In a previous article -- "What is Everyone FUDing About Runes Protocol Five Days After Launch?", I briefly analyzed the underlying reasons for the FUD surrounding the Runes protocol: the current layer one protocol only supports the rampant issuance of assets without any fresh narrative, and has not realized the greater value of making assets flow. It is precisely because there has been no further development beyond speculation and memes that the high gas fees triggered by Runes have only maintained for a few days before sharply declining back to a "normal level" below 50.

So, what kind of layer one protocol do we need to support the long-term development and value narrative of the BTC ecosystem? Instead of just issuing a few memes, most protocol assets end up at zero after a brief surge.

Author: Portal _ Kay

X / Twitter: @ portal _ kay

1. Comparison of Mainstream BTC Layer One Protocol Features

Before discussing this issue, we need to have a basic understanding of several mainstream BTC layer one protocols. Here, I have summarized the content from Cipher's course "Overview of Bitcoin Layer One Asset Protocols" in four aspects: data location, two-step operations, balance models, and issuance methods.

(Highly recommend Cipher's course; the explanations of several protocols are very clear. Interested friends can take a look. Details: https://www.youtube.com/watch?v=mgUxYU5tcJM)

2. What Kind of Protocol Can Support the Explosion of the BTC Ecosystem?

If we expect a BTC ecosystem where various DApps flourish and Bitcoin assets flow freely, then to achieve this vision, I believe that a layer one asset issuance protocol needs to have these four characteristics:

1. Efficient and Convenient Asset Circulation

First of all, whether on layer one or layer two, the ability for assets to circulate efficiently is the foundation for releasing their value. Circulation on layer two is relatively easier to achieve, so here we focus on the situation of asset flow on layer one, which can be divided into two types:

1.1 Transfer Transactions of the Assets Themselves

Due to the underlying logic of PoW, the flow of assets on layer one is inherently limited by the generation of a block every 10 minutes. Therefore, the convenience of asset transactions on layer one should be able to achieve the same level as transactions of BTC itself, where any amount can be transferred in a single transaction, which would meet the basic requirements.

Currently, aside from BRC-20, other protocol assets can already achieve single transaction transfers of any amount between two wallets. The biggest issue lies in the order placement on DEX exchanges. As it stands, ARC-20, Runes, and RGB++ can only place orders for all assets on a single UTXO at once, and cannot allow users to choose any amount for order placement.

For example: If there are 2 runes in a wallet, and each rune has 100 tokens. The scenarios the user wishes to achieve and the operations currently supported by the trading market are as follows:

1️⃣ Place an order for 50 tokens: Cannot be directly achieved; must first perform a split operation to transfer 50 tokens from one UTXO to themselves, then split into two UTXOs, and finally place an order for the UTXO with 50 tokens.

2️⃣ Place an order for 150 tokens: Cannot be directly achieved; the 50 tokens need to be transferred and split first, then separately choose one rune with 100 tokens and one with 50 tokens to place orders for both.

It can be seen that currently, trading various layer one assets on DEX is not flexible enough, which inevitably reduces the liquidity of various layer one assets.

1.2 Mutual Exchange of Different Assets

In addition to the transfer transactions of the assets themselves, asset circulation also includes the mutual exchange between various layer one assets. Moreover, this exchange ideally should not rely on a centralized node. To achieve this functionality, it not only requires the capability of the protocol itself but also depends on another important infrastructure: layer one Swap. Currently, we have seen many projects emerging in this space, with Dot Swap running relatively fast. MagicEden has also reserved an entry for rune Swap, and the product is expected to be launched soon.

Additionally, if a credible BTC network stablecoin can emerge, the mutual exchange between assets will become even more efficient. As an intermediary for exchange, stablecoins can allow users to see the actual price of an asset more intuitively and eliminate concerns about exchange fluctuations caused by the intermediary's own exchange rate.

2. Flexible and Diverse Asset Issuance

If we are laying the foundation for the explosion of the BTC ecosystem, then layer one protocols must support more flexible asset issuance methods; simply relying on Fair Launch cannot cover diverse use cases. Currently, the Runes protocol can support three different asset issuance methods:

(1) Fair Launch, which is 100% open and fair minting;

(2) Fixed Cap, where the project party pre-mines 100%;

(3) A combination of the two, where the project party pre-mines a portion and the remaining part is Fair Mint.

Only when the protocol supports flexible asset issuance methods can it meet the actual use cases of various projects, such as:

1️⃣ Issuing meme coins, 100% Fair Mint, entirely based on community consensus;

2️⃣ The project party issues governance tokens, distributing them to investors, ecosystems, and other stakeholders according to the tokenomics plan;

3️⃣ Reward tokens for a certain project, 100% pre-mined and airdropped to community users;

4️⃣ Projects co-built by the project party and the community, where the project party reserves a portion for operational needs, and the remaining part is Fair Minted by the community.

5️⃣ ……

3. Limited Programmability Support on Layer One

The core value of BTC layer one lies in its broad consensus and maximum asset security. Under the premise of ensuring the security of layer one assets, implementing some basic programmable features is sufficient to stimulate considerable asset liquidity.

In this regard, one of the solutions currently visible is Babylon. Although Babylon has not launched its own layer one protocol, it utilizes BTC's own timelock and hashlock settings to ultimately allow BTC assets to remain in the holder's own wallet while participating in staking and earning staking rewards. Therefore, other BTC layer one protocols can also leverage these settings of BTC to enhance their own programmability on layer one.

Additionally, the ARC-20 protocol has disclosed that it is developing AVM, which can implement smart contracts on BTC layer one, enabling basic DeFi functions such as deposits, staking, and lending. However, AVM has not yet disclosed many implementation details, so I will not elaborate further on this.

With the efforts of various projects, I believe more excellent solutions will emerge in the future. At that time, if it can safely achieve an annualized interest rate of 5+%, it should attract a significant amount of BTC capital.

4. Layer Two Supports Complex Smart Contracts

Since BTC layer one cannot achieve Turing completeness, it inherently lacks the conditions to operate complex smart contracts. Therefore, we can only place our hopes for the flourishing of DApps on layer two. Of course, the high programmability of layer two must be based on the premise that assets can inherit most of the security of the main network.

Recently, several EVM-compatible L2 projects have experienced varying degrees of congestion in cross-bridge funding, leading to a deeper understanding of this issue: project parties temporarily changing cross-funding conditions, insufficient liquidity for cross-chain bridges, high fees, etc. These problems undoubtedly deter large BTC funds. If a layer two cannot enhance the liquidity of BTC assets, then such a layer two is of little significance.

The BTC ecosystem needs asset circulation methods that align with its characteristics. In this regard, the most competitive solution currently seems to be the "homomorphic binding" scheme implemented by RGB++ on the CKB network. Layer one assets can safely jump to the layer two network without needing to cross bridges, using Leap operations. Meanwhile, the CKB network can support the construction of relatively complex smart contracts, providing a foundation for the emergence of various ecological DApps.

3. Vision for the Development of the BTC Ecosystem

The scene I look forward to seeing for the true rise of the BTC ecosystem is as follows:

🔹 Layer one asset issuance protocols gradually stabilize, allowing simple DeFi operations such as Swap, liquidity mining, and collateral lending on the BTC mainnet.

🔹 Layer one assets can safely, conveniently, efficiently, and at low cost enter the layer two network.

🔹 The layer two network sees various fresh and interesting applications, including but not limited to various DeFi, GameFi, and SocialFi products.

🔹 A large number of DApps with active users and real asset flows emerge within the entire ecosystem, and these DApps issue their project tokens based on credible layer one protocols, gradually giving the core assets within the ecosystem actual business value as support.

Seeing these envisioned scenarios, some friends might wonder what’s so magical about them? They don’t seem much different from Ethereum's current situation. Yes, with my limited imagination, I indeed couldn't think of a more attractive new story. However, all of this needs to be built from scratch for the BTC network. Even just reaching Ethereum's current state would allow the entire ecosystem's value to reach trillions of dollars. Not to mention that we are relying on BTC, which itself carries 50% of the value of crypto assets?

Let us witness this process together, or better yet, choose to be a participant and build together in your own way!

Disclaimer: This article is for reference only and should not be used as legal, tax, investment, financial, or any other advice, nor does it represent the position of RunesCC.