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Building on Bitcoin: a Comparison of Bitcoin Projects

New projects are bringing smart contracts, DeFi and scalability to Bitcoin, but the ultimate question is how to unlock the $400B in Bitcoin capital.

Type
Deep dive
Topic(s)
Bitcoin
Published
September 14, 2022
Author(s)
Content Marketing Manager
Bitcoin Projects
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In 2009, Bitcoin sparked the emergence of a new decentralized paradigm, opening a world of opportunities, business models and community involvement. In just over 10 years, the nascent technology drove the creation of a $1T industry, and through it all, Bitcoin has remained the dominant blockchain ecosystem.

Bitcoin is an effective store of value because it takes a limited functionality approach (making it more secure), but we are only scratching the surface of how Bitcoin could change the world. All of the capital in the Bitcoin ecosystem can be better deployed to take advantage of the innovation we’re seeing in DeFi products, apps, scaling innovations and more that are all accessible in other blockchain ecosystems today.

Several different projects have made headway on different approaches to unlocking Bitcoin’s potential, whether by scaling Bitcoin payments or introducing smart contract functionality. In this post we will take a look at a few of the high-profile Bitcoin projects that are all collectively working toward unlocking more opportunities for entrepreneurs and developers to utilize the untapped capital in Bitcoin.

Disclaimer: I am employed by an entity that builds in the Stacks ecosystem, one of the projects discussed below. Do your own research!

Bitcoin Projects: What Is the End Game?

At its simplest, BTC is a form of decentralized money, and it’s very good at being that—Bitcoin didn’t get the nickname “digital gold” for nothing. However, the end game for Bitcoin-based projects is to turn Bitcoin into more than just a digital currency. Projects building on Bitcoin hope to make it a foundation for DeFi, NFTs, apps, and more, while simultaneously making the network scalable for millions of users.

Today, Bitcoin is a $400 billion network but not much of that capital has been deployed for use in DeFi, DAOs, NFTs, and other decentralized applications. Instead, most users simply “hodl” their Bitcoin. In fact, only about $550M is locked into the four major projects building on Bitcoin:

Source

These early ecosystems are growing (more on them below) and in just a few years have shown impressive traction. However, $550M is still only a fraction of Bitcoin’s $400B market cap.

Compare this to Ethereum’s nearly $200B market cap, of which $35B is in DeFi alone. Other ecosystems put significantly more of their capital to work in various use cases, and the same cannot be said for Bitcoin today. Interestingly, nearly $5B BTC is bridged on Ethereum for use in various ways, which indicates a clear pent-up user demand to do things with their Bitcoin that the Bitcoin ecosystem cannot provide today.

By empowering developers and entrepreneurs to build on Bitcoin, we can let users put their Bitcoin to work in a safer and more native Bitcoin environment. So how are Bitcoin projects working towards this future?

Bitcoin Projects: Sidechains, Layers, and Independent Blockchains

A typical first question when trying to review Bitcoin-based projects is to try to identify the development approach in use. Sidechains, Layer-2s, and improvements to the base chain are well-known approaches within the crypto ecosystem, but there’s another category of Bitcoin-based projects to explore as well—independent blockchains that can support smart contracts and apps for Bitcoin.

Sidechains

Sidechains are separate blockchain protocols that are connected to another blockchain by creating a two-way peg between the sidechain and the parent chain. Sidechains typically port a direct 1-1 relationship value from a token on one blockchain to a token on the sidechain, meaning a user can send BTC to an address and mint a form of wrapped BTC on the sidechain. 

This form of tokenized Bitcoin is often more programmable and easier to use in different applications. Importantly, sidechains have their own consensus mechanism and do not inherit the security or the decentralization of the blockchain they are tied to.

Sidechains building on Bitcoin today include:

RSK 

RSK is working towards its mission of enabling a global economy built on Bitcoin. RSK is an Ethereum Virtual Machine (EVM)-compatible sidechain to Bitcoin. Being EVM-compatible means that developers can port over the code from other EVM-chains for use on RSK and can write new smart contracts for RSK using Solidity (Ethereum’s smart contract programming language).

RSK derives its security from Bitcoin’s security through a merge-mining consensus mechanism that enables miners to concurrently mine both Bitcoin and RSK blocks. Since RSK is a sidechain, it has a “SmartBitcoin” (RBTC) token that is pegged 1:1 to BTC. RBTC enables users to lock up their Bitcoins on the Bitcoin chain to mint an equivalent amount of RBTC for transactions on the RSK sidechain. Today, there are currently 3,130 RBTC in circulation, and users can put their RBTC to work in a number of different apps on RSK.

Liquid Network

Liquid Network is a sidechain that focuses on building financial infrastructure for the Bitcoin ecosystem, ranging from security tokens to stablecoins. While Liquid facilitates the issuance and settlement of various financial assets, it does not facilitate general-purpose applications.

To secure its network, Liquid uses a federated consensus mechanism that is managed by 15 functionaries, who are responsible for validating blocks and adding transactions to the ledger. The federated nature of Liquid’s consensus mechanism makes it centralized and potentially vulnerable to the control of a few participants. 

Similar to RSK, the Liquid Network also has a token that is pegged 1:1 to Bitcoin (called Liquid Bitcoin L-BTC) –  and there are about 3,559 L-BTC in circulation. L-BTC allows users to access faster transaction times and higher transaction throughput on Liquid’s sidechain relative to the transaction speed and throughput on the main Bitcoin network.

Layer-2 Solutions

Layer-2 solutions introduce protocol developments on top of a base blockchain to improve security, scalability, or decentralization. Most often, these Layer-2s are designed to bring scalability to a blockchain, but in the world of Bitcoin, it can also mean adding new functionality to the ecosystem.

Lightning Network

Lightning Network is a payments layer designed to help scale Bitcoin payments by reducing transaction times and costs when you pay for goods and services with Bitcoin. Lightning Network was first proposed in 2018, and its beta version went live on the Bitcoin mainnet in 2018. 

The Lightning Network enables users to create payment channels, within which they can make an unlimited number of near-instant transactions at a fraction of what it would cost to make such transactions directly on Bitcoin. Lightning is able to reduce transaction costs because BTC transactions on Lightning do not trigger transactions on the Bitcoin chain until the Lightning channel closes, and all BTC transactions are processed at once.

Importantly, Lightning is not a blockchain, and there is no global state or ledger of transactions that occur on a Lightning channel. The protocol does not support smart contracts and focuses on delivering scalable payments infrastructure. Lightning also recently proposed Taro, a Bitcoin upgrade that would enable other assets (fungible and non-fungible) to be represented on the Bitcoin blockchain as well as enable two types of transfers (swaps and sends) for those assets. While still in the early phase of development, this work could pave the way for other assets to be tradable on Lightning as well.

The Lightning Network is making it easier to use Bitcoin for everyday transactions, and there are currently about 4,593 BTC being used for transactions within payment channels on the Lightning Network.

FastKitten

FastKitten is a research proposal from 2019 on how to implement smart contracts on Bitcoin. In essence, users lock their assets into an off-chain smart contract (called a Trusted Execution Environment, or TEE). This TEE is controlled by a centralized operator, and once the smart contract completes, the operator publishes the final state of the TEE ledger to the Bitcoin blockchain. 

As far as we know, this project has not been developed or worked on since the initial publication of the white paper in 2019.  

Changes to Bitcoin Script

A few projects are also working on bringing smart contracts directly to Bitcoin Script without needing to introduce a new layer or a new blockchain. Those projects include:

Sapio

Sapio is a smart contract programming language being developed for Bitcoin. Sapio is created by Jeremy Rubin, a Bitcoin core developer, as part of his Bitcoin research and development organization Judica. Sapio is still in development and is not actively used by any apps. But if and when it is officially released, it will help developers to create intuitive, secure, and composable Bitcoin smart contracts.

Sapio extends the limited scripting functionality within Bitcoin to create complex smart contracts for Bitcoin. The language leverages the concept of “covenants,” which are added security measures that can add restrictions to a batch of Bitcoin, such as limiting their ability to be transferred to only a handful of addresses.

Discreet Log Contracts (DLC)

Discreet Log Contracts (DLC) is another solution designed to enable the creation of smart contracts on different blockchains, including Bitcoin. DLCs were proposed in 2018 by Tadge Dryja under MIT’s Digital Currency Initiative. DLCs are designed to run on Bitcoin’s limited scripting capabilities and rely on information from independent oracles to determine the winner in precomputed potential outcomes. DLCs enable programmability by locking funds in a multisig wallet (effectively an escrow) with the participating users and the oracle.

In 2020, the first live implementation of DLCs on Bitcoin was recorded in a bet between Nicolas Dorier of BTCPay Server and Chris Stewart of Suredbits, on the outcome of the U.S. presidential election. DLCs are still in development and its most recent updates include multi-signature setup, and multi-oracle support, among others.

Independent Blockchains

Sidechains, layer-2 scaling solutions, and improvements to the core blockchain are projects you’ve likely seen before, but there is a final category of work being pursued by a number of projects. These projects are layer-1 blockchains in their rights, but they provide the programmability component to Bitcoin and are free from the encumbrances of Bitcoin’s limited script while maintaining a unique connection to the Bitcoin blockchain.

Mintlayer

Mintlayer is working to bring Bitcoin DeFi to life by creating a smart contract platform on which you can build Bitcoin DeFi applications through Mintlayer’s Script programming language. Mintlayer facilitates 1:1 peg-in and out of various cryptocurrencies, mint new DeFi assets (equity, real estate, and more), and trade via decentralized Lightning Swaps (Mintlayer integrates with Lightning).

To secure its network, Mintlayer uses a Dynamic Slot Allotment (DSA) consensus protocol, a new proof of Stake (PoS) consensus model that attempts to merge with Bitcoin’s Proof of Work (PoW). The consensus mechanism ensures that Mintlayer’s blocks are mined alongside Bitcoin blocks and anchored to the Bitcoin blockchain by using a checkpoint system to prevent long-range attacks and validating blocks through a randomized selection.

Importantly, Mintlayer lets developers choose to use Mintlayer’s native MLT token or a different token altogether for gas fees for any given application. Mintlayer is live on testnet, and it is scheduled to launch on mainnet sometime in Q1 2023. 

Internet Computer

DFINITY’s Internet Computer (ICP) is an independent blockchain protocol created to facilitate the emergence of a decentralized internet and a decentralized global computing system. In 2021, DFINITY announced that it plans to integrate ICP directly with Bitcoin to transform Bitcoin into a full-fledged financial ecosystem on which faster transactions and Bitcoin smart contracts can run.

To reach this goal, ICP aims to empower developers to create “canisters” (smart contracts) that can communicate with the Bitcoin network. These canisters will replicate the Bitcoin chainstate on the Internet Computer and allow you to query and receive Bitcoin’s unspent transaction output (UTXO) information.

The successful integration of ICP with Bitcoin will allow developers to create dApps on the Internet Computer that can actually facilitate Bitcoin transactions on the Bitcoin chain. However, it appears to be a trusted setup where a sufficient number of nodes (a federation of nodes) on the ICP subnet have to approve transactions. This will be done via Chain Key cryptography.

The ICP team recently announced the launch of a beta version of their BTC integration on testnet. We’ll be watching to see how it unfolds in the coming months.

Stacks

Stacks is an independent blockchain that enables developers to create Bitcoin smart contracts. The Stacks blockchain has its own gas token (STX) that ensures efficient use of network resources and prevents spam, and it also has its own miners and consensus mechanism. 

For its security, Stacks relies on an innovative consensus model — Proof of Transfer (PoX), which is the first consensus model between two independent blockchains. PoX enables the Stacks blockchain to settle on the Bitcoin blockchain with each new block mined on the Bitcoin chain. This is done without altering Bitcoin in any way and without Bitcoin miners having to be aware of Stacks’ existence. Thus Stacks inherits Bitcoin’s security, and to alter the history of Stacks, you’d have to alter the history of Bitcoin.

Stacks relationship with Bitcoin doesn’t end there. Clarity, the programming language used in Stacks, can read and react to changes in Bitcoin’s global state, and the STX token itself can generate BTC yield for users who choose to lock up their STX to secure the network. Stacks enables dApps and businesses to be built in the Bitcoin ecosystem while maintaining and protecting the core ethos of Bitcoin: decentralization and open access to all.

Today, Stacks is home to dozens of different apps, and the blockchain is the largest and fastest-growing Web3 project on Bitcoin.

More Bitcoin Projects = More Opportunities for Developers

Bitcoin grows stronger the more that developers choose to build and innovate on it. Developer adoption is still early across all of Web3, and Bitcoin, as the largest and strongest cryptocurrency, remains a solid bedrock for builders, entrepreneurs, and startups to build on.

Today, most of the buzz around dApps and Web3 innovation is occurring outside of Bitcoin. We expect to see that narrative shift. It’s still early days in Web3, and we believe that apps built on the most secure blockchain (Bitcoin) are apps designed to be around for the long term. We’ve yet to scratch the surface of what can be built on Bitcoin, and with each new project launched, the bull case for Bitcoin grows.

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