The Second Half of the BTC Ecosystem Competition: Who is the Optimal Solution for Value Carrying?

Author: Evan Lu, Waterdrip Capital

Since the Ordinals protocol exploded in popularity in 2023, sparking the vigorous development of the Bitcoin ecosystem, the Bitcoin ecosystem has, in just a year and a half, completed the evolutionary path that Ethereum took years to complete. By the end of Q1 this year, the Bitcoin ecosystem's 1.0 cycle had gradually come to an end. BTC's price, reversing its previous summer slump, broke through $110,000 and $120,000 per coin, reaching new all-time highs. However, the market performance of Bitcoin-related tokens on exchanges has been less than satisfactory. However, a single year is inherently insufficient for a technology to progress from conception to development, implementation, and widespread adoption. This is especially true for implementing new technologies on Bitcoin, the largest store of value network.

Observing the different technological paths of the Bitcoin ecosystem reveals that we are still in a developmental phase. The true prosperity of the BTC ecosystem is still far from here. Therefore, the battle over the BTC L2 path has just begun. BTC Ecosystem 1.0 and 2.0 Since BTC is widely recognized as "digital gold," why is there still a need to promote the development of the BTC ecosystem? This is because the BTC network's extremely simplified scripting language, coupled with the PoW consensus mechanism, ensures extremely high security and decentralization; however, this also limits Bitcoin's scalability and programmability. As the underlying anchor asset of the entire crypto industry, BTC actually has a significant amount of value that has yet to be fully realized. Imagine if just 10% of BTC (approximately 2.1 million coins) were used in DeFi. At $100,000 per coin, a whopping $210 billion in asset liquidity would be released! From an ecosystem perspective, the BTC ecosystem can be divided into the infrastructure layer (L2) and upper-layer financial protocols (BTCFi). The following article will focus on the interpretation and comparison of BTC's infrastructure technology paths. In the 1.0 era of the BTC ecosystem, a typical characteristic was "TVL-first"—BTC was first transferred to the L2 network through asset bridges or custodians, and then DeFi protocols were deployed on L2 to activate BTC liquidity. This was also the approach used by early ETH sidechains, most notably Polygon. This approach was also very user-friendly for crypto users who came from the ETH era. The logic was essentially the same as the EVM's L2 layer—except that the underlying layer was the BTC network. This technical path was able to quickly accumulate funds and a user base. However, its shortcomings were particularly obvious: the security of BTC assets could not be guaranteed. The 2.0 era of the BTC ecosystem returns to fundamental technological innovation: achieving breakthroughs in security, efficiency, and native compatibility. From the mainnet launch of the Raiden Network to the active advancement of technologies like ZK Rollup, RGB, and BitVM, we've seen an increasing number of projects exploring how native assets on-chain can be more secure, efficient, and natively generated and transferred on Layer 2. For developers, this presents greater potential for innovation; for VCs, it marks a significant turning point in the BTC ecosystem's transition from a valuation-driven approach to a product-market fit (PMF)-driven approach. A Panoramic Comparison of BTC Layer 2 Technology Paths Based on the existing technology stack, several paths can be categorized as shown in the table below. However, a deeper dive into each path and the projects it represents reveals that even different paths often share common solutions, and that different technologies and stacks exhibit a parent-child relationship.

Comparison of different technical paths of BTC L2, data source: https://worried-eagle-e5b.notion.site/BTC-21b34b2a8d7a80cb83c1d0021e3a5696

Based on the 6 more well-known technical paths, this table selects 15 BTC L2s and compares their TVL data and the technical solutions they have adopted for data visualization:

An overview of Lightning Network data, data source: https://mempool.space/zh/lightning

In Q1 this year, Tether, the company behind USDT, announced that it would issue USDT through the TA protocol to enter the Lightning Network ecosystem, which means Tether's recognition of the Lightning Network. Lightning Lab (the parent company of the Lightning Network) announced Tether's integration into the Lightning Network. Source: https://x.com/lightning/status/1885083485678805424 Furthermore, a Lightning Network-based ecosystem is gradually taking shape. For example, the financial infrastructure protocol Lnfi aims to become the preferred platform for BTC and Taproot assets, covering the entire asset issuance, fundraising, revenue generation, and trading process. Its core product, LN Exchange, boasts a daily trading volume of $30 million, and LN Node offers over 5% trustless BTC returns. Recently, Lnfi joined forces with Tether and Lightning Labs on X Space to discuss the opportunities and challenges of issuing stablecoins on the Lightning Network. X Space of USDT ON LIGHTNING, data source: https://x.com/i/spaces/1vOxwXmjVbRKB Furthermore, "AI Agent + Micropayment" is gradually building a new payment system based on the security of the BTC network. AIsa is a typical example. Its principle leverages the millisecond response characteristics of the Lightning Network and the strong security of the BTC network to solve the problem of massive microtransactions that traditional systems cannot support. AIsa provides AI service providers and enterprises with real-time, efficient, and affordable payment capabilities. It supports operations such as automatic micropayments of just $0.0001 per API call, real-time settlement via DePIN nodes, and intelligent cross-chain path optimization, requiring virtually no human intervention. Limitations and Challenges Although the Lightning Network has matured significantly in recent years, its scalability remains constrained by network effects and channel design, resulting in limited network capacity. While the TA Protocol addresses the shortcomings of the asset layer, its design, which requires users to build their own nodes for security, raises the barrier to entry for participation, and product refinement remains a work in progress. For example, BitTap offers users of the TA Protocol the right to self-host their wallets. BitTap is focused on addressing the decentralization and usability issues of the Lightning Network and the Bitcoin (BTC) ecosystem. They have launched a decentralized browser plugin wallet and will soon be launching a stablecoin payment wallet app. Users can make payments and transfers with stablecoins on both the Lightning Network and BTC layers, while also supporting secure and free cross-layer transfers (Bridge) between the two layers. 2. Native Ledger Scaling: Bitcoin Thunderbolt Just last month, the Raiden Network officially launched its mainnet. This was also announced in an official press release from HSBC. This marked the first time that a leading figure in traditional finance has expressed positive interest in and attention to blockchain infrastructure, particularly Bitcoin. Strictly speaking, the Raiden Network is not a traditional Bitcoin Layer 2, but rather a native ledger scaling solution based on a soft fork compatible with the Bitcoin mainnet. Its core technology lies in extending the OP_CAT directive of the Bitcoin scripting language and combining it with UTXO bundling technology to achieve high-performance contract execution. Similarities and differences with the Lightning Network: Unlike the Lightning Network, which requires payment channels for off-chain interactions to remain open at all times, the Raiden Network employs a decentralized, asynchronous design, enabling off-chain UTXO ownership transfers between users without the need for direct trust or a persistent connection. Its key feature is the introduction of a Byzantine Fault Tolerant (BFT) committee to manage Schnorr signatures, enabling off-chain delegation of asset ownership and on-chain finality. Under the 3f+1 model, this mechanism can tolerate up to f malicious nodes, ensuring transaction security and consistency even in an asynchronous network. Furthermore, through UTXO bundling, the Raiden Network can aggregate multiple UTXOs for processing, achieving transaction speeds and efficiency over 10 times that of the Bitcoin network. In terms of asset protocols, the Raiden Network proposed Goldinal's unified standard for BTC's Layer 1 assets. Combined with its BitMM (Bitcoin Message Market) system, it implemented a native on-chain AMM for the BTC network. Designed with a verifiable and adjustable signature component, the Raiden Network implements a recursive off-chain UTXO transfer structure and runs on native Bitcoin Core logic. This acceleration mechanism, built from the mainchain architecture, not only maintains BTC's security and censorship resistance but also supports the transfer of native BTC assets such as BRC-20 and Runes. Development Progress Raiden Network is jointly driven by a group of OG miners, HSBC, BTC core developers, and Nubit community contributors. It is one of the few protocols in the current BTC technology stack to have formal academic backing. Currently, access to the Raiden Network is only available to users who have obtained a Boosting Code. This code is distributed in limited quantities by core contributors such as Nubit through the community, and comes with a rare BTC native airdrop reward.

As of mid-June, the Raiden Network mainnet has nearly 50,000 users and a total transaction volume of nearly 4 million:

Raiden Network on-chain data overview, data source: https://data.thunderbolt.lt/?new

Limitations and Challenges

Based on joint mining, Core has slightly improved the consensus mechanism: Core's consensus mechanism is called the Satoshi Plus consensus mechanism, which combines delegated proof of work (DPoW) and delegated proof of stake (DPoS); the specific implementation principle is that BTC miners delegate their computing power to validators on the Core chain, thereby leveraging BTC's powerful mining infrastructure to provide security for the Core chain. This part of computing power is called "delegated proof of work (DPoW)" and is executed by Bitcoin miners and mining pools; at the same time, CORE Token holders can stake or delegate their tokens to validators to participate in the network's security and governance. This stake is called Delegated Proof of Stake (DPoS). Through this combination, Core Chain integrates Bitcoin miners into the security of Turing-complete smart contracts, unlocking their functionality and utility beyond simply maintaining the Bitcoin ledger and providing them with purely supplemental income rewards in the form of CORE tokens. Fractal, on the other hand, adopts a scaling solution. Its technical principle is to create multiple independently operating extension layers on the Bitcoin mainnet, forming a tree-like structure to increase transaction processing capacity and speed. While retaining the PoW mechanism, Fractal introduces a hybrid mining mechanism called "Cadence Mining." For every three blocks produced, two are generated through permissionless mining, while the remaining one is generated through merged mining with Bitcoin. Furthermore, Fractal Bitcoin has re-enabled the OP_CAT opcode, which is a BTC An instruction that existed in earlier versions but was long disabled. OP_CAT concatenates two strings into one. Theoretically, a script using OP_CAT could expand a single byte of data into over a terabyte. Without strict limits, this unlimited expansion could be exploited by malicious actors to launch DoS attacks, bringing down nodes or causing network congestion. For this reason, OP_CAT was disabled by the community early on. Today, the "cleaned" version of OP_CAT used by Fractal provides developers with more flexible script processing, showing particular promise in on-chain large integer calculations and smart contract functionality. Despite improvements to the technical mechanism, reactivating OP_CAT could still pose security risks in extreme scenarios. Current Development Status: Fractal Bitcoin has achieved significant scale, with a market capitalization of approximately $20.12 million, daily trading volume of 1.43M FB, and over 176 active addresses. 10,000. Its combined mining hashrate reached 648.13 EH/s. The mining difficulty is 0.01t, which is still in its early stages.

Fractal on-chain data overview, data source: https://www.oklink.com/fractal-bitcoin

4. RGB & RGB++

In the early morning of August 7, 2025, the RGB protocol, a Bitcoin scaling solution that had been preheated for two years, finally launched on the BTC mainnet.

RGB originated from The LP/BNP Association proposed a technical architecture for off-chain asset issuance and smart contract protocols based on the Bitcoin network's UTXO model. One of RGB's most highly regarded technical features is that data running on RGB is compressed and encapsulated into each UTXO on the Bitcoin network. Through "single-use seals" and "client-side validation" mechanisms, private changes and verification of asset status are achieved. Each asset status is tied to a specific Bitcoin UTXO, and when that UTXO is spent, the asset status is updated accordingly. This design eliminates the need to publicly disclose asset ownership and status changes on-chain, enhancing privacy. The RGB protocol is also compatible with the Lightning Network, enabling the construction of DeFi logic. RGB version 0.12 is now live. Data source: https://x.com/lnp_bp/status/1943318227854950809. Bitlight Labs: The first wallet to support RGB assets, an official member of the RGB Association. Bitlight Labs is committed to leading the original BTC Fi by developing native smart contract infrastructure for BTC and the Lightning Network. In addition, it is not only a board member of the RGB Protocol Standard Development Association INP/BP, but also a core contributor to the development of the RGB protocol, making it an indispensable core product of the RGB ecosystem. Bitlight Wallet, a product under Labs, is a wallet designed specifically for the Lightning Network and RGB protocol. Recently, in conjunction with the official launch of the RGB mainnet, the first RGB-based The minting of the mainnet's asset token "RGB." BitMask Wallet: Bitmask was the first wallet to support NFT assets on the RGB protocol. The team behind Bitmask was one of the most significant early contributors to the RGB protocol, and their product development prioritizes privacy and user control over their assets. Recently, BitMask has been working on full interoperability between RGB and RGB++, and is currently preparing for the mainnet launch to truly achieve a combination of privacy, programmability, and ease of use on the BTC network. From RGB to RGB++: Nervos (CKB) is a popular project that implemented BTC's Layer 2 using RGB logic and proposed the concept of RGB++ based on RGB. RGB++ introduces "isomorphic binding" technology, which allows BTC's UTXOs to be used as tokens. Mapping to Nervos CKB's Cell, leveraging CKB's Turing-complete smart contract capabilities and on-chain verification mechanisms, improves the efficiency and security of asset status management. In RGB++, asset status changes are not only recorded on the BTC chain, but also accompanied by corresponding transactions and status verification on the CKB chain, achieving coordinated on-chain and off-chain verification. While RGB++ implements asset mapping between BTC and CKB, cross-chain interactions based on the RGB protocol remain limited in their simplicity when handling certain transactions, posing security risks. 5. Following the ETH L2 philosophy: ZK-Rollup. The core of a Rollup is to bundle a large number of off-chain transactions, generate cryptographic proofs, and submit them to the main chain for verification using ZK technology. The most popular BTC L2 Merlin is a BTC L2 network that continues this concept and is also an EVM-compatible BTC L2. Merlin utilizes a multi-party computation (MPC) wallet solution, with user assets jointly managed by Cobo (a Hong Kong-based cryptocurrency custodian). Furthermore, Merlin continues to utilize ZK-Rollup technology for verification, compressing large amounts of transaction data before submitting it to the BTC mainnet to ensure data integrity and security. Since its launch, Merlin has become one of the most sought-after Layer 2 projects in the BTC ecosystem. Reportedly, its total locked value (TVL) reached $3.5 billion within 30 days of its launch, attracting over 200 projects to deploy and operate on its platform. Merlin Chain supports a variety of BTC Layer 1 native assets, such as BRC-20 and BRC-420, and expands the breadth of its ecosystem through compatibility with ETH. Enhanced BTC Bridge Security

B² differs from traditional monolithic Rollups in that it employs a "1.5-layer architecture": the Rollup layer is responsible for transaction execution and status updates, while the Data Availability (DA) layer operates independently and stores raw transaction data. This data undergoes off-chain labeling and organization and is periodically submitted to the Bitcoin mainnet for finality confirmation.

B² Network's DA (Data Availability) layer—the B² Hub—is Layer 1.5. It slices batches of data using Reed-Solomon + KZG encoding, then aggregates zero-knowledge proofs submitted by Layer 2 into Taproot commitments and submits them to the Bitcoin mainnet, thus inheriting the finality and immutability of the Bitcoin network.

B² Network utilizes decentralized blob storage and light node sampling. With the sampling mechanism, any validator only needs to randomly sample a very small percentage of shards to verify data integrity with a high probability, significantly reducing synchronization and verification costs. Regarding consensus, the B² Hub only needs to submit short commitments and validity proofs, freeing the mainnet from the burden of large data volumes. Rollup batch publishers are responsible for availability, forming a modular architecture of "validity outsourcing + availability guarantees." By decoupling the DA from the execution layer, B² Rollup can scale and update shards in parallel, while maintaining its security boundary anchored to the Bitcoin chain, achieving high throughput, low costs, and L1 security. This approach has two advantages. First, its modular design allows for unlimited horizontal scalability without requiring any modifications or upgrades to the BTC network. Second, B² Network's DA layer, the B² Hub, can aggregate storage proofs and state transition proofs and submit them to the Bitcoin network, integrating Bitcoin's security. Final confirmation of L2 transactions must first be confirmed and aggregated by the B² Hub, and then confirmed on-chain by the BTC network. This is passive confirmation on the BTC network, which falls under the optimistic mode. Furthermore, zero-knowledge proofs are aggregated into Taproot commitments for optimistic verification on the BTC network. This is still in the Proof-of-Concept (PoC) phase and has not yet been finalized.

Project Progress: From Technical Implementation to User Ecosystem

To date, BSquare's total locked value (TVL) has exceeded $600 million, with a peak daily on-chain transaction volume of $900 million and 500,000 active platform users. The platform ecosystem covers over 100 DApps, covering scenarios such as DeFi, lending, and AI Agent applications.

BSquare on-chain data overview, data source: https://www.bsquared.network/

At the same time, BSquare also launched the first BTC interest-bearing mining pool "Mining Square", a "Yu'e Bao" for miners, providing miners with a solution that provides native BTC income. Currently, the mining pool accounts for 1% of the total network computing power and ranks in the top 10 mining pool computing power rankings.

6. Implementing a Turing Machine with BTC Script? Decoding BitVM

BitVM is a BTC-based Turing machine. The core goal of the mainnet extension protocol is to create a universal virtual machine environment that supports any verifiable computation without changing the consensus mechanism. Its principle draws on the idea of ​​optimistic rollup: the majority of computation is performed off-chain, and only in the event of a dispute is the relevant computational process submitted to the chain for verification in the form of "fraud proofs." Similar to Ethereum's Arbitrum, BitVM uses a mechanism of off-chain computation + on-chain verification. However, its unique feature is that it utilizes Bitcoin's scripting system (Bitcoin Script) to construct a "logic gate circuit" to simulate a Turing-complete virtual machine (similar to Qin Shi Huang's human-shaped computer in the game "The Three-Body Problem"). BitVM does not run EVM or WASM directly on-chain. Instead, it translates these high-level virtual machine operations into combinations of the most basic logic gates in Bitcoin Script (such as AND, OR, NOT), using these logic gates to construct a massive "fraud proof circuit." All transaction data and computation are processed off-chain, and only in the event of a challenge are the data and computational steps submitted to the chain (in the form of Merkle proofs, etc.) BitVM2 is an optimized version of the original BitVM, introducing a more modular computational structure and circuit compression mechanism. It also incorporates interactive fraud proofs, timelock scripts, and multi-signature mechanisms to enhance the protocol's practicality and security. BitVM2 places greater emphasis on optimizing on-chain data submission and seeks to introduce script opcodes, such as OP_CAT, which may be activated in the future, to improve circuit construction efficiency. The BitVM approach is gradually moving from theory to practice, with Citrea being a representative project. Citrea executes a large number of transactions off-chain and submits the execution results and proofs to the Bitcoin network for verification via BitVM. This achieves efficient scalability and security for Bitcoin's Layer 2 (L2). Citrea is also the first solution capable of implementing universal Layer 2 settlement on Bitcoin, with all proofs natively verified within blocks on the Bitcoin network. Currently, Citrea's mainnet has not yet officially launched and is still in the testnet phase. For example, Goat Network is dedicated to exploring the possibilities of BitVM2. Goat's white paper demonstrates a fraud proof mechanism based on circuit logic and Merkle tree structures. Goat emphasizes expanding computation on Bitcoin into a Turing-complete state machine and attempting to build a new Bitcoin Layer 2 framework that allows smart contract execution and asset interactions to occur natively on the Bitcoin mainchain. Goat's implementation also includes the integration of a data availability layer (DA layer) and optimized circuit compression mechanisms, propelling BitVM from experimental implementation to practical deployment. As of June this year, Goat Network's locked-in value has exceeded $100 million. Top chains by TVL CryptoDiffier launched each month of the year; Data source: https://x.com/GOATRollup/status/1929596963286114614

Although the BitVM family of protocols offers clear advantages: extreme nativeness, enabling Turing-complete computation without modifying the BTC consensus, and possessing exceptional security and nativeness; its structure also naturally supports fraud proofs, a low data on-chain rate, and extreme decentralization.

However, BitVM's disadvantages also stem from its technology: the logic gate circuits constructed from BTC Script, which then simulate EVM or WASM, are inherently complex and massive. Consequently, BitVM development is extremely complex, and the circuit construction effort is enormous. Furthermore, a mature developer ecosystem and standardized tools are currently lacking.

7. Multiple paths are advancing, and the battle for value bearer remains undecided

In the future, BTC L2 will undoubtedly see a multi-polar competitive landscape, with different solutions serving different core scenarios: payments, contracts, assets, storage, AI, and other areas. These solutions will collaborate across a wide range of sectors, supporting the long-term prosperity of the BTC ecosystem. This competition is far from over; the true winner will be determined by both asset retention capabilities and the developer ecosystem. As the world's most powerful consensus asset, BTC's ecosystem boundaries will continue to expand due to the influx of US dollar stablecoins and L2 modular innovations, ushering in a two-way upgrade of "payment sovereignty + contract expansion."

Recently, with the passage of the US GENIUS Stablecoin Act, global stablecoin regulation is becoming increasingly clear and well-regulated. The legal inclusion of "payment stablecoins" in the US dollar system is expected to accelerate the entry of USDT, USDC, and other emerging stablecoins into on-chain payment scenarios. As Tether's CEO pointed out, emerging markets are the primary battlefield for stablecoin adoption, with 60% of USDT's growth coming from actual payment demand outside the crypto community.