Thesis 2024: Bitcoin Building Szn

Throughout early Q1, The Tinkering Society will be sharing four themes it believes will drive freedom of choice and decentralization across 2024.

There’s an old philosophical problem posed by Irish politician William Molyneux in the 1600s. This is the excerpt:

“Suppose a Man born blind, and now adult, and taught by his touch to distinguish between a Cube, and a Sphere of the same metal, and nighly of the same bigness, so as to tell, when he felt one and t’other; which is the Cube, which the Sphere. Suppose then the Cube and Sphere placed on a Table, and the Blind Man to be made to see. Quaere, Whether by his sight, before he touch’d them, he could now distinguish, and tell, which is the Globe, which the Cube.”

We believe that crypto is largely blinkered to the potential of building on Bitcoin.

That it is so ingrained in us to collectively see it as the store of value that we’re missing a much wider DeFi opportunity.

In reality, Bitcoin’s ‘brand’ as the most recognizable digital asset on the planet could actually imbue it with the kind of trust needed for mass adoption. Not to mention, its serious head start in terms of distribution and integrations.

Here’s why we think we’re on the cusp of a DeFi Summer renaissance, but with Bitcoin taking the lead, and where the most novel developments will happen.

Ordinals

As a quick primer on the concept: each Bitcoin network block contains 100 million satoshis (known as Sats) and the Ordinal protocol allows users to inscribe text, images, and other kinds of data onto them. We’ve previously discussed Colored Coins and this is just another way of giving tokens unique value.

Ordinals were a revelation in early 2023. They let Bitcoin users stamp their individuality directly onto the network for the first time, and in a completely different way from NFTs.

Despite waves of dips, Inscriptions have been on a consistent, but very gradual, uptrend across the span of a year. This is a strong indicator now that the dust has settled from the initial frothy hype in a space that is deeply fickle like crypto.

The BRC-20 standard was born from the concept of Ordinals. While a Bitcoin NFT season looks very unlikely (JPEGs are rekt, sorry) there’s a significant opportunity for RWAs to be built on the network.

Why Bitcoin and not Ethereum? Well, one of them is getting exponentially harder to attack and the other is locked in a growing struggle with centralization.

Rollups

Scalability is not a new problem. Solve the issue and it not only becomes a more efficient way to send and receive, but potentially enables greater functionality (and even privacy?) and new ways to utilize $BTC in DeFi, such as using it for loan collateral.

As with Ethereum, there are several scaling options being built. Perhaps the most intriguing execution here is rollups, which is (broadly) where transactions are bundled up off-chain and then verified on a separate network. The pay-off here is that the computational cost of validation transactions is much lower.

Most importantly, other options like sidechains potentially undermine decentralization due to factors like multi-sigs and team control, and so it only makes sense that Web3 developers gravitate towards lesser risk.

ZK-Rollups in particular are going to be a focus of interest for us over the coming year. Leveraging zero-knowledge proofs, a cryptographic proof that preserves computational integrity while compressing computational on-chain storage, is a natural next evolutionary step for Bitcoin on its path to mass adoption.

Chainway and Kasar Labs are leading development in this area (and both leverage the aforementioned Ordinals project). The fundamental difference here is that Chainway uses its Sovereign Software Development Kit (SDK), while Kasar Labs lets developers utilize the Madara stack to create StarkNet-based rollups.

Stacks

Stacks is a smart contract layer (L2) built “on top of” Bitcoin that enables the deployment of dApps using its Proof of Transfer consensus mechanism. It extends Bitcoin’s functionality by allowing dApps to use the network’s state, in a manner similar to how builders have been using Ethereum so far.

It is by far the most advanced L2 project aiming to develop smart contracts that interface with Bitcoin, and it has a pivotal 2024 ahead of it.

The upcoming Nakamoto upgrade will bring fast blocks and a reduction in Stacks network confirmation times from ~10 minutes down to seconds. This will happen alongside the introduction of sBTC, a 1:1 Bitcoin-backed asset that will allow developers to leverage the security and network effects of the base network.

In conjunction with this, Bitcoin’s underlying infrastructure is undergoing major changes, with new tools like BitVM facilitating a trust-minimized way to transfer between L1 and L2.

Lightning Network

Lightning Network is a second-layer scaling solution that uses off-chain micro-payments to improve Bitcoin’s network performance.

For a long time, the project was pitched as a scaling messiah with its novel approach. That now looks to be changing.

Developer unrest has seen core figures from the community voice opinions on the direction of Lightning Network and potentially serious bugs.

The number of Lightning Network nodes and channels have both been declining across 2023 and into this year. While we know the Bitcoin network has never been stronger, this paints a bearish picture for the Layer 2’s ecosystem.

In addition, Lightning Network integration by centralized exchanges and payment solutions has remained slow, which is clearly hurting the rate of adoption.

However, we’ve seen an interesting product market fit between Lightning Network and the Nostr community. More use cases like this could quickly revive interest and attract new developers and ideas.

Bitcoin Szn Summary

DeFi as a broad concept remains hazy at best for significant portions of the world. But a far bigger number have heard of and used Bitcoin.

As it stands, accessibility is the core issue for Bitcoin-led DeFi growth. If this can be remedied, which many of the signs point to, then we expect an exponential rate of development. In fact, we believe we’re already seeing the very early signs of piqued, frothy interest which preceded DeFi Summer 1.0.

The difference here is that we’re dealing with Bitcoin DeFi and not Ethereum. The outcome could be DeFi that is more readily digestible for masses, and therefore has a much better shot at going global.