As Bitcoin’s Ecosystem Expands, The Floodgates Open Up For Investors

Clothes, coffee, dinner, gas, haircuts, gold – you name it – it’s all priced in satoshis. While the dollar and other currencies are still in use, the vast majority of people prefer to store their wealth in Bitcoin due to its deflationary nature. 

Bitcoin’s incredible success was due to the community’s decision to maintain its focus on decentralization and security. While Bitcoin’s imitators collectively bagged billions of dollars in funding, they were never able to surpass it, succumbing to fraud, cons, scams, vulnerabilities and chaos. Most altcoins ended up fighting for scraps as Bitcoin emerged from the great crypto winter of 2022-2024, with names like Ethereum, Avalanche, Solana and Ripple left in the dust, serving as cautionary reminders of the danger of “tulip mania”. 

In the end, all of the practical innovation we saw in altcoins was incorporated into Bitcoin through scaling solutions that took advantage of its decentralized and highly secure settlement layer. When it came to the crunch, Bitcoin proved to be by far and away the most useful token for every crypto use case ever envisioned, be it DeFi, NFTs, GameFi, digital rights, social media, land registries, space flight, and more. Scarcity and decentralization were the only things that mattered at a time when the world turned to cryptocurrency en-masse to ward off unprecedented inflation that crippled the global economy. 

As the world transitioned to a new form of money, Bitcoin propelled it into an unprecedented economic growth and prosperity, providing the unbanked with access to financial services and golden opportunities that the old fiat/capitalist system could never deliver. Today, much of the world’s financial infrastructure is hosted on the most secure blockchain in the world, bringing a decades-long era of economic boom and bust cycles to a close. 

Bitcoin Wasn’t Built For This

It’s a vision of a utopian future that may seem out of reach for now, but as more developers turn their attention to Bitcoin it’s looking less and less like it’s beyond the realm of possibility. 

While Ethereum has been the darling of blockchain development up until today, there are signs that may change. Ethereum has long been the preferred solution for developers building decentralized applications and NFTs because it has higher throughput and it’s “Turing complete”, allowing dApps to execute transactions seamlessly on its network. 

Unlike Ethereum and competing platforms like Solana and Avalanche, Bitcoin was never designed to host next-generation applications on its base layer. It was never designed to host the world’s financial infrastructure. Satoshi Nakamoto, whoever he is, conceived Bitcoin as a simple, censorship-resistant settlement layer for peer-to-peer payments only. Because its core architecture is based on a Turing incomplete system, it’s unable to process the kinds of complex transactions Ethereum can handle. 

The concept of “Turing completeness” refers to a network’s ability to solve complex problems. Satoshi purposely scripted Bitcoin’s codebase with Turing incomplete language to ensure its simplicity. He was worried that by introducing more complexity, it could introduce new problems and vulnerabilities that would undermine the network. 

In contrast, Ethereum was built using a Turing-complete codebase that ensures it can be used for multiple different purposes. It’s because of this that Ethereum is able to run smart contracts that power all manner of DeFi applications. 

Developing on Bitcoin is further complicated by its low throughput. Its blockchain relies on a proof-of-work consensus mechanism that can only process seven transactions per second as a result of the limits on its block size. That’s far slower than Ethereum and other blockchains, and is left for dust by centralized payment networks such as Visa. While this constraint helps to guarantee the security and immutability of Bitcoin, it presents serious obstacles to any projects that want to build atop of it. Alternative blockchain platforms have been designed to overcome these limitations, but the price they pay is that they’re no match for the unrivaled security and decentralization that Bitcoin offers. 

Security & Network Effect

Bitcoin’s security is one of the main reasons why it’s so desirable to build applications on top of it. The network is widely considered to be the most difficult of all blockchains to hack thanks to the vast amount of nodes and miners in its ecosystem. To hack Bitcoin’s network, an attacker would need to control 51% of all Bitcoin’s nodes. At the time of writing, there are currently 15,659 reachable Bitcoin nodes up and running in support of the network spread across 67 countries. 

While it isn’t inconceivable that someone could somehow gain control of 51% of these nodes, doing so would require such an enormous amount of resources that such an attack would almost certainly not be profitable. 

Then there are the network effects of Bitcoin to consider. Bitcoin is by far and away the most popular blockchain in the world and its token BTC has the highest market cap of any on the market. Bitcoin perfectly exemplifies the economic theory that the more users a product has, the higher its value becomes. 

Applications that build on Bitcoin are the only ones that can tap into what is the biggest liquidity pool in cryptocurrency, with the biggest user base and therefore, the biggest potential. 

Scaling Bitcoin Beyond Payments

Because its base layer cannot be changed without sacrificing its main characteristics, building on Bitcoin therefore requires an alternative approach that involves so-called “scaling solutions” that improve its functionality and scalability while benefiting from the security and immutability of its base layer. 

This has been a focus of the Bitcoin developer community for many, many years, and at least some of these efforts are beginning to pay off. 

By far and away the most popular Layer 2 scaling solution for Bitcoin so far is the Lightning Network, which is based on the idea that smaller transactions can be processed “off-chain” in order to get around its block-size limitations. 

Lightning Network works by creating “channels” between two users to process transactions. So if Tom wants to buy a coffee from Sam, he’ll open a channel that connects his Bitcoin address to Sam’s wallet. The transaction then happens off-chain, within that channel. Tom can then keep that channel open to process additional transactions that take place off-chain. Eventually, once the channel is closed, the final state of all of those transactions is aggregated and recorded onto Bitcoin’s blockchain as just a single transaction. By bundling smaller transactions off-chain in this fashion, it means they don’t need to be settled on Bitcoin’s base layer individually. As a result, it becomes much more scalable and can handle many more transactions per second. 

The Lightning Network is used to power dozens of decentralized payment applications, such as the micropayment platform Tipping.me, which is a browser extension that Twitter users can employ to send tips to other users. It can also be used for more complex applications such as GameFi. For instance, the battle royale game LightNite leverages Lightning Network to bring Bitcoin rewards to gamers. 

A second Layer 2 solution known as Rootstock enables developers to write smart contracts that can run on Bitcoin. Rootstock has created the RSK blockchain, which uses a “two-way peg” system to connect to Bitcoin’s network, similar to how sidechains work. Meanwhile the Rootstock Virtual Machine is used to execute smart contracts on the sidechain, similar to how Ethereum Virtual Machine handles smart contracts on Ethereum and other EVM-compatible chains. 

Rootstock relies on a concept known as “merge-mining” to leverage Bitcoin’s security, while being able to process many more transactions at once through its RVM sidechains. 

Even more promising is the emergence of Stacks, which is different from the above projects in that it is an independent, Layer 1 blockchain that connects to Bitcoin through a unique Proof-of-Transfer mechanism. 

This allows Stacks to benefit from Bitcoin’s decentralized and permissionless structure as well as its unrivaled security, while adding Ethereum-like capabilities around DeFi, NFTs and smart contracts. In this way, Stacks makes it possible for projects to build on Bitcoin without altering its base layer. Through the PoX consensus mechanism, all Stacks application transactions are ultimately settled on Bitcoin’s blockchain to ensure their security. In addition, Stacks also provides a way to interact with Bitcoin directly, meaning it’s possible to transact BTC itself over its network. 

These unique capabilities make it possible to build decentralized applications, NFT marketplaces, social networks, crypto wallets and more that can tap directly into the liquidity of the world’s biggest cryptocurrency. 

Funding Accelerates Bitcoin’s Emerging Ecosystem

It has only been in the last couple of years that these platforms have finally reached maturity, and that has been reflected by a recent deluge of venture capital that has been pumped into the space. Investors have seen the potential of what these platforms can do, and they’re now dead set on helping Bitcoin expand its dominance into new areas around dApps and take on rivals like Ethereum. 

A May 2022 research paper, Bitcoin: Beyond The Base Layer, published by TheBlock and commissioned by Trust Machines, a startup that aims to build an ecosystem of dApps on Bitcoin using Stack’s platform, has shown that investor capital is now flooding into the space at breakneck speed. 

The report found that projects based on Blockstream, a company building crypto-financial infrastructure, have raised a combined $299 million in funding, while Stacks-based products have collectively pulled in $220 million in funding. 

The research validates the claim that Bitcoin ecosystem funding is accelerating due to the maturity of these platforms. TheBlock noted that fundraising picked up considerably in late 2021 and early 2022, with multiple individual raises that surpassed aggregate funds raised in previous years. 

“While efforts to expand Bitcoin’s use cases have been ongoing for nearly a decade, they have not gained much traction to date,” the paper explained. “However, some catalysts may propel the adoption of Bitcoin-based financial services.”  

Those catalysts include Lightning Labs recent asset issuance on the Lightning Network, as well as its plans to launch a BTC-collateralized stablecoin. A second example is Trust Machines, which has raised $150 million to build an infrastructure base layer for Bitcoin applications using Stacks platform. Then there are startups in the Stacks ecosystem, including Arkadiko, Gamma and Superfandom, which are building applications that expand Bitcoin’s use cases in the real world. 

Moreover, the space is expanding too with Block, the parent company of Square Inc., announcing plans to create a Bitcoin-based decentralized exchange platform. This is an exciting development given Block’s incredibly large user base. The thinking is that it could provide a major catalyst to onboard millions of new users into the Bitcoin ecosystem. 

Finally, Stacks is offering some major incentives to developers with a $165 million Bitcoin Odyssey fund along with Okcoin, Digital Currency Group and GSR that aims to encourage the development of Bitcoin-based apps. 

The money flooding into Bitcoin’s ecosystem now underlines the promise of platforms like Blockstream, Lightning Network and Stacks to finally unlock the real potential of Bitcoin far beyond its original aim of facilitating payments. Bitcoin is no longer just a blockchain – it is a platform for the future of finance that can support highly complex applications. Unlike other dApps though, Bitcoin-based apps will have the unique advantage of its impressive security and its unrivaled network effects. With these innovations, Ethereum finally has a worthy contender to its status as the king of DeFi and decentralized finance.

If that happens, then maybe, just maybe, our vision of a utopian future where Bitcoin underpins the world’s financial system isn’t so far-fetched after all.