The consensus of the Bitcoin ecosystem still requires 3 to 5 years to establish, and the next breakout point is more likely to be Bitcoin-native lightweight assets, such as inscriptions and runes, supported by liquidity from centralized exchanges.
Host: Joe Zhou
Guests: Joshua, Chief Growth Officer of exSat; Sunny, Merlin Chain Infra Lead; Director Zhao; Lao Bai, Investment Partner at ABCDE; Chen Jian, Independent Researcher.
The Bitcoin ecosystem, as one of the main narratives in this round, has attracted much attention. We are fortunate to invite the Chief Growth Officer of exSat and industry OGs to discuss "how to find the next breakout point in the BTC ecosystem" on the occasion of the exSat mainnet launch.
Host: Please briefly introduce yourselves and share the latest developments of the projects you are involved in.
Sunny: I am Sunny, serving as the Merlin Chain Infra Lead. Merlin is a BTC L2 that launched its mainnet at the beginning of the year, and we have some exploratory collaborations with exSat.
Director Zhao: I have been following the Bitcoin ecosystem for a long time. During TOKEN2049 in 2023, we discussed many future opportunities for the BTC ecosystem, and I proposed a concept that if Bitcoin is gold, then the Bitcoin ecosystem and the inscription ecosystem are like gold products.
Lao Bai: Hello everyone, I am Lao Bai, an investment research partner at ABCD. We might be one of the VCs that invest the most in the Bitcoin ecosystem, especially in the infrastructure sector, in Asia and even globally. We have invested in nearly 10 projects, including Merli, Babylon, and Bitlayer.
From a VC perspective, the future of the Bitcoin ecosystem is unpredictable because each main line has its own logic for existence, and the Bitcoin ecosystem does not have a clear direction set by an organization like the Ethereum Foundation. The Bitcoin ecosystem is completely diverse, and it may take another 3 to 5 years to determine who will ultimately succeed.
Chen Jian: I am Chen Jian. I haven't been deeply involved in the Bitcoin ecosystem, as my main focus is on Ethereum, but I have participated in the development of some Bitcoin ecosystem projects, so I have maintained a long-term interest in the Bitcoin ecosystem.
Host: Merlin has become a validator node for exSat. Can you briefly discuss the reasons and details of the collaboration?
Sunny: This year, the main narrative around Bitcoin L2 has been focused on how to increase the application layer, which raises the question of what kind of chain can be considered the application layer of Bitcoin, or how to achieve a secure application layer. There are many different types of validation mechanisms, and Merlin's current approach is to find projects that can complement the middle layer from a specific angle, ultimately integrating Merlin into Bitcoin.
From the beginning of the year until now, we have seen various solutions. For example, there are proposals to turn Bitcoin into a POS to earn yields, which is a significant trend. The mechanism of exSat is quite unique; it features a dual mining mechanism that combines the mature PoW Bitcoin mining pool with POS from the Ethereum ecosystem. Therefore, we look forward to participating in this and exploring the balance between these two different methods.
Host: exSat launched its mainnet today. Can you share the project's progress and how ordinary users can participate?
Joshua: I am the Chief Growth Officer of exSat. exSat is a Bitcoin scaling solution because we believe that Bitcoin scaling solutions should be diverse, so exSat is not limited to just an L2 or sidechain solution. We have designed three major scenarios for BTC: one is the issuance of BTC native chain assets, the second is the payment and application of BTC itself, and the third is how BTC can safely enter the BitcoinVM or EVM ecosystem. Currently, we are in the consensus-building phase, and the first thing we are doing is synchronizing the original Bitcoin data to exSat to form data consensus. Data, assets, and users are the three essential elements of blockchain; mastering data means mastering the flow of assets, allowing for asset operations. However, the Bitcoin network does not have an account system like Ethereum, so we aim to develop an account model system based on the UTXO model. Based on the UTXO model, we can establish an index of assets on the BTC chain and facilitate secure liquidity and issuance of BTC assets, thereby achieving true decentralized custody of BTC assets. These are the three main things exSat aims to accomplish.
As for how users can participate in the exSat network, there are two aspects to consider. First, both ordinary users and institutions can participate in the consensus layer through staking. Our partners have built many nodes, and ordinary users can also participate through the nodes constructed by our partners. Additionally, ordinary users can enter our ecosystem through a cross-chain bridge solution that we will launch next week. Users can first participate in staking, and later we will introduce a new asset issuance protocol, which is part of our short-term plan.
Host: Is the shift of BTC from a store of value to developing an ecosystem a necessity? Where do you think the next breakout point in the BTC ecosystem might occur?
Sunny: We can generally categorize Bitcoin holders into two types: one type consists of relatively new holders whose belief in Bitcoin is purely based on its value, and they indeed hope to move Bitcoin onto the chain for hedging or stable returns, or to participate in some DeFi activities in other ecosystems, which leans towards developing the ecosystem. The other type is the old OGs of Bitcoin, who hold Bitcoin more like traditional market participants hold gold, caring about Bitcoin's value storage. They may lack interest in the Bitcoin ecosystem and prefer to hold it. We have different strategies to serve these two distinct groups.
According to market data, the breakout point of the Bitcoin ecosystem may still be in some lightweight assets, while the development cycle of the underlying Bitcoin protocol may take a bit longer, possibly as Lao Bai mentioned, requiring 3 to 5 years or even 10 years to establish the underlying consensus of the Bitcoin ecosystem.
However, if we consider a slightly smaller breakout point, I believe it will start with relatively lightweight assets, such as the recent signs of speculation in the rune ecosystem. Runes can accommodate a variety of resources, can fully describe a sentence, and can have tags placed on them. We are currently investing considerable effort into runes. Additionally, the combination of the Bitcoin ecosystem and Telegram could also be a great breakout point.
Director Zhao: Recently, market liquidity has been lacking. The entire industry widely believes that liquid assets are three types: BTC, ETH, and USDT. Therefore, the overall market growth actually comes from the issuance of USDT. Apart from direct fiat USD deposits in compliant countries, most of the entry into the crypto market is through USDT. However, the issuance of USDT has now reached around 120 billion USD, so the pace of stablecoin issuance is relatively slow, unlike the state in 2021 when 1 billion USDT was issued weekly.
Since the last cycle began, when everyone was building applications on various chains, we have returned to a pricing state based on Bitcoin and Ethereum. People have noticed that various inscriptions, runes, and NFTs in the Bitcoin ecosystem are basically priced in Bitcoin. Even when people were rushing into Solana memes, it returned to a state of pricing based on Solana. Each ecosystem has started to become a relatively closed environment, rather than everyone using USDT to price all assets as before. In this context, its applicability is reflected; it is no longer purely a store of value. The so-called development of the Bitcoin ecosystem is essentially creating more pricing scenarios for Bitcoin. Once it starts pricing other assets, its circulation will increase, and when people begin using Bitcoin to purchase other things, it will enhance the potential applications of Bitcoin itself. To increase Bitcoin's pricing power, we need to establish its application scenarios across the entire market ecosystem, including BTC L2, etc.
People will also find that the willingness to hold USDT has gradually decreased compared to 2021. Now, people are more willing to hold other pricing currencies, including BTC, SOL, and ETH. The Ethereum and Solana ecosystems are already quite mature, and now Bitcoin also needs to build different ecosystems and continuously increase its pricing scenarios. BTC as a pricing asset and yield-generating asset is a significant direction.
Lao Bai: The development of the Bitcoin ecosystem is essential. Back in 2019, I supported the large block technology route, and the logic is simple: if there are not enough transactions on-chain after 5 or even 10 more halvings, the security model of Bitcoin will be threatened. Bitcoin will ultimately have no second option besides issuance. So at that time, we believed that large blocks could stimulate more transactions on-chain. Later, when BRC-20 became popular, many people felt that Bitcoin was saved because these inscription transactions on-chain brought in enough block transaction fees, and at one point, transaction fees even exceeded block rewards. However, it turned out that this only lasted for about five months.
From a VC perspective, we have already seen four different routes. As for which route is the true core route of the Bitcoin ecosystem, it is now completely uncertain. The first route is the issuance of assets mentioned earlier, such as inscriptions and runes, which issue assets on the Bitcoin mainnet. The second route is the recently popular BTCFi, which strengthens Bitcoin's position as digital gold and connects digital gold to various public chains to participate in DeFi, somewhat like the decentralization of wBTC. The third route is the scaling route, which leans towards EVM or ZKVM or other various VM versions, using familiar languages and tech stacks to bring Bitcoin into these strategies and redevelop the ecosystem. The last route is the most native and the most challenging, but we have recently seen some promising momentum, all based on the UTXO native route. For example, UniSat did Fractal Bitcoin last month, which is equivalent to a mirror point of Bitcoin, just modifying the block time and difficulty and adding many flexible settings. We have also seen many projects deeply engaging with the Lightning Network. Previously, the Lightning Network struggled to expand because, first, setting up a node was too complex for ordinary users; second, there were no stablecoins, making it strange to use Bitcoin for payments; and third, the number of Lightning Network nodes was insufficient, requiring more people to participate in building these nodes. So now we see different teams working on this, including those starting to create incentive layers for the Lightning Network, and even projects that encourage people to set up devices similar to routers at home to incentivize them to become Lightning Network nodes, as well as projects that completely abstract the setup of Lightning Network nodes, allowing users to deploy nodes with a single click.
The technical challenges or ecological issues faced by the Lightning Network now show signs of being resolved. If these issues are truly addressed, the theoretical TPS (transactions per second) of the Lightning Network could be infinite, as it is a channel-based technology. Therefore, the Lightning Network is a line I personally have high hopes for, although it is a technically challenging line that may take three to five years to mature.
Chen Jian: Currently, 58% of all assets in the crypto space are in Bitcoin. All entrepreneurs and VCs are trying to find ways to leverage this massive amount of assets to release some of its liquidity, which would greatly help increase and boost the inherent liquidity within the entire crypto space.
This logic is straightforward and sounds appealing. The Bitcoin ecosystem or BTCFi will certainly continue to strive for greater heights. The most suitable direction for the Bitcoin ecosystem right now is how to allow holders to safely release their liquidity without locking or custodial requirements. People are generally reluctant to spend Bitcoin, and I believe this is a significant reason; Bitcoin holders still hope to find more stable ways to release their Bitcoin liquidity. I cannot imagine how a gaming or social platform could be built on Bitcoin's current state, as this transcends any technical issues.
If Bitcoin holders could ensure sufficient security and have a stable staking yield similar to Ethereum's POS, they would be very willing to participate. Besides staking for yield, they also hope to release dual liquidity through a mechanism similar to Ethereum's re-staking logic in a secure environment. Engaging in gaming or social activities on Bitcoin is challenging to fit into the aforementioned two closed loops.
However, developing stablecoins and BTCFi-related applications on Bitcoin seems logically feasible. Of course, I do not rule out the possibility of social and gaming applications on Bitcoin, especially from a profit-making perspective, but establishing the logical foundation is quite difficult.
Joshua: A few days ago, we discussed a question: if SpaceX takes you to Mars, what assets can you use on Mars? From the perspective of asset classes, first, production materials on Earth, such as land, cannot be taken with you. As for gold, how much can you carry to Mars? It is also uncertain whether there is more gold on Mars. Essentially, digital assets are the most suitable, meaning that in the next era of exploration, digital assets will be the most appropriate form of currency. In the long run, we have always believed that BTC is not just a store of value; it must have use cases and essential needs. Moreover, from the attributes of BTC itself, while it is often defined as digital gold, it differs from gold in several ways. First, both gold and BTC can be preserved for a long time, but BTC can last even longer because it is data; as long as the data exists, the asset continues to exist. Second, gold's past liquidity as currency has geographical limitations, while BTC has ample liquidity when settled on-chain, and its settlement is very easy, far surpassing the circulation scenarios of gold. If we step outside the ecosystem defined by the US dollar, BTC has the potential to exist as a real currency.
The BTC ecosystem has always had two types of users. One type treats BTC as an asset, so all their scenarios revolve around preserving and increasing the value of that asset. Since 94% of BTC has already been mined, with only 6% remaining, it resembles many previously issued NFT assets, which have a phase of explosive growth followed by maintaining the existing market. The only demand from users in the existing market is to preserve and increase value, leading to a proliferation of deposit-like or fixed-income products. The other type of user treats BTC as a consumer product. From the perspective of younger individuals, BTC and ETH, even many memes, are not seen as different; they simply view them as consumer goods. If I can exchange BTC for higher-yielding inscriptions or other items, it becomes a consumer product. When using BTC for consumption, a consumption logic emerges.
From the perspective of consumption logic, BTC has the potential to develop social applications. I see it as akin to Pinduoduo or Taobao, where I use BTC to exchange for a specific asset or service on Taobao. At this point, various demands will arise, so the Bitcoin ecosystem itself could generate gaming or search scenarios.
BTC entirely relies on liquidity bursts; it is a non-yielding asset, unlike many other assets. It is a completely zero-interest asset, so its price volatility differs from gold, which has low volatility, while BTC's price volatility is significant and entirely dependent on liquidity. Currently, Bitcoin staking essentially injects BTC liquidity into other public chains, effectively siphoning liquidity from other public chain ecosystems. All tokens in the public chain ecosystem will absorb BTC liquidity, and ultimately, Bitcoin holders will convert this liquidity back into BTC.
We believe that in terms of Bitcoin staking, besides the ongoing discussions about on-chain asset issuance, we see that BTC is likely to have significant connections with RWA (Real World Assets). When you have stable returns in real assets, following the logic of buying fixed-income products, you can genuinely access a stable RWA product, which could bring long-term asset appreciation to BTC. First, excluding BTC's own value growth, it can provide you with additional stable interest, which does not rely on liquidity bursts.
BTC consumer users essentially want to earn money from liquidity and information asymmetry. Its model is quite similar to what we see on Douyin (TikTok); the faster the information flows, the better the liquidity, and the better the asset prices. Currently, the inscription and rune assets have not experienced a liquidity explosion because they have not received support from centralized exchanges. For Bitcoin-native assets to explode, they must gain liquidity support from centralized exchanges.
Host: Does Bitcoin have the potential to become the next major platform for DeFi? What conditions are limiting its current development?
Sunny: Currently, there are no technical conditions to achieve this. The Bitcoin network does not support smart contracts, and the block size is limited, making it impossible to perform overly complex programming. Of course, the biggest limitation is also the greatest security guarantee of the Bitcoin network. Projects that want to use the Bitcoin chain as a platform can easily face challenges in consensus, as Bitcoin holders, including these mining pools, may not agree. I believe this is a significant factor limiting the development of the Bitcoin network. In fact, there are already more and more BTCFi applications on various chains, and their gameplay is gradually resembling the re-staking that occurred after Ethereum's POS launch, using BTC as collateral to leverage. I saw a report today stating that only 2% of BTC is actually involved in DeFi activities, while 98% of BTC assets remain unutilized, which indicates a high potential and upper limit for development. Because the Bitcoin chain itself can do very little, Merlin has built an application layer to meet user needs.
Joshua: As an asset, Bitcoin is now widely present in the current public chain ecosystem and participates in DeFi activities. Since only 2% of assets are involved in protocols, 98% of BTC assets are still on the sidelines or locked in wallets, indicating its enormous development potential. The main reason this 98% of assets are restricted is that there hasn't been a sufficiently secure way for holders to participate in the ecosystem. The various versions of the BTC underlying layer we see now are likely managed in a centralized or relatively centralized manner, with users trusting centralized institutions. Centralized institutions have their advantages, such as the compliant development methods in the US that give people confidence in placing their assets in these custodial institutions. However, the so-called centralization requires compliance with many complex regulations, which greatly limits the participation of truly anonymous BTC holders in these projects. Therefore, we believe that in asset management, there are two approaches: one is for users to participate in projects through centralized institutions they trust, and the other is a decentralized approach that allows BTC holders to engage in DeFi.
From the beginning of exSat's design, when synchronizing UTXO data, we considered the idea of building a decentralized custodial platform within the next six months, hoping to construct the BTC ecosystem in a more decentralized manner and help the BTC native chain move towards a broader public chain path. Without the significant restrictions of centralized institutions, how to achieve truly secure transfers of BTC with anonymity and untraceability is a question that needs to be answered before we can truly open the door to BTCFi.
Host: Are there differences between players in the BTC ecosystem and players on other chains? What direction do they lean towards in terms of on-chain applications and interactions?
Chen Jian: The demands of Bitcoin players may be divided into two types. The first demand is for yield on their holdings. The second is to release the second layer of liquidity for Bitcoin assets in a secure manner without locking liquidity, which means staking Bitcoin securely and exchanging it for a certain proportion of stablecoins. Additionally, treating Bitcoin as a consumer product, burning gas to inscribe, could gradually give rise to communities and games; I do not deny the possibility of this scenario.
Director Zhao: Recently, there has been a trend where more institutions or larger players are actively or passively participating in the construction of the Bitcoin ecosystem. First, Bitcoin's market share has been steadily increasing. Second, as an index product for the underlying industry, BTC or BTC ETFs are the first choices for allocation, and BTC ETFs have brought in a lot of incremental funds. All risk assets are priced using a marginal pricing mechanism, meaning they are priced based on the last transaction price. The market has undergone significant changes due to the approval of BTC ETFs, attracting a lot of liquidity when BTC prices were between $50,000 and $60,000.
It is precisely because of the liquidity brought by BTC ETFs that Bitcoin's price has remained relatively stable, with little risk of significant price bubbles. In contrast to meme tokens, which have substantial price bubbles—like the recently popular GOAT, which has a market cap of $600 million—if large-scale cashing out occurs, how much can that $600 million market cap actually be converted into? People have seen that around $1 million in liquidity can support a market cap of about $30 million for a meme token, meaning that only $1 million was invested to price a $30 million asset.
However, the current price bubble of Bitcoin is relatively small, and many addresses have become permanently dormant due to lost keys. Some strong believers in Bitcoin have ceased any selling behavior, so the market value of Bitcoin is gradually increasing, or the overall market's holding cost is continuously rising. The question of how to make this idle money more liquid and how to further expand Bitcoin's network effect is something many entrepreneurs are contemplating.
Lao Bai: We categorize Bitcoin holders into three types. The first type is the old OGs who hold their coins without moving them. Generally, they entered the space relatively early, and some of them missed the DeFi bull market; they are indifferent to this matter. Even with sufficiently secure yield-generating tools, these OGs will not move their Bitcoin for a 5% or 10% API, or they may simply not need the money and thus do not care about those few points of yield.
The second type consists of players from last year's inscriptions and runes, who are similar to those currently participating in the Pump.Fun meme launches on Solana. These individuals do not treat Bitcoin as a belief; they do not hold much Bitcoin, generally using it merely as initial capital or tools for inscriptions and runes.
The third type includes many regular traders, including myself, who prefer to buy altcoins and hold Ethereum among mainstream assets. Many do not favor Bitcoin, believing its market cap is too high and its growth too slow. After this cycle, they suddenly realized that aside from memes, there are hardly any sectors that can outperform Bitcoin, so they are forced to allocate Bitcoin. This group of players purely views Bitcoin as a value benchmark and part of their investment portfolio, without particularly caring about what they can do with Bitcoin.
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