Polygon Ventures: Research and Analysis of the BTC Ecosystem in This Bull Market

Author: @PolygonVentures

Translation: Baihua Blockchain

This article aims to answer the "why" questions we are often asked about our investment theory regarding Bitcoin. The discussion topics mentioned in the text should not be considered financial advice.

In simple terms: Bitcoin (BTC), as an institutional-grade asset and global remittance system, is quickly becoming a programmable blockchain network, with its identity becoming the focus of intense debate. Although BTC has long been viewed as a de facto store of value, many technical, institutional, and market factors are driving it towards a more productive role than merely being "passive" digital gold. In this article, we share our views on the history and controversies of Bitcoin innovation, the latest initiatives, and Portal's investment theory, aiming to make Bitcoin more "capital efficient" rather than just "programmable."

1. Bitcoin / Accounts

Digital gold is just the prelude. The most robust asset created by human civilization is extending its immense influence into the realm of smart contracts.

Untapped Potential

Bitcoin is mostly classified as a store of value due to its lack of programmability, coupled with low transaction throughput, slow speeds, and high fees. The majority of Bitcoin held by 3 billion users remains dormant and unused.

This lack of programmability stems from its non-Turing complete scripting language, along with strict limitations set by the core development team on the types of operations that can be executed. This inflexibility ensures its security but comes at the cost of slow innovation.

While value storage tools like real estate, gold, and stocks can be used as collateral or generate income, Bitcoin remains largely idle in most cases.

Previous attempts to lend Bitcoin left users with unpleasant experiences, as they had to relinquish regulatory control of their Bitcoin to over-leveraged entities that ultimately went bankrupt.

Attempts to send Bitcoin to the Ethereum Virtual Machine chain to replicate DeFi lending have also been largely unsuccessful, as the two environments are fundamentally different, and bridges need to provide a trust area for such exchanges.

Bridges lock Bitcoin and mint a representation on the Ethereum Virtual Machine chain. This introduces a reliance on a centralized entity or a group of multi-signature validators, which has lower security assurances. The most popular bridging token, WBTC, has a market cap of only $10 billion, less than 1% of Bitcoin's total market cap.

2. So, why has interest in programmable Bitcoin resurfaced?

Three catalysts have attracted attention:

1) Ordinals

2) BitVM

3) Babylon

1) Ordinals

While ETF inflows have captured the attention of the financial world, Ordinals have drawn significant developer interest in the Bitcoin ecosystem. Ordinals and BRC-20 tokens "inscribe" data onto the Bitcoin ledger, but require a social consensus layer to convert these specific data encodings.

Ordinals have pushed Bitcoin NFTs to the second position in terms of trading volume, only behind Ethereum. This success raises a critical question: Can we create a trustless EVM paradigm on Bitcoin that does not rely on social layer support, guaranteed by Bitcoin L1?

Due to limitations of the underlying layer, this seems impossible. Sidechains have been the only alternative, leveraging Bitcoin miners to secure new chains embedded with EVM environments. However, the security of this layer depends on an external group of coordinators.

2) Enter BitVM

Robin Linus from the ZeroSync team found a way to implement validator logic on Bitcoin scripts without changing the protocol or soft forks.

BitVM employs an OP proof - validator model to express Turing-complete smart contracts.

Computation is executed off-chain, with results settled on the Bitcoin chain, similar to a modular Rollup ecosystem. Any observer can verify the execution results and has the right to penalize the prover if fraud is detected, potentially slashing their funds.

This has become a catalyst for the second-layer scaling of Bitcoin. Teams like BSquaredNetwork are using BitVM to build Rollups with diverse proof mechanisms and virtual machines. The citrea_xyz team has designed a zero-knowledge verifier circuit that runs natively on Bitcoin scripts.

Rollups on Bitcoin leverage a modular tech stack, significantly enhancing scalability and efficiency. This advancement not only attracts talented developers skilled in EVM tools but also millions of users eager to interact with the same user experience.

BitVM also introduces a minimal trust bridge to transfer BTC to POS chains. Citrea collects lightweight client proofs from other chains that can be verified natively on Bitcoin. This reduces the required trust, ensuring integrity as long as at least one validator remains honest.

3) Babylon

While second-layer scaling is busy expanding, Babylon has sparked a revolution in capital efficiency within the Bitcoin ecosystem. Simply put, Babylon is the EigenLayer for Bitcoin. @eigenlayer is a restaking protocol that allows Ethereum stakers to provide validation services to POS chains, bridges, and sequencers, earning rewards.

It ensures integrity through an automatic reduction mechanism in the base chain's smart contracts—something that is impossible to achieve on Bitcoin. Therefore, the Babylon team proposed a clever solution. Bitcoin is locked in a multi-signature account, allowing holders to stake and retrieve their funds after a waiting period.

If any attack is observed, the protocol will leak the keys to this vault, enabling automatic penalties.

By staking their Bitcoin, users can provide validation services for PoS chains, DA layers, oracles, AVS, and more. This has triggered a new paradigm, allowing Bitcoin to generate substantial yields without relinquishing self-custody.

POS chains and other validation services can leverage Bitcoin's economic security to bootstrap their protocols and build secure layers. Portal Finance is protecting a Bitcoin bridge, Nubit is using Bitcoin as a DA layer, and the Avail Project plans to use a Bitcoin-backed quorum.

LSTs increase liquidity by creating freely tradable locked staking tokens on POS chains. Babylon collaborates with Ankr Staking to restake these tokens for higher yields, creating Bitcoin-backed stablecoins, among other functionalities.

3. Conclusion

In summary, Bitcoin is making significant strides in two areas:

Vertical scaling, addressing programmability issues through second-layer solutions capable of handling millions of transactions.

Enhancing capital efficiency by serving as a reliable collateral in a wide range of applications.

BitVM is still in its early stages and faces challenges related to multi-party contracts, high computation costs, and the need for regular server interactions. The ultimate goal may involve integrating zero-knowledge verifier opcodes into Bitcoin's scripting language to overcome these obstacles.

Echoing @sandeepnailwal's view, "Bitcoin is an isolated island, disconnected from the broader web3 ecosystem."

We are on the verge of witnessing the emergence of entirely new applications on Bitcoin that will seamlessly integrate with the EVM stack, unlocking endless possibilities.