Building on Bitcoin: A Business Perspective

In the last twenty-four months, the Bitcoin ecosystem has seen more development than the previous fifteen years. This development has bolstered Bitcoin’s most accepted current use-case, as an alternative store of value independent of the traditional financial system, by increasing its usability as a peer-to-peer payment network. Ultimately, the goal of Bitcoin, since its creation by Satoshi Nakamoto, is to become a global currency. While these technical advances have brought us closer to this goal, in order for Bitcoin to achieve this global status, there are still many technical developments required. This article aims at providing an overview of the current developer or builder ecosystem as well as exploring the current and potential markets that will arise from these new implementations.

Bitcoin’s first fifteen years

Satoshi created Bitcoin with a clear humanitarian vision: create a decentralized, trustless, financial system resilient to domination by any central authority. The Bitcoin white paper acknowledges the need for low transaction costs to compete with the legacy financial system. To achieve global adoption and fulfill its potential, Bitcoin must establish itself in three crucial roles: a stable store of value, a medium of exchange, and a global monetary network.

Market Basics

Perhaps the most critical technical feature to understanding the challenges facing Bitcoin as a payment platform is the number of transactions stored in a block in the Bitcoin blockchain. A block is a collection of transactions that are bundled together and recorded in the blockchain as a single unit. Any application must be cognisant of the block size. The block size is currently limited to 1 megabyte(MB) by the Bitcoin protocol, which affects the number of transactions included in each block. This limit was originally designed to ensure that more participants can contribute to network security through mining, as larger blocks could potentially centralize control in the hands of a few powerful miners. Ultimately, the challenge for developers is finding innovative ways to overcome the self-imposed limitations of the network while adhering to the principles that those limitations are meant to safeguard.

The second feature which must be taken into account is Bitcoin’s price volatility. Some factors contributing to price volatility include market speculation, government regulation, and technological developments. Since during currency trades, Bitcoin is most often paired with the US dollar, it is still heavily influenced by US financial markets and economic events. The latest approval of the Bitcoin ETF has allowed new capital inflows from institutions and banks, a positive catalyst for the growth of the network. But this also means that traditional financial players have more control of Bitcoin’s price structure. News that can increase the volatility of Bitcoin include: GDP reports, consumer price index (CPI) reports, and details of Federal Reserve Meetings. These events need to be taken into account by bitcoiners as they can rapidly affect the price and congestion of network usage.

Present Builder Ecosystem

To extend the number of Bitcoin transactions and to better handle its price volatility, there are several approaches to building systems based on the Bitcoin blockchain.

The two main approaches when building on Bitcoin are Layer 1 and Layer 2 applications.

Layer 1 applications involve building directly on the Bitcoin blockchain. This was made possible by the Taproot upgrade in November 2021. Taproot introduced a scripting language called “Tapscript.” Tapscript enables smart contract functionality on the Bitcoin network. Smart contracts “programmable digital agreements” allow decentralized applications (dapps) including decentralized finance (defi) and non-fungible tokens (NFT’s). This diversification should help stabilize the Bitcoin price.

Layer 2 and sidechain solutions are networks built “on top of” or run in parallel to the main Bitcoin blockchain. These applications leverage the Bitcoin blockchain, and its robust security features, as a final settlement layer for secondary blockchains which are able to meet the needs of a complex decentralized financial ecosystem. The aim is to reduce overload of the Layer 1 chain, reducing the number of transactions that need to be recorded to the Bitcoin blockchain, while relying on its security for final settlement. Layer 2 applications take on the workload of processing individual transactions and then confirm the net change back to Layer 1. All assets on the main Bitcoin blockchain can be transferred between its Layer 2’s and sidechains.

Layer 1 and Sidechains

Rootstock

Rootstock (RSK) is an Ethereum virtual machine (EVM) compatible sidechain for Bitcoin which brings the utility of the Ethereum smart contract ecosystem to the Bitcoin blockchain. This compatibility enables dapps and smart contracts using a method known as a two-way peg system based on a federation of functionaries. The network uses merged mining with Bitcoin which allows miners to mine two cryptocurrencies simultaneously. Blocks are created every 30 seconds with an average of 6 minutes for transactions.

The Liquid Network

The Liquid network is a sidechain protocol of Bitcoin that allows for fast settlement, asset issuance, and private transactions. The protocol operates as a federated network under the Liquid federation which consists of 15 “functionaries” who serve as validators for the network. The sidechain connects to the mainchain via a two-way peg which enables a seamless transfer of BTC between the mainchain and sidechain, while maintaining a consistent value between the two.The network is averaging a 60-second block time and a two-block finality, the Liquid Network can confirm transactions within 2 minutes.

Ordinals

Ordinals enable users to inscribe data on the Bitcoin blockchain, allowing Bitcoin native non-fungible Tokens (NFT’s). This protocol is based on “ordinal theory”, which individually numbers every single satoshi (Bitcoin’s lowest denomination), and the ability to inscribe arbitrary data onto a specific satoshi. The creation of ordinals allowed a metaprotocol that creates fungible tokens called BRC-20’s. BRC’s are minted and traded on Bitcoin directly. Ordinals were introduced last year by Casey Rodarmor, an ex-Bitcoin core contributor. The creation of ordinals has significantly increased the transactional volume and block processing of the Bitcoin blockchain, this added pressure has shown why Bitcoin is not yet ready for global adoption. Since ordinals use the main chain its block transactions time average 10-15 minutes, depending on network congestion.

Bitcoin Virtual Machine

Bitcoin Virtual Machine (BitVM) is similar to the Ethereum virtual machine. Due to the limited capacity of the Bitcoin blockchain, when it comes to smart contracts, this new computing paradigm proposes the creation of a “novel design space for more expressive Bitcoin contracts and also off-chain computation.” If implemented, it will enable validation of off-chain computations on Bitcoin to ensure that computation can be executed on the network without changing the foundation. Bitvm can also potentially enable trustless or trust minimized bridges from Layer 1 and Layer 2s that require fewer intermediaries and less decentralization. While BitVM is still a concept, it has various potential use cases for the Bitcoin network.

Layer 2s

Lighting Network

The Lightning Network is a Layer 2 payment protocol aimed at facilitating faster transactions at lower fees with the potential to massively scale Bitcoin as a payment system. The network creates payment channels between two parties off the main chain. Once the transaction has been achieved the channel is closed and the net change is recorded back to Layer 1. Transaction times can range from milliseconds to under 1 minute.

According to a report by Fidelity Digital Assets, “Strike, a Lightning Network payment services provider, has made payment in bitcoin possible for over 400,000 merchants through a partnership with Shopify, NCR, and Blackhawk Network. Using Bitcoin as a payment rail via the Lightning Network, fiat payments are converted into bitcoin and bitcoin is converted back to fiat for the merchants. This partnership enables merchants to accept bitcoin as an alternative to credit cards, incurring next to no fees compared to the average 1.5% to 3.5% transaction fee associated with most credit cards. 6 With a median fee rate of 0.0029%, the Lightning Network is 1,000 times cheaper than that of Visa or Mastercard and presents the unique ability to revolutionize payments for merchants through the use of this technology.”

Stacks

Stacks is a Bitcoin Layer 2 blockchain that enables smart contract programmability. Stacks has its own network, miners, native token, and nodes. Stacks created and uses a novel mechanism called Proof-of-Transfer (PoX) which allows the Stacks blockchain to settle all transactions on the Bitcoin blockchain. Stacks miners commit Bitcoin to the Stacks network, spending Bitcoin in order to mine Stacks blocks, and are rewarded in the form of Stack’s native STX tokens. Stacks uses the Bitcoin base-layer as a reliable storage and broadcast medium. The transaction history and state are hashed and recorded on Bitcoin. In its current state, blocks are created every 10-15 minutes; but with the activation of the upcoming Nakamoto upgrade this year, block times are expected to dramatically decrease to 5-10 seconds.

The Master Plan: All Possible Futures

As the Bitcoin smart contract ecosystem grows and more decentralized applications are built, using current and future protocols, we will see continued growth in transactions and increase market cap as the utility of a decentralized monetary network becomes more visible and accepted.

Developers are the backbone of this industry but while there are obvious financial incentives for them to contribute to the ecosystem, developers must share the vision of Satoshi and the core developers that helped build the network. Before Satoshi disconnected from the grid, he assigned maintenance powers to a few individuals known as the Bitcoin core developers. The philosophy behind the core development team prioritizes security, stability, and decentralization. This conservative approach carefully peer-reviews and tests changes to the underlying software, while minimizing the risk of introducing vulnerabilities and bugs. Though often overlooked by the media, these developers are the force driving Bitcoiners to realize Satoshi’s vision of Bitcoin as a global monetary network.

As Bitcoiners, it is our duty to contribute to the shared vision of a decentralized economic future. Bitcoin as a project is built on a set of values that Satoshi believed would be necessary for an advanced civilization to prosper. We must not forget the sacrifices made by the developers, technologists, and believers from the early days of Bitcoin’s birth.

While developers are building the current framework, the people of the network must guide them to accomplish the goals that were initiated by Satoshi for the future of all participants. Bitcoin was made to be better money for all, and in order for us to advance our economic future, we must stay focused on this ultimate goal.

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