Bitcoin Layer 2 Hundred Chain Battle: Project Parties and Capital "Collude," Chinese Return to the C Position in Crypto

Author: flowie, ChainCatcher
Editor: Marco, ChainCatcher

At the recently concluded Denver conference, Jademont, founding partner of Waterdrip Capital, met several overseas investment institutions and founders. "They were inquiring about the mysterious Bitcoin Layer 2 from the East and why its TVL is higher than most Ethereum L2s."

In the second half of last year, over 20 investment institutions were chasing Jeff, the founder of Bitmap and Merlin Chain, wanting to invest in his Bitcoin Layer 2 project. "Investors were very FOMO."

The media also fueled the hype. After the explosive popularity of inscriptions, Jeff participated in more than ten interviews and Spaces in a month.

ChainCatcher learned that by early 2024, nearly a hundred Bitcoin Layer 2 projects had emerged, 90% of which were led by Chinese individuals.

After experiencing the explosive popularity of inscriptions, entrepreneurs and investment institutions attempted to ride the wealth train through Bitcoin Layer 2, believing that the Bitcoin ecosystem had finally ushered in an epic opportunity similar to the Ethereum ICO in 2017.

LaoBai, a partner at ABCDE Investment Research, began reviewing over 20 Bitcoin Layer 2 projects in the second half of last year. Well-known investment institutions such as OKX Ventures, HashKey Capital, and Waterdrip Capital also announced investments in Bitcoin Layer 2.

However, the narrative of Bitcoin Layer 2 led by Chinese individuals gradually split into two camps. Supporters believe it is a rediscovery of the value of the Bitcoin network, and the Chinese community will reclaim the spotlight in crypto. In the eyes of opponents, this is undoubtedly an old wine in a new bottle, essentially a massive funding scheme, "with a lot of faith at the start and a mess at the end."

For most ordinary investors, they are not concerned about technology but focus more on wealth codes, and Bitcoin Layer 2 seems like a decent meme.

The train has just started, the future is here but the overall situation is uncertain, and no one wants to lose at the starting line.

Conservatism and Progressivism

The explosive popularity of inscriptions in 2023 has divided the crypto market into two camps.

Conservatives believe this is a story of old wine in a new bottle, "with a lot of faith at the start and a mess at the end."

Progressives see it as a revolutionary moment for the Bitcoin ecosystem, "Bitcoin will be Ethereum's biggest killer, and Ethereum can serve as Bitcoin's testnet."

In early 2023, after the emergence of Ordinals/BRC-20, the market heated up. dForce founder @mindaoyang recalled the story of Vitalik tinkering with colored coins a decade ago.

In 2012, Vitalik and his team launched Colored Coins to support users in issuing tokens on the Bitcoin ecosystem, allowing anyone to build assets, trade, and vote based on the Bitcoin protocol.

Soon after, Vitalik, along with EOS founder BM, attempted to write a smart contract platform for Bitcoin, trying to realize the dream of a world computer on the Bitcoin network. However, due to the limitations of Bitcoin's architecture and the community's adherence to the value storage concept, both of Vitalik's attempts ended in failure, leading to the subsequent creation of Ethereum and ERC20.

@mindaoyang believes that Vitalik's failed experiences represent Bitcoin's stubborn ideology, "This is the key to its success, but it also means it's extremely closed off, so don't have too high expectations."

Early participants of Ordinals, like Long, recalled that most of the Bitcoin community believed this was undoubtedly old wine in a new bottle, so initially, the popularity of ORDI and other BRC-20 tokens was not high.

However, Bitcoin crypto OGs who missed the 2017 Ethereum ICO and DeFi summer sensed a different atmosphere. At that time, Jeff, who was focused on modular blockchain development on Ethereum, turned to dive into Bitcoin ecosystem development.

Gavin, who has always struggled to achieve interoperability between Bitcoin and the entire chain, was planning how to reconstruct an old project that had once shone brilliantly four years ago but quickly stagnated.

In their view, based on a significant variable, any business is worth redoing. The traditional Web2 business world's common saying about innovation logic is also playing out in the Bitcoin ecosystem.

"Every bull market is based on the emergence of new assets, generating new narratives, asset trading, and business models." The NFT market exploded in 2021, giving birth to the unicorn OpenSea. After the 2017 Ethereum ICO, the next cycle saw the DeFi Summer, and Ordinals will also cause an explosion in the Bitcoin ecosystem.

Jeff sees the innovation in Ordinals: "Everything in Ordinals is on-chain, while NFTs, game content, and other non-financial assets on Ethereum are not on-chain. The innovation of Ordinals allows Bitcoin to be more suitable for applications than Ethereum."

Gavin sees more significant changes in Bitcoin's scalability conditions after the Taproot upgrade: "The emergence of Ordinals is a historical inevitability; the Pandora's box of the Bitcoin ecosystem is about to open."

But they did not anticipate that the Bitcoin ecosystem would move faster than expected.

In early May 2023, the Bitcoin ecosystem welcomed its first small climax. The daily transaction volume on the Bitcoin chain repeatedly broke new highs, reaching 663,000 transactions on May 8.

Based on the Ordinals protocol, a large number of derivative protocols and wealth codes quickly emerged, with Jeff becoming one of the key promoters. He attempted nearly ten applications on Bitcoin Layer 1, with Bitmap.Game (Bitmap Metaverse land) and the BRC-420 protocol (an asset protocol based on modular data) generating significant wealth utility.

The floor price of BRC-420 protocol assets reached 0.798 BTC (approximately $34,067), while the mint cost in September 2023 was only about $1, increasing over 30,000 times.

However, the overly active transaction volume on the Bitcoin chain led to congestion and high fees. In early May 2023, the average block reward for BTC had surged to 4.85 BTC in fees, compared to 0.19 BTC two months earlier, an increase of 25 times.

This was like a spring for the Bitcoin cross-chain project ChainX, which had been paused by Gavin.

In 2017, cross-chain was one of the hottest topics in the blockchain technology circle. One of the cross-chain giants, Cosmos, held a developer competition in China. Gavin seized the opportunity to ask Cosmos founder Jae Kwon a long-standing question: "With such a large market cap for Bitcoin, why don't you cross Bitcoin?"

Jae Kwon laughed and said, "Who can do that?"

Gavin persisted and launched the Bitcoin cross-chain project ChainX, choosing another cross-chain star, Polkadot. In 2019, ChainX's mainnet went live, and within two years, ChainX was able to cross-chain 100,000 BTC. However, with the slot auctions launched by Polkadot at the end of 2020, this auction model had little to do with Gavin's ideal of universal connectivity and created excessive financial burdens. ChainX was temporarily abandoned.

Gavin did not leave the Bitcoin ecosystem. In 2022, he launched a new Bitcoin application project, OminiBTC, to involve Bitcoin in decentralized lending across the entire chain. However, after many twists and turns, what was achieved was a multi-chain ecosystem outside of Bitcoin.

During this period, Gavin and another partner flew to Singapore to seek help from Jump, intending to try to solve the issue of Bitcoin's interoperability with the Wormhole they manage, but ultimately it was shelved due to "impossibility."

"On one hand, the limitations of Bitcoin's architecture make it difficult to achieve secure decentralized cross-chain." More importantly, what would other chains cross over for? Bitcoin has no assets and no ecosystem.

A turning point came around October 2021 when Bitcoin welcomed its first significant upgrade—Taproot. Gavin excitedly stated, "This is a cross-era upgrade of Bitcoin's underlying technology."

The new pricing model introduced by Segregated Witness in 2017 allowed Bitcoin to soft scale by four times, but that fourfold scaling space could not be utilized. Until the Taproot upgrade, developers expanded the original script space from a limited size to an unlimited size, providing the possibility for Bitcoin's expansion.

In other words, the concept that Vitalik proposed over a decade ago about issuing colored coins and building smart contracts on Bitcoin has become genuinely possible under the scalable technical framework brought by the Taproot upgrade. "The birth and explosive popularity of Ordinals and BRC20 in 2023 are based on this premise."

In May 2023, after upgrading the existing technology at ChainX, Gavin launched the Bitcoin Layer 2 BEVM. Compared to ChainX, BEVM utilized a combination of schnorr + Mast + Bitcoin light nodes from the Taproot upgrade to form a decentralized POS network, transforming the security and decentralization of Bitcoin Layer 2 into the security level of BFT and POS models.

Fomo Venture Capital

Entering 2024, Bitcoin Layer 2 is booming with numerous chains.

In January 2024, the BitVM Chinese community conducted an incomplete count, claiming that within just a few days, there were at least 34 projects claiming to be Bitcoin Layer 2. However, multiple Bitcoin Layer 2 projects interviewed by ChainCatcher believed the number was far more than that, estimating that there were hundreds of projects eager to move. Jeff joked, "There are more banks than depositors; it's hard not to be accused of speculation."

The long-established Bitcoin news media founded by Vitalik, "Bitcoin Magazine," also stepped forward to say that "a new wave of speculators is trying to leverage the development of Bitcoin Layer 2 to promote their crypto assets."

Such a popular Bitcoin Layer 2 is a fast track for both project parties and investors in the bull market.

In the bull market, under the principle of promoting new over old, Bitcoin Layer 2 is indeed a shortcut for project parties to attract users and capital.

Rooch Network, which began developing modular blockchains at the end of 2022, plans to connect with all L1 blockchains in the future, but at that time, they did not consider the Bitcoin ecosystem.

The two co-founders of Rooch Network, HaiChao and jolestar, were initially among the many skeptics of inscriptions. HaiChao admitted that he did not realize the value of inscriptions at first. In May 2023, jolestar stated on the X platform that inscriptions need application scenarios to ensure sustainable development.

However, after the leading ORDI in the inscription market was listed on Binance in November 2023, the price of ORDI soared from $7.4 to over $12, and subsequently continued to rise, even approaching $100 at one point.

"The user base and ecosystem of inscriptions have reached a point that cannot be ignored," HaiChao also belongs to the group that was "convinced by the rise."

At this point, he realized that the essence of inscriptions is actually a third form of token distinct from NFTs and FTs—SFT (semi-fungible tokens), representing a genuinely new type of asset that possesses the dual advantages of FTs and NFTs, which also means that the Bitcoin network has achieved native innovation.

As the foundational development work of Rooch Network neared completion, they needed to find a suitable market entry point, and the Bitcoin network became one of Rooch Network's top choices. Rooch Network launched the first pilot network, RoochBTC, built on the BTC ecosystem, to create a bridge for Move developers to enter the BTC ecosystem.

After positioning itself in Bitcoin Layer 2, Rooch Network not only saw an increase in media interviews and Space invitations but also attracted the attention of several investors in a short period.

In addition to new projects, for some older projects from the previous cycle, Bitcoin Layer 2 is also a shortcut to quickly establish a position in the new bull market. Nervos Network (CKB), established in 2018, is a Layer 1 public chain ecosystem based on PoW consensus and supports smart contract development.

In early January 2024, Nervos chief architect Jan Xie posted on the X platform that CKB is the ideal second layer for Bitcoin's monetary system. Within less than a month, CKB's price rose from $0.0047 to nearly $0.02.

Some holders in the CKB community also tasted the sweetness of the Bitcoin Layer 2 narrative. They actively discussed how to maximize the use of the Bitcoin Layer 2 narrative, with one community member keenly pointing out that Binance's introduction of CKB—"Nervos Network is an open-source public chain ecosystem and protocol collection"—needs to be quickly changed to align with the definition of Bitcoin Layer 2.

Many well-known projects also benefited from "Bitcoin Layer 2." Conflux, known for chasing trends, saw its token price rise by 12% on the day it announced compatibility with EVM for its Bitcoin Layer 2 solution.

In December 2023, the five-year-old project MAP Protocol transformed from a full-chain interoperability protocol benchmarked against LayerZero into a Bitcoin Layer 2 and disclosed at least five investments from well-known institutions such as Waterdrip Capital, DWF Labs, LK Venture, and Alchemy Pay.

In an instant, everything could be Bitcoin Layer 2, and project parties flocked in, causing dissatisfaction from the Bitcoin scaling project Telepathy.

On the X platform, they opposed all Bitcoin Layer 2s, insisting that Bitcoin has no so-called "second layer." The reason for the proliferation of Bitcoin Layer 2s is obvious; venture capitalists envy the success of Ordinals but had no opportunity to participate, so they could only create a product that mimics Ethereum.

After chatting with Jeff, the founder of Bitmap and Merlin Chain, and over 20 investors, they all basically wanted to invest. "Investors were very FOMO, even though most did not fully understand the technology and gameplay."

In 2023, inscriptions led to the explosive popularity of the Bitcoin ecosystem, but it was all retail excitement, and investment institutions were FOMO but could not participate.

Bitcoin Layer 2 is almost the most suitable narrative for investors to enter the Bitcoin ecosystem. They can not only participate in the Bitcoin ecosystem but also have "Ethereum Layer 2 as a clear benchmark."

Around early 2024, Bitcoin Layer 2 became a hot track for financing, with nearly ten investments disclosed, and well-known venture capital firms like OKX Ventures, HashKey Capital, and ABCDE actively participated.

LaoBai, a partner at ABCDE Investment Research, bluntly stated, "No one can truly predict whether the Bitcoin ecosystem will prosper as expected, but Bitcoin Layer 2 is a track that absolutely cannot be missed."

When New Concepts Meet Memes

In January 2024, an incomplete count showed that there were at least 30 Spaces and podcast events surrounding Bitcoin Layer 2, with Bitmap and Merlin Chain founder Jeff being the most popular guest.

In about a month, Jeff accepted interviews from almost all mainstream Chinese blockchain media and participated in more than ten Spaces, podcasts, and interviews.

In the second half of 2023, LaoBai from ABCDE Capital focused on reviewing over 20 Bitcoin Layer 2 projects.

Similar to the early rise of Ethereum Layer 2 narratives, various technical routes flourished and debated in the early stages when the concepts were unclear.

However, learning from the experience of the Ethereum Layer 2 disruptor Blast, LaoBai stated that strong technology and strong narratives are two core considerations.

The so-called technology, since Bitcoin only does on-chain settlement and does not do verification, all Bitcoin Layer 2s basically cannot achieve security equivalence with the mainnet like Ethereum Layer 2. LaoBai needs to find a Layer 2 solution with security close to the mainnet.

But for project parties, in addition to security, they also need to consider practicality. The three mainstream scaling solutions for Bitcoin in the past, represented by client verification solutions like the RGB protocol, state channel solutions represented by the Lightning Network, and sidechain solutions. In the view of Stone, the research head of B² Network, none of them can balance security and practicality.

The B² Network team envisioned whether they could draw on Ethereum's Rollup solution, but it did not go smoothly at first; they could not solve a fatal security issue.

Stone explained, "That is, Bitcoin cannot complete the execution of Rollup and the verification of the entire state transition like Ethereum."

Half a year later, B² Network believed they had found a higher security handling method, which is to combine the bitVM and RGB solutions to achieve Bitcoin Rollup Commitment verification on the Bitcoin mainnet. Stone stated, "This is currently the solution with the highest degree of inheritance of Bitcoin mainnet security among BTC Rollup solutions."

However, Jeff bluntly stated that discussing technological innovation in Bitcoin Layer 2 is a common-sense error. "If you dig into the code, everyone's technical solutions are very similar," and the so-called innovation is merely how sufficiently decentralized and secure the second-layer chain should be.

"The security of the chain is the bottom line; it is not the reason why users are willing to deposit money." In Jeff's view, if viewed from the user's perspective, the willingness to deposit money must come with high returns.

Starting in June last year, the Bitmap Metaverse and the first asset blue box of the BRC420 protocol successively exploded, bringing wealth effects to users.

In the bull market, crypto players have little patience. For example, in the eyes of Bitcoin ecosystem player Lina, the core of Layer 2 public chain project parties is to make money, increase TVL, and support FDV, while users deposit money, earn points, and exchange tokens.

Beta, a newcomer to the crypto space for half a year, has experienced various narratives such as AI, DePin, and the Bitcoin ecosystem. After several rounds of sector rotations, he decided to downplay the narrative and look for more Ponzi-like and meme projects.

Bitcoin Layer 2 projects have both staking point models that are creatively played out and those that issued tokens early and became meme coins.

Merlin Chain's staking points for airdrop gameplay attracted over $3.6 billion in TVL in just one month, surpassing Solana and Blast.

Telepathy tells all parties from personal experience that creating a narrative for decentralized indexing of Bitcoin Layer 1 may be far less attractive than memes.

The Telepathy team claims that they unintentionally created a bunch of inscriptions, and after experiencing near-zero, they quickly rose again. Based on these inscription assets, they established Telepathy.

Telepathy is known as "medium" in the West and can be described as "jumping the god" in rural China.

The quirky style makes Telepathy highly meme-worthy. As soon as the Telepathy testnet went live, they released the inscription TEL3, accompanied by a video singing "appealing to Ponzi, equality for all."

Crypto user @qianqianlaw was quickly attracted by this unique style, saying, "This cult-like project stands out in the chaotic battle of L2s with its very quirky personality; I love this crazy project." @qianqianlaw bought TEL3 for 110+ sats before the Spring Festival and found it had tripled after the holiday.

Chinese People Reclaiming the Crypto Spotlight

In this bull market, the Bitcoin ecosystem is one of the narratives that cannot be ignored. Whether it is inscriptions or Bitcoin Layer 2, it is a narrative led by the Chinese community.

The narrative led by the Chinese community has long been subject to criticism: short-termism, harvesting retail investors, and weak technology. However, with the explosive popularity of inscriptions, Bitcoin Layer 2 has seen the emergence of innovative players like Merlin Chain, who can generate TVL, and the mysterious power from the East is also attracting the curiosity of overseas communities.

LaoBai, a partner at ABCDE Capital, has clearly felt that starting from the end of 2023, Western investment peers have begun to pay attention to the Bitcoin ecosystem and Bitcoin Layer 2.

Stone, the research head of B² Network, also stated that since the beginning of the year, North American investors have actively reached out to their team.

At the recently concluded Denver conference, Jademont, founding partner of Waterdrip Capital, met several overseas investment institutions and founders. "They were inquiring about the mysterious Bitcoin Layer 2 from the East and why its TVL is higher than most Ethereum L2s."

Dashan lamented that the last time the Chinese had such a position in the crypto market was during the Chinese public chain era from 2016 to 2017. Later, with regulatory constraints, Chinese public chains declined, and Chinese projects were almost entirely absent from the last bull market's DeFi Summer.

In the battle of Bitcoin Layer 2 in 2024, "with Hong Kong and Singapore, Chinese projects can finally have a place."