Unleashing Bitcoin: Deep Dive into the Future of Digital Assets

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Introduction

In the fast-paced world of cryptocurrencies and blockchain technology, Bitcoin stands as a titan, with the potential to revolutionize the way we perceive and utilize digital assets.

The report from Outlier Ventures delves into the untapped opportunities within the Bitcoin ecosystem, highlighting key innovations that are set to reshape the landscape of digital finance. Let’s embark on a journey through the report, exploring the transformative power of Bitcoin and the exciting prospects it holds for both founders and investors.

Bitcoin Unchained – The New Startup Goldrush

The report kicks off by emphasizing the underutilization of Bitcoin in decentralized applications (dApps) within the ecosystem. With less than 1% of Bitcoin being used in dApps, BTC holders predominantly engage in HODLing, missing out on the potential for greater utility.

However, recent advancements in composability and scalability are paving the way for founders to create BTC native dApps, offering holders an alternative to traditional HODLing. This shift signifies a significant opportunity for innovation and investment in digital assets.

Why Build on Bitcoin?

The report underscores the strong value proposition of the Bitcoin network for founders looking to build new applications. Bitcoin boasts the strongest network effect among blockchains, with widespread adoption by corporates and investors. Prioritizing decentralization and security, Bitcoin addresses the blockchain trilemma effectively. While Bitcoin has traditionally been viewed as a currency and store of value, recent proposals and innovations are enhancing composability and scalability, making it an attractive platform for developers seeking to leverage its network effect and security features.

The Network Effect

Blockchains thrive on network effects, and Bitcoin’s unrivaled first-mover advantage, liquidity, and global acceptance contribute to its strong network effect. Despite Bitcoin’s dominance in the digital asset space, only a fraction of its value is utilized in BTC-based projects. Building utility on Bitcoin for BTC holders through DeFi and other services presents a vast untapped opportunity in the digital asset realm. Leveraging Bitcoin’s network effect can provide founders with a head start in application adoption and usage.

Narrative Shift – Bitcoin’s Evolution

Bitcoin is undergoing a narrative shift from being solely a medium of exchange to a store of value. The report highlights the wave of innovation sweeping across the Bitcoin network in 2023, enabling developers to access enhanced functionality, composability, and scalability while maintaining the network’s security and decentralization. Layered solutions such as Lightning Network, Stacks, Trustless Computer, RSK, and Liquid Network are expanding the possibilities for developers to create new applications on top of the Bitcoin network. This evolution signifies a breakthrough moment for Bitcoin as it transitions into a platform for diverse use cases beyond traditional HODLing.

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Composability and Scalability for Bitcoin. Source: Outlier Venture

Composability

Composability in the blockchain realm is akin to assembling Lego bricks, allowing various protocols, smart contracts, and decentralized applications (dApps) to seamlessly integrate in a modular and interoperable manner.

This flexibility, akin to adding plates and connectors to a Lego set, empowers developers and founders to create new applications without starting from scratch. The open-source nature of Bitcoin democratizes composability, making it accessible to all stakeholders and enhancing the potential for innovation in the digital asset space.

The State of Composability on Bitcoin

In 2023, Bitcoin’s composability landscape witnessed significant transformations with the introduction of Ordinals, Inscriptions, and BRC-20 tokens. The Ordinals protocol facilitated the structured creation of both fungible and non-fungible tokens, laying the foundation for more complex blockchain applications. The emergence of BRC-20 tokens marked a shift towards active token minting, indicating growing user demand for issuing assets on the Bitcoin blockchain.

The ongoing community debates surrounding blockspace allocation and the fundamental purpose of the Bitcoin network underscore the evolving nature of composability within the ecosystem. Despite the volatility in digital asset prices, the sustained activity in inscriptions and token issuance highlights a strong market interest in structured token standards. While BRC-20 tokens may not represent the optimal token issuance method, they signify a step towards establishing standardized practices in the Bitcoin space.

The interplay between composability and the creation of new applications forms a positive feedback loop within the Bitcoin adoption flywheel. As new applications cater to a broader user base, driving network adoption, the demand for scaling solutions and enhanced composability grows. This cycle of innovation and adoption propels the Bitcoin network towards greater throughput and functionality, aligning with the evolving expectations of users and developers in the digital asset landscape.

Scalability

Scalability is a crucial aspect of blockchain technology as it directly impacts the network’s ability to handle a large volume of transactions efficiently, without delays, congestion, or high costs. A scalable blockchain is essential for the practical adoption of blockchain technology in real-world scenarios as it makes the technology more viable across a range of use cases, thereby encouraging broader adoption. While not all applications require fast and low-cost transactions, scalability is fundamental for achieving widespread use of blockchain technology.

The State of Scalability on Bitcoin

In the context of Bitcoin, the topic of scaling has sparked debates within the community. One perspective argues that Bitcoin’s network blockspace should primarily focus on BTC transactions as a medium of exchange, while another viewpoint advocates for a free market approach where any transaction willing to pay fees is considered valid. Despite these differing philosophies, the rising demand for transaction settlement on the blockchain has led to an increase in blockspace demand and transaction fees.

Since the introduction of the Ordinal protocol and BRC-20 tokens, transactions associated with these protocols have surged on the Bitcoin network. Currently, Ordinal transactions account for approximately half of the network’s daily transactions. This surge in popularity, coupled with the relatively large size of Ordinal transactions, has resulted in an increased workload in Bitcoin mempools, contributing to congestion and higher fees

Layers and upgrades

As transaction fees rise due to increased network activity and demand for blockspace, certain use cases such as BTC microtransactions become less practical. This scenario has fueled a demand for scaling solutions among users, leading to opportunities for Bitcoin sidechains and Layer 2 solutions like Lightning Network, Liquid, RSK, and Stacks to address the growing need for scalability and attract users seeking more efficient transaction settlement options [T6].

The current state of scaling on Bitcoin reflects the ongoing challenges and opportunities associated with enhancing the network’s scalability to accommodate increasing transaction volumes and user demands. The development of innovative solutions and protocols aimed at improving composability and scalability is crucial for the continued evolution and adoption of blockchain technology within the Bitcoin ecosystem.

Smart Contract for Bitcoin?

The evolution of blockchain technology, particularly in the context of Ethereum, has been instrumental in shaping the landscape of programmable finance and decentralized finance (DeFi). The deployment of the first Ethereum smart contract in 2015 marked a pivotal moment for blockchain composability by enabling seamless on-chain execution of contracts. This breakthrough laid the groundwork for the emergence of smart contracts as crucial tools for developers, leading to the exploration and implementation of new protocols in the subsequent years.

During 2016 and 2017, developers began testing the potential of smart contracts, experimenting with products like EtherDelta and laying the foundation for programmable finance. The launch of MakerDAO on the mainnet in late 2017, followed by platforms such as Compound and Uniswap in 2018, further solidified the role of smart contracts in creating the first generation of DeFi protocols. This period of experimentation and innovation set the stage for the development of decentralized finance platforms that continue to play a significant role in the sector today.

Moreover, the introduction of ERC-721 tokens in 2018 revolutionized the digital collectibles space by providing a new standard for creating non-fungible tokens (NFTs). ERC-721 tokens allowed for the representation of unique digital assets on the Ethereum blockchain, offering true ownership and scarcity to digital items. This breakthrough in on-chain composability paved the way for the NFT Boom that occurred three years later, opening up a plethora of possibilities for artists, gamers, and creators to mint, trade, and own individual digital items as NFTs.

As the demand for blockchain scalability grows, driven by factors like the congestion caused by BRC-20 tokens and their applications, users and developers are increasingly focusing on scaling solutions. Just as Ethereum faced congestion due to the DeFi summer and the NFT Boom, leading to higher fees and longer transaction times, the need for scalable solutions became apparent. This demand for scalability prompted the development of Layer 2 scaling solutions like Arbitrum and Optimism to address the network’s workload, reduce gas fees, and enhance the overall user experience.

In conclusion, the interplay between blockchain composability, smart contracts, NFT standards like ERC-721, and the demand for scalability underscores the dynamic nature of blockchain innovation and the continuous evolution of decentralized finance ecosystems.

Conclusion

In conclusion, the Outlier Ventures report paints a compelling picture of the imminent surge of innovation within the Bitcoin ecosystem. The convergence of composability, scalability, and innovation is creating a fertile ground for founders to tap into Bitcoin’s network effect and offer new utility to BTC holders.

The narrative shift in Bitcoin’s evolution towards a platform for diverse applications signals a new era of possibilities in the digital asset space. Now is the time for founders and investors to seize the opportunities presented by Bitcoin’s transformative potential and contribute to the ongoing evolution of digital finance.

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