Polygon Ventures: Research and analysis of the BTC ecosystem in this bull market

Author: PolygonVentures, Compiled by: Vernacular Blockchain

To put it simply, Bitcoin (BTC), as an institutional-grade asset and global remittance system, will soon become a programmable blockchain network, whose identity has become the focus of intense debate.

Although BTC has always been viewed as a de facto store of value, there are a number of technical, institutional, and market factors that are pushing it in a more productive direction than mere "lazy" digital gold.

In this article, we share our views on the history and controversies of Bitcoin innovation, the latest initiatives, and Portal’s investment thesis, which aims to make Bitcoin more “capital efficient” and not just Just "programmability".

Bitcoin / Account

Digital gold is just a prelude. The most solid asset created by human civilization is extending its huge influence to the field of smart contracts.

Untapped potential

Bitcoin is mostly classified as a store of value because of its lack of programmability. Add to that low transaction throughput, slow speeds and high fees. Most of the Bitcoin held by 3 billion users lies dormant, unused.

This lack of programmability stems from its non-Turing complete scripting language and the fact that the core development team placed strict limits on the types of operations that could be performed. This inflexibility ensures security, but comes at the cost of slow innovation.

While stores of value like real estate, gold, stocks, etc. can be used as collateral/generate income, Bitcoin remains mostly unused.

Previous attempts to lend Bitcoin left an unpleasant impression on users, as they had to hand over custody of Bitcoin to overleveraged entities that eventually went bankrupt .

Attempting to send Bitcoin to the Ethereum Virtual Machine chain to replicate DeFi was also not very successful because the two are completely different environments and the bridge needs to provide a trust for this exchange area.

The bridge locks Bitcoin and mints a representation on the Ethereum Virtual Machine chain. This introduces reliance on a centralized entity or a set of multi-signature validators, which has lower security guarantees. The most popular bridge token, WBTC, has a market cap of just $10 billion, less than 1% of Bitcoin’s total market cap.

Programmable Bitcoin

So why is there renewed interest in programmable Bitcoin? Three catalysts attracted attention:

1) Ordinals

While ETF inflows have attracted attention from the financial community, Ordinals Attracting the attention of a large number of developers to the Bitcoin ecosystem. Ordinals and BRC-20 Token "burn" data into the Bitcoin ledger, but a social consensus layer is required to convert these specific data encodings.

Ordinals has Bitcoin NFT has pushed to second place in trading volume, second only to Ethereum. This success raises a key question:Can we create a trustless EVM paradigm on Bitcoin that does not rely on the social layer, backed by Bitcoin’s L1 guarantees?

Due to the base layer Given the constraints, this seems impossible. Sidechains have been the only alternative, leveraging Bitcoin miners to secure new chains embedded in an EVM environment. However, the security of this layer depends on an external group of coordinators.

2) Enter the BitVM

ZeroSync team Robin Linus has found a way to implement validator logic on Bitcoin Script without requiring protocol changes or soft forks.

BitVM adopts an OP proof-verifier model to express Turing-complete smart contracts.

Computed off-chain Execution, results are settled on the Bitcoin chain, similar to the modular Rollup ecosystem. Any observer can verify the execution results and has the power to punish the prover by having his or her funds slashed if fraud is discovered.

This has become The catalyst that allowed layer 2 scaling on Bitcoin to take off. Teams like BSquaredNetwork are using BitVM to build Rollups with diverse proof mechanisms and virtual machines. The citrea_xyz team designed a zero-knowledge validator circuit that runs natively on Bitcoin Script.

On Bitcoin Rollup leverages a modular technology stack that greatly improves scalability and efficiency. This advancement not only attracts talented developers who are proficient in EVM tools, but also attracts millions of users eager to interact with the same user experience.

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

3) Babylon

Although the second-layer expansion is busy Scaling, but Babylon sparked a revolution in capital efficiency within the Bitcoin ecosystem. To put it simply, Babylon is the EigenLayer of Bitcoin. It is a re-staking protocol that allows Ethereum stakers to provide verification services to POS chains, bridges, and sequencers, and earn rewards.

It ensures integrity through an automatic reduction mechanism in the underlying chain smart contract - a feature not possible on Bitcoin. So the Babylon team came up with an ingenious solution. Bitcoins are 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 key to this vault, thus enabling automatic penalties.

By staking their Bitcoin, Users can provide verification services for PoS chains, DA layers, oracles, AVS, etc. This has sparked a new paradigm that allows Bitcoin to generate substantial returns without giving up self-custody.

POS chains and other verification services can Leverage Bitcoin's economic security to bootstrap its protocol and build layers of security. Portal Finance is securing a Bitcoin bridge, Nubit is using Bitcoin as a DA layer, and the Avail Project plans to use quorum backed by Bitcoin.

LSTs are created on the POS chain Freely tradable locked and pledged Tokens to increase liquidity. Babylon partners with Ankr Staking to re-stake these tokens for higher yields, create stablecoins backed by Bitcoin, and more.

Summary

To summarize, Bitcoin is taking important steps in two aspects:

Scale vertically to solve programmability issues with a second-tier solution capable of handling millions of transactions.

Secondly, through a wide range of used as a reliable collateral to improve capital efficiency.

BitVM is still in its early stages and encounters some issues with multi-party contracts, high computational costs, and the need for regular server interaction. The ultimate goal may involve integrating zero-knowledge validator opcodes into Bitcoin’s scripting language to overcome these obstacles.

We are on the verge of seeing entirely new applications emerge on Bitcoin that will smoothly integrate with the EVM stack, opening up endless possibilities.