL is higher, the number of tokens users can obtain is also four times that of other chains. Secondly, as TVL continues to increase, the amount of money left on the chain is increasing, so the overall activity and prosperity of the entire ecosystem, including the long-term total market cap of the chain, will definitely be higher. In fact, many of our users have tools to calculate everyone's expected income, and they find that both the quantity of tokens and their value yield higher returns compared to other chains that release only 5%.

In addition to staking, tools like Merlin swap, which are more retail-friendly trading tools or on-chain applications, will also release tokens. We have previously mentioned that apart from Merlin Seals, a large portion of the tokens will be released to holders, users, builders, and validators. So our token release will always exist in the long term and will be given to those who genuinely participate in our chain.

Therefore, whether it is staking, lending, or trading in other applications within Merlin, including the recent MEME on Merlin, I believe these users can earn profits from trading or obtain token releases through their trading activities. This is a way we have always promised to our users.

What forms will the upcoming multiple rounds of airdrop weight activities take?

jeff: It will mainly be based on the ecosystem. This includes some new applications going live, grants for developers, incentives for early participants, and the need for more nodes on-chain to validate and provide cross-chain anti-fraud proofs, etc. So essentially, the tokens will be released to those participating in the ecosystem, whether they are developers, users, or validators.

Now, public chains issuing airdrops easily attract many opportunists or studios. How do you view these groups?

jeff: I think the culture in the Bitcoin space does not complicate things. Just yesterday, there was a space discussing this matter, and someone asked if we had analyzed IP addresses to identify different people for anti-cheating measures. But if you look at Merlin, you will find that Merlin's activities do not involve complex rules. In any other so-called Ethereum L2, you will find that their Ethereum entrepreneurs tend to create tasks, where completing one task earns a certain number of points, and completing another task earns another set of points, with first-level distribution percentages and second-level distribution percentages. They design the entire system to be very complex. Once the system is designed to be complex, you will find that this is when opportunists and studios emerge. In our collaborations with Ethereum projects, without exception, we find that everyone likes to complicate this issue.

But looking back at the Bitcoin ecosystem, the act of inscribing is particularly fair. For example, there are only so many inscriptions; if you are particularly wealthy, you can inscribe them all. But so what? If one person inscribes them all, no one will come to build the ecosystem with you or build the community; you essentially just bought an air coin.

So I particularly like the culture in the Bitcoin space, which uses very simple, fair, and open rules to allow the market to self-regulate rather than impose restrictions on rules. Logically speaking, the more restrictions there are, the more it actually limits not the opportunists or studios but rather blocks out real users. Therefore, I have never participated in airdrops or completed tasks; the activities we offer in Merlin are all very simple and fair, allowing everyone to participate.

Merlin announced at the beginning of the month that it received investments from over 20 institutions, including OKX Ventures and ABCDE. I heard that the terms from investors were not retail-friendly. How did you ultimately persuade the investors, and what do you focus on when selecting investors?

jeff: This is something that our community is quite concerned about. The reason why people feel uncomfortable on Ethereum is that they feel they are being exploited by institutions. This is a sentiment that ordinary retail investors often experience, so when they come to Bitcoin, they naturally have a strong aversion to institutions. Therefore, you will find that last year, many projects in the Bitcoin ecosystem did not raise funds or did not announce fundraising. Users in the ecosystem are also easily paranoid about how many tokens institutions take. I remember one project gave 5% to the team and institutions, and then it was attacked across the board. I think this culture is a bit extreme.

I believe that when investment institutions invest in Merlin, their thinking must be focused on the long term because we are building a Bitcoin L2. From an architectural perspective, we are more like a public chain of Bitcoin because Bitcoin itself does not have smart contracts. Therefore, building a public chain for Bitcoin and developing the ecosystem and Dapps naturally takes 5 to 10 years. So for investment institutions, a longer unlocking period is relatively reasonable. If investors do not accept this long unlocking period, it indicates a lack of confidence in the ecosystem itself. However, for users, we hope for a market that circulates freely, allowing early supporters to come in and those who are not optimistic early on to exit quickly and profit. Therefore, in our ecosystem, some people say that the Merlin project is "retail investors profiting at the expense of VCs," where retail investors can obtain tokens for free trading while VCs have to wait for unlocking. However, I think it is not like that; the investment logic of institutions and retail investors is still quite different.

Does Merlin have any experiences to share regarding community building?

jeff: I think first and foremost is transparency. We answer any questions in Twitter Spaces and often do podcasts and live streams on YouTube. We always tell the hosts to collect the most piercing questions. Many project teams like to answer some superficial questions in Spaces, but we answer very sharp and pointed questions, such as where the money went, whether the money is safe, why you support this and not that, and what the team situation is, etc. We particularly enjoy answering these sharp questions. For example, if someone asks if Merlin is L2, our first response is to say no; we are a sidechain, but all sidechains will claim to be L2, so we must do the same. However, many founding teams may be unwilling to say such things. I think this is a form of transparency that makes users feel you are very real.

What happened yesterday? Merlin swap had an airdrop, giving all early participants a free token to claim. Due to the pressure on the chain from AA and the lack of upgrades on Polygon zkEVM, many users could not claim in time, and we had a snapshot for user registration, with some saying they did not receive this snapshot. So the official statement was that they would guarantee to cover all gas fees for the airdrop, and if the final amount exceeded expectations due to the inability to find it quickly, the official team would also buy back on the market to airdrop. So whenever we encounter issues, we always resolve them in the fastest and most honest way, admitting our mistakes.

Including on the day of the BRC-420 launch, the website was quite slow, causing many users to fail their transactions. Historically, all projects on the Bitcoin network would not refund gas fees because gas is paid to miners. However, because our website was slow at that time, we tweeted within ten minutes that we would refund all failed transactions and gas fees. On that first day, we refunded hundreds of thousands.

So I think this kind of honesty, respect for the market and users, and the key is that since June last year, we have consistently treated the community in this way, maintaining 4-5 Spaces and podcasts daily, has made the community feel we are a very genuine team.

Are there any interesting projects on Merlin that you can share with us?

jeff: I think in the early stages of DeFi, everyone can participate actively and with low risk, especially in ecosystems with a lot of hot money. Of course, regardless of the type of DeFi, the premise is that their applications have undergone audits to ensure safety.

Secondly, for many Bitcoin users and Ethereum users, I think they can experience some native Bitcoin innovative applications. For example, we have invested in several companies, including one that allows you to inscribe L1 inscriptions on L2, which is particularly interesting. It allows you to use various tokens on L2 to inscribe real inscriptions on L1, and it can instantly help you cross-chain to L2, such as giving a ST Token, allowing for earlier interactions or liquidity.

Bitmap's metaverse also has two products currently undergoing external testing on the testnet, so I think everyone should pay more attention to these early applications.

Easter Egg Segment

"Backer"? I just entered Web3 entrepreneurship last year and don't know anyone.

jeff: Today (February 23) marks exactly 14 days since launch, and Merlin Seals' TVL has reached $1.97 billion, surpassing Blast. This achievement is indeed remarkable, as everyone has said. However, the amount of FUD that has arisen in these 14 days has exceeded my personal understanding. For example, some people ask if this person is a backer. But to be honest, I don't know any of the people mentioned. I have been in Web2 entrepreneurship all along, and I even did a lot of popular science for this, even contacting people to ask about these backers and dispel rumors.

But later I realized that in the eyes of the larger market, Merlin is a project that just launched a month ago and suddenly swept the entire market in just a few days, and everyone is talking about it. So I think it is this suddenness that makes people feel this situation is unreasonable. Because most people, including myself, need to find a rationale for many things, to explain that this rise must have a reason, and that this ecosystem's popularity must have an explanation. If I do not know why it suddenly became popular, there must be some mysterious force behind it.

But I want to say that our team has been present in this inscription ecosystem and Bitcoin ecosystem since its earliest and coldest times. Honestly, looking back to June last year, there were probably no more than ten teams with legitimate developers building in this ecosystem globally. So we persisted in building during the coldest times without making money or receiving funds, developing seven or eight products, and now we are at this point. Therefore, when we launched Merlin Chain, I believe the entire ecosystem was a natural progression, and the enthusiasm of the overseas community on Twitter, as well as the Asian community, for our FOMO, trust, and participation feels quite natural. However, for the outside world, they may see this as a particularly new project that just became popular.

This has also been an interesting episode; I feel that things have improved recently, and people have begun to shift from FUD to research.

The role of BRC-420 and the duality of tokens.

jeff: I believe BRC-420 plays a role in the entire Bitcoin network in terms of asset diversity. Different content, and after modularization, can become speculative targets that can be utilized for applications. For example, if you are making a game, you can package it entirely on-chain using BRC-420 to turn it into a full-chain game asset, thus merging content and assets, which has not appeared in the past on Ethereum. I think this asset on Bitcoin L1 is a particularly impressive thing. On L2, its trading or interactivity will definitely be stronger, and Merlin Chain is capable of accommodating this traffic. BRC-420 is not an L2 asset, but I believe these assets can circulate better on L2 for games and applications.

Not to be modest, the term "token duality" was first proposed by me. There are records on Twitter that can be checked. I believe the token duality on Ethereum was modeled after our design. That said, I think it is different; it has achieved this in finance, and this can snowball, so to speak, the left foot stepping on the right foot can create momentum. It doesn't matter whether it's good or bad. However, when BRC-420 proposed this concept, we were more focused on its applicability. For example, looking at Bitmap, in Bitmap's metaverse game, this token itself is a land; you need this land to do many things, such as having computing power to conduct transactions to obtain a space, which can operate a privatized node, or a privatized game, or a privatized social venue, etc. So this token itself is practical. When it is wrapped into a token, this token serves as a circulating currency within the entire system, whether for transactions, DeFi, or spending. Based on bilateral practicality, we then build a financial gameplay around it; this is what I consider a complete story. But if there is no practicality and only financial gameplay is constructed directly, it will likely become very ponzi and FOMO. However, I believe this is not a game that can run long-term.

Of course, I personally think ponzi is a neutral term, even slightly positive. So I believe the best product is a long-term ponzi, where practical applications and assets themselves have utility, and then a layer of financial gameplay is added; it may then become a longer-term ponzi, like Bitcoin, US stocks, or real estate, which are all longer-term ponzis. But if only financial attributes are added, it is more likely to become a short-term ponzi.