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- 🟣 Soon(TM) Bitcoin L2s: A new frontier for DeFi
🟣 Soon(TM) Bitcoin L2s: A new frontier for DeFi
Is Bitcoin ready to challenge Ethereum in smart contracts?
Macauley Peterson & Donovan Choy
September 09, 2024
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Welcome back to 0xResearch. Here's what we’ve got for you today:
A Bitcoin week
Chart: Revenue milestone
Gov: Gas-free governance
CT: L2s vs the world
This week, we’re going to be taking a look at the coming onslaught of Bitcoin “layer-2s” and new prospects in Bitcoin DeFi.
Advances in cryptographic innovations such as BitVM are positioning networks built on Bitcoin as a viable alternative to Ethereum for smart contract-based dapps.
Traditionally, Ethereum has been viewed as the more versatile of the two, bolstered by a robust infrastructure maintained by its community and scaling via rollups to lower the cost of block space while being “secured by Ethereum.”
However, Bitcoin's appeal as a simpler, more trusted "digital gold" holds significant weight. BTC as the premier "store of value" asset has unmatched meme value and greater public trust, not to mention a market cap edge which could be leveraged to provide economic security.
Are Bitcoiners ready to make the leap to new chains that are “Bitcoin-aligned,” or is a flourishing layer-2 ecosystem more likely to be populated by experienced Ethereum users?
How will users navigate the vagaries of sidechains, rollups and less well-known scaling concepts like Fractal Bitcoin, which launched its mainnet today? To what extent will they prioritize decentralization and security on these chains?
One of the key discussions of late for the Ethereum community is where long-term value will accrue. Is a settlement and data availability (DA) layer enough for mainnet, or does it need a vibrant dapp environment on the execution side?
Ethereum’s lead in MEV extraction may erode as protocols aim to capture and redistribute MEV, employ encrypted mempools that block front-running or route to offchain solutions.
How are Bitcoin L2s going to help the base chain thrive?
While Bitcoin will likely move slowly, as it always does, the potential to implement zero-knowledge proof (ZKP) verifiers and other cryptographic innovations without requiring a hard fork will let layer-2s innovate faster.
BitVM2, released last month, builds on the original BitVM protocol to enhance the security and efficiency of Bitcoin’s L2 networks, thus overcoming some early limitations.
If you want to flag some new tech or protocol I should be looking at along these lines, my DMs are open.
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Dapp time to $100 million:
The Solana memecoin maker pump.fun is the fastest growing application by revenue in the industry, making $100 million in 217 days. Only two other names here are relatively new entrants in this crypto cycle, namely Ethena (ENA) and Aerodrome (AERO).
Unlike pump.fun, the latter two have dished out millions in token incentives to bootstrap growth. Ethena’s incentives have primarily been given through its points farming campaign, while Aerodrome DEX utilizes a veCRV tokenomics model to incentivize holding of its AERO token.
— Donovan Choy (X: @donovanchoy | Farcaster: @donovan)
The Aptos ecosystem is accelerating, with both the network and core projects gaining notable volume, transactional activity and deposits. Aptos’ TVL has grown significantly, rising 263% year to date from $116 million at the start of the year to over $425 million today. Ondo Finance’s tokenized US Treasurys product, USDY, has surpassed $15 million, bringing RWAs to Aptos and highlighting the realities of new innovative financial products that bridge TradFi and decentralized platforms.
Snapshot goes onchain with Snapshot X
DAO governance is pretty confusing, but here’s a simplification of how it works:
Propose your great idea on the DAO forum.
After heated discussions conclude, DAO members commence “temperature check” token-based voting. Voting on the L1 is expensive, so DAOs use an off-chain voting platform like Snapshot which uses the IPFS storage to keep receipts of votes.
If the temperature check passes, the DAO proceeds to an onchain vote on Tally. Tally is a front-end interface building on Governor, originally created by the lending dapp Compound.
When the onchain vote passes and if the vote at hand necessitates an enforceable onchain action (e.g. upgrading a smart contract), Tally’s API triggers the DAO’s smart contracts, making it a trustless and binding governance action.
Snapshot has been used as a suboptimal solution by practically every DAO (96%) since DAOs became a thing circa 2020. The company is today launching “Snapshot X,” an onchain voting protocol, to make DAO voting cheaper.
To circumvent the costs of onchain voting on the Ethereum L1, Snapshot X is launching on Starknet, where voting is 10-50x cheaper compared to the L1.
Snapshot X also leverages “storage proofs,” which allow the DAO to verify your tokens on the L1 while voting with the same tokens on the L2 — no bridging needed.
And no, you won’t have to onboard Starknet with an Argent wallet just to vote. The new Snapshot experience will be chain-abstracted. Popular EVM wallets like MetaMask or Rabby will work just fine, thanks to the fact that Starknet supports native Ethereum cryptographic signatures.
Various other features that DAOs have used in governance such as NFT voting, gasless signature voting, permissioned proposal creation and time-lock execution using Safe will all continue to be possible.
“Essentially, the point of Snapshot X is unstoppable onchain governance,” Snapshot Labs COO Jeremy Musighi told Blockworks.
— Donovan Choy
In August, equity markets experienced volatility but ultimately ended higher as inflation continued to ease, with the PCE Price Index showing inflation at 2.5%. The Federal Reserve signaled cuts for next month, reflecting progress on inflation and a softening labor market. While the S&P 500 and NASDAQ closed higher, Bitcoin faced challenges, declining 11% from $63k to $57k. Despite this setback, Bitcoin's market dominance reached 56.4%, suggesting either a shift in market dynamics due to ETFs or the early stages of a bull run. Network activity remained robust, with August marking the second-highest monthly transaction count ever recorded, and highlighting Bitcoin's growing ecosystem despite its recent price performance.
We believe DRIFT offers a unique addition to portfolios as Solana fundamental beta with a number of idiosyncratic potential future catalysts, particularly in the context of its valuation relative to some peers.
We’re asking all the hard questions at Permissionless.
Hear the leading voices in the Cosmos ecosystem discuss the past, present, and future of the space.
Plus, the rise and fall of Friend.tech.
Meanwhile, Euler returns with a V2 launch of its lending protocol.
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The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.