Recently, the entire primary and secondary markets have been under a heavy cloud of pressure, leading many to question the future direction of the BTC Layer 2 market. The answer is not as simple as capital from the East and West avoiding each other. After in-depth research into several representative projects, I have gained a profound understanding.

In my view, the key breakthrough points are as follows: 1) A “new” narrative for asset issuance; 2) Narrowing the “standards” of Layer 2; 3) The advent of BTCFi and the onset of yield-generating activities. Let me elaborate on my thoughts below:

A “New” Narrative for Asset Issuance

As the BTC ecosystem evolves through developments like Ordinals, BRC20, BitVM, Runes, and Layer 2 solutions, it finds itself in a predicament where the technology is becoming increasingly clear, but the wealth-generation effect is weakening. Why is this happening? The root cause lies in the fact that wealth creation has so far stemmed from the information asymmetry within existing capital, while technological iterations have yet to attract new capital.

Take the flawed BRC20 and the privileged Runes protocol as examples. Despite the widespread criticism of BRC20, it managed to create a wealth effect that drew significant attention to the BTC derivative market. However, the Runes protocol, which seemed promising with its more mature data storage, indexing logic, and mechanics, did not generate the expected market response.

So, does this mean that the direction of technological development is wrong? Is the OP_Return directive to eliminate UTXO spam transactions flawed? Is the premine reservation mechanism poorly designed? Clearly not. The wealth effect triggered by BRC20 inscriptions was a coincidental phenomenon driven by a unique macroeconomic environment and pure information asymmetry. The success of the BTC asset issuance narrative isn’t about “first is first,” but rather about the continuous value empowerment by project teams.

The traditional method of issuing new assets on the BTC main chain, tied to the UTXO model, only benefits those early birds with access to insider information. To create a sustainable narrative for the issuance of BTC derivative assets, two key issues need to be addressed both in the short term and the long term:

1. Short-Term Liquidity Challenge: The goal of issuing BTC derivative assets isn’t just to let some early adopters mint a bunch of assets; it’s to ensure these assets circulate and generate value through trading. Relying solely on the BTC mainnet to handle the circulation of inscription assets is unfeasible. Instead, these assets could be bridged to Layer 2, where they can be activated within the appropriate application ecosystems. For instance, the Nervos Network’s CKB, through the RGB++ protocol, allows BTC mainnet inscription assets to leap onto the CKB Layer 2 chain for circulation. This approach can solve liquidity problems, especially for high-quality assets with strong growth potential.
2. Long-Term Project Empowerment Challenge: Although the Runes protocol has garnered significant mainstream consensus for asset issuance, and project teams can control distribution through premine mechanisms, the approach of generating hype on the mainnet before circulating on Layer 2 can lead to enormous initial operational costs. These costs include the high expense of premine tokens during FOMO periods, high transaction fees for airdrops, community marketing, and operational expenses. Under such financial pressure, discussing “empowerment” with project teams becomes challenging.

Rooch Network, a BTC-native Layer 2 project driven by MoveVM, offers a solution through its Parallel BTC global state synchronization. This allows a BTC inscription asset to be issued at a low cost and circulated initially within a Layer 2 environment. Once the asset has gained sufficient market scale and consensus, it can then be migrated to the BTC mainnet for consensus upgrades. This narrative design, focused on asset circulation, aims to solve the problem of empowering BTC ecosystem projects.

In conclusion, the narrative of asset issuance in the BTC Layer 2 ecosystem is just the beginning. The real inflection point lies in whether these purely community-driven assets can find strong project empowerment on either Layer 1 or Layer 2, and demonstrate significant circulation value within the Layer 2 ecosystem.

Narrowing the “Standards” of Layer 2

Over the past year, the BTC ecosystem has undergone a period of chaotic and rapid growth, where the lack of direction, standards, and entry barriers has led to a flood of builders into the BTC Layer 2 space. We’ve seen a wide variety of approaches, including EVM-compatible solutions, UTXO stack homomorphism, UTXO parallel stacking, BitVM off-chain Turing completeness, native RGB, AVM virtual machines, and more. It’s said that there are already hundreds of BTC Layer 2 projects in the pipeline. However, there’s still no consensus on which direction will ultimately succeed.

Despite this, the BTC Layer 2 market’s “free-for-all” has not significantly contributed to the overall growth of the BTC ecosystem. When the market quiets down, debates resurface about whether BTC Layer 2 is a false narrative. Although the lack of standards has allowed for a “borrow-and-apply” mentality in BTC Layer 2 development, simply stitching mature expansion solutions onto the inherently limited BTC mainnet might not return the expected benefits to the mainnet. Instead, it could pose security and stability risks, potentially harming the BTC mainnet user base.

In my view, the prosperous yet unregulated phase of BTC Layer 2 development is coming to an end, and the next phase will see a shift towards higher technical thresholds:

1. UTXO Stack Structural Framework: The Nervos CKB team has extended the RGB++ protocol to create a standardized BTC Layer 2 construction solution. This approach is considered the most native solution for scaling the BTC mainnet, as the UTXO stack structure inherits the simplicity and security of BTC. In the short term, it can be seen as a relatively mainstream direction for BTC Layer 2 development. Recent upgrades to the RGB++ layer protocol and the implementation of UTXO Swap provide foundational infrastructure for developers looking to expand the Bitcoin ecosystem based on the UTXO structure.
2. zkVM Universal Protocol Framework: Project ZKM has developed a comprehensive ZK Bridgeless cross-chain and Entangled Rollup Network with interactive operability, based on the zkMIPS microprocessor instruction architecture. By leveraging zero-knowledge technology for cross-chain verification, this approach introduces a native “cross-chain” solution to the BTC ecosystem. Its technical principles resemble RGB’s Peg-in and Peg-Out commitment verification and unlocking mechanism, combined with BitVM2’s challenge mechanism. The zkVM protocol framework offers a broader range of ZK technology-powered Layer 2 expansion solutions, allowing non-UTXO-based public chains to natively integrate with the BTC ecosystem.
3. RGB Client-Side Validation Framework: The native RGB protocol offers a Layer 2 expansion solution for Bitcoin through the construction of off-chain P2P client-side infrastructure. Utilizing one-time seals and state channels, it supports complex applications like smart contracts while integrating with the Lightning Network to enhance payment scenarios. For example, Bitlight Labs is actively developing a series of wallets, DEXs, and other infrastructure to support the RGB protocol.
4. AVM Virtual Machine Framework: By simulating a Bitcoin virtual machine, this approach enables the stateless Bitcoin mainnet to support smart contracts through the embedding of special code. This method neither relies on off-chain extensions nor deviates from the current Bitcoin core OP Codes, offering a “native” expansion method. Atomicals.xyz, for instance, is exploring this very concept.

In summary, adopting higher technical thresholds and narrowing Layer 2 standards will inevitably weed out the “trend-chasers” from the market, allowing more capable developers to expand the Bitcoin ecosystem with the backing of capital. Although this exploration process might be lengthy—akin to Ethereum’s journey from Plasma and Validium to the mainstream Rollups—it will ultimately lead to a more robust and sustainable Layer 2 ecosystem for Bitcoin.

The Dawn of BTCFi Yield Generation

At some point, BTCFi quietly emerged as a focal point in the BTC ecosystem, becoming a hot topic of discussion. Initially, I struggled to understand the distinction between BTCFi and DeFi. Is it simply that DeFi was centered around “decentralization,” while BTCFi focuses on the “BTC public chain”? However, if the goal is to turn the isolated asset with massive community consensus into a catalyst for unlocking liquidity across chains, then even the most advanced high-performance technologies must inevitably yield to the grandfather of all chains, Bitcoin.

Given the unique constraints of Bitcoin’s scripting language and its stateless storage, this reasoning makes sense. Therefore, I believe that the BTCFi concept should encompass three key characteristics:

1. Inclusive Asset Integration: Besides native BTC assets, BTCFi must also include various derivative assets on the BTC public chain, such as Runes, ARC20, and BRC20. If BTCFi’s goal is not to activate more derivative assets within the BTC ecosystem, it risks being indistinguishable from existing DeFi ecosystems focused on BTC outflows and Wrapped BTC.
2. Native Cross-Chain-Free Feature: This could also be referred to as bridgeless or trustless mechanisms. Native cross-chain capabilities ensure that the inflow and outflow of BTC and its derivative assets do not involve centralized trust elements, providing a fundamental technical premise for BTC-related yield generation. Only then can staking, restaking, and other yield-generating activities on Layer 2 maintain absolute on-chain traceability and fairness, laying the groundwork for a rich array of BTCFi yield-generation strategies.
3. Programmable Complexity: Whether based on UTXO stack architecture or zkVM protocol, the off-chain expansion environments they integrate with must have complex programmable features. In the short term, the structured homogeneity of UTXO offers an advantage, making it easier to implement practical applications. In the long run, ZK technology could become a powerful interface for integrating the BTC chain into high-performance public chains like EVM or MoveVM. The potential ecosystem and innovations that BTCFi could develop in this context are vast and limitless.

For instance, GOAT Rollup, built on the zkVM framework, offers “native secure cross-chain” and “unified liquidity layer” features, using the GOAT Stack to provide a robust technical foundation for BTC Layer 2 market expansion. Similarly, Rooch Network, which I mentioned earlier, aims to deliver utility applications for BTC while also providing yield-generating possibilities for BTC assets. The RGB++ layer built on the UTXO structure follows a similar approach, with solutions closely aligned with these three key technical features.

However, before BTCFi fully emerges, I tend to view it more as a direction for ecosystem development. The current stagnant market environment is far from capable of supporting BTCFi to break away from DeFi. Therefore, technical standards should not be the rigid criteria for defining whether a project falls under BTCFi. As long as there is some level of market consensus, it can be included in the BTCFi category. After all, beyond technical methodologies, the most critical aspect is delivering results to the market. Take Blast, for example—it’s not widely recognized as Layer 2 by the mainstream, yet that hasn’t stopped it from making a significant impact on the Layer 2 industry.

Final Note: Although the BTC Layer 2 market is currently chaotic and fragmented, with various challenges in asset issuance, Layer 2 standards, and yield generation, I still see signals of “Keep Optimism.” Whether the inscription market hype will return, whether Layer 2 can achieve the same level of success as Ethereum, or whether BTCFi can bridge the gap between virtual currencies and the real world, the answers lie in the optimism we all share.

Disclaimer：

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