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Bitcoin’s security model removes trusted third parties, relying on cryptographic hashing, decentralization, and proof-of-work mining to ensure transaction integrity. While this provides censorship resistance and user autonomy, it also demands personal responsibility for safeguarding private keys and securing funds.Bitcoin security is one of the more interesting new phenomena in computer science, as it involves a complete reversal of the security model found in traditional digital financial systems. While the old systems involve trusted third parties who operate and control centralized databases of everyone’s assets and transactions, the bitcoin model flips the script and gives each individual user full autonomy over their digital money. While this altered security model is also what enables bitcoin’s underlying utility as a digital cash and apolitical monetary system, it can be difficult for new users to understand this financial paradigm shift.

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Through the right combination of preexisting technologies, such as cryptographic hashing and public-private key encryption, bitcoin creator Satoshi Nakamoto was able to create a revolutionary new model for digital money. And since 2009, Nakamoto’s experiment has turned into a resounding success up to this point, with more than $1 trillion worth of value now held on the network, and increasing interest coming from the largest asset managers in the world such as BlackRock and Fidelity.

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But how is this new model even possible? And how can we know that bitcoin is secure? Let’s take a look at how security works on the bitcoin network from both a high-level and a deep, technical perspective.

What New Users Need To Understand About Bitcoin Security

The first attribute of bitcoin security that must be understood by users is that, unlike traditional digital financial systems like PayPal, users are put in full control of their own security at the base layer. While systems like PayPal involve trusted third parties who are able to hold their users’ hands and provide customer support when something goes wrong, bitcoin is a system where each user has complete control over their assets at all times. And while the full control users have over their bitcoin is the general point of the decentralized digital cash system in the first place, it also creates a situation where they must accept a much larger degree of personal responsibility when it comes to the security of their assets.

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The best analogy for bitcoin security is physical cash. If you’re going to hold a large amount of physical cash, you must also be able to secure it yourself, as there is no one who is able to reverse the transaction in a situation where the cash is lost or stolen. In the case of bitcoin, users must protect the private keys associated with their public bitcoin addresses.

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Unlike bitcoin, traditional banks have a number of measures, such as chargebacks and identity verification, to add a number of safety nets for their users. Again, these additional safety precautions come with trade-offs, as they effectively mean the bank is in control of the customer’s assets rather than the customer themself. As a side note, those who prefer the extra assistance found in the traditional banking system can still use bitcoin banks to gain a similar level of ease-of-use with the cryptocurrency; however, this setup also removes many of the benefits of using bitcoin as a store of value or medium of exchange (more on that later).

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Understanding this key difference between bitcoin and traditional online financial systems is a key piece of education that should be viewed as a prerequisite for using the cryptocurrency network in the first place. Otherwise, financial loss is bound to occur.

Best Practices For Users Securing Their Bitcoin

So, how are users supposed to take responsibility for their own financial security in bitcoin? The first step is to not fall into the same traps that are found in the traditional financial system, namely handing over one’s bitcoin to a “trusted” third party. While this structure is problematic enough in traditional systems, the reality is it can be even worse in bitcoin because there are oftentimes less avenues for practical legal recourse when something goes wrong. For example, former customers of bankrupt cryptocurrency exchange FTX were only able to recover a fraction of their cryptocurrency holdings through the bankruptcy process, and there have been plenty of situations throughout bitcoin’s history where third parties were able to successfully run off with other people’s money.

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Of course, general education and awareness of how bitcoin works is also necessary before deciding to take full control over one’s own digital finances. There have been plenty of instances of people who try to bite off a bit more than they can chew when they first hear about bitcoin and end up making a mistake that leads to a loss of funds, so newcomers are advised to educate themselves first and play around with small amounts of money before diving into the deep end.

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In terms of general tips for users to successfully secure their own bitcoin, it’s important to understand a variety of concepts such as non-custodial wallets, multisig addresses, and cold storage. These avenues for secure storage of private keys, which are what allow users to move their bitcoin, are the best way to make sure one’s money remains secure without the assistance of a trusted third party.

Fundamentals Of Bitcoin Network Security

When talking about the security of the bitcoin system itself, rather than individual users’ private keys, there are a variety of different aspects of the system that must be understood. That said, the key ingredient that keeps the bitcoin network, and thus the transactions that take place on that network, secure is decentralization.

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As covered previously, the key innovation with bitcoin is that there is not a trusted third party that controls everyone’s account balances and payments. Instead, everyone on the network participates in coming to consensus on the current distribution of bitcoin and future valid transactions.

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Each node on the bitcoin network checks and verifies that every transaction published on the network is valid according to the consensus rules, which were effectively set in stone by Nakamotoo when the first version of the node software was released. This is what prevents things like someone creating new bitcoin out of thin air or spending some coins that they don’t actually own.

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By operating a node, a bitcoin user can confirm that the bitcoin they receive are legitimate and valid. This system where everyone checks the legitimacy of transactions and blocks of transactions is what enables the system to remain decentralized, and the relatively low number of on-chain transactions that can be processed per second (compared to traditional, centralized systems) makes it much easier to connect to the network and participate in the consensus process. In this way, the cost of operating a node on the network can be viewed as a very rough measure of the level of decentralization found on the network.

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The health of the bitcoin network can be tracked by the percentage of economic activity that is taking place via individual users operating their own nodes. If too many people start outsourcing the verification of network rules to a third party, the system starts to look very much like traditional online banking.

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To understand this point, just imagine a scenario where all bitcoin users are outsourcing their connection to the network to a third party, that third party would be able to make up whatever version of bitcoin transaction history they’d like. They would be able to do things like create bitcoin out of thin air and block certain types of transactions from happening, as no one would have the ability to verify what is actually happening behind the scenes. Economically relevant nodes could also more easily alter the rules of the network in a situation where too many users are outsourcing their node operations to someone else. Therefore, in addition to running a node to check the validity of the payments they receive, bitcoin users should also run their own nodes for the overall health of the network.

The Role Of Miners And Proof Of Work

Of course, not all nodes on the network are in charge of processing payments into new blocks of transactions, which are finalized roughly every ten minutes. Special nodes on the network, known as miners, earn the right to participate in the bitcoin accounting process by provably expending computational resources.

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While miners are sometimes mistakenly referred to as the new type of trusted third party that still exists in the bitcoin network, the reality is their power is extremely limited, and kept in check by the nodes. This is due to the fact that the nodes on the network are what provide value to the asset that miners generate through their work.

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Miners are only able to cause issues on the network if they become too centralized and a single party or multiple nefarious parties working together account for 51% of the network hashrate, which is the total amount of computing power that is pointed at the network at any one point in time. This is what is known as a 51% attack.

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Even then, miners are unable to do things like steal users’ bitcoin or inflate the bitcoin supply. Instead, they’re basically only able to implement a denial of service attack on bitcoin transactions, which would be extremely costly due to the large amount of resources that go into the industrialized bitcoin mining process these days. In fact, the system is built to incentivize a bitcoin mining cartel to continue acting in the best interest of bitcoin users in a situation where they gain a majority share of the network hashrate, as that should be more profitable for them. That said, there is still plenty of room for further decentralization of bitcoin mining.

How Does Bitcoin Mining Work?

Miners expend energy on the bitcoin network via the proof of work (PoW) mining process. PoW is the consensus mechanism used in bitcoin, meaning those miners that are willing to expend energy in exchange for newly issued bitcoin and transaction fees are the ones who process transactions and package them into blocks. They “prove” their worth to the network by “working” on figuring out the answers to complex mathematical problems with their computer hardware. The specific hashing algorithm that miners work on in bitcoin is known as SHA-256.

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Essentially, miners gather a group of unconfirmed transactions and combine them into a “block.” To validate this block and add it to the blockchain, they must find a hash—a unique, fixed-length alphanumeric code—that meets specific difficulty criteria. The miners achieve this by inputting various possible “nonces” (random numbers) into the SHA-256 algorithm until the resulting hash starts with a certain number of leading zeros, set by the network’s current difficulty level. In other words, it’s a guessing game, and having more computational resources allows someone to make more guesses.

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While some commentators have espoused the view that the computing power that goes into the bitcoin mining process is wasteful, the reality is it plays a critical role in the bitcoin network. In fact, it would not be possible for bitcoin to exist without it. In short, the use of PoW mining in bitcoin solves the double-spending problem seen in previous digital cash systems, and without the introduction of a trusted third party. The centralized parties that controlled the transaction ordering process to prevent double spending in previous systems were effectively security holes that could be targeted with regulation or other forms of attacks. In other words, the PoW mining process is what enables bitcoin’s accounting system to operate in a decentralized manner, thus enabling the entire value proposition of the system as a whole.

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Put another way, PoW mining is what ensures that the decentralized accounting ledger on the bitcoin network, known as the blockchain, can be trusted. While bitcoin transactions are never finalized in the true sense of the word, they become increasingly difficult to reverse over time due to the chaining of transaction blocks in a way that requires an increasingly large amount of computing power to reverse. In other words, it takes exponentially more computing power to rewrite 100 blocks of bitcoin transaction history than it does to rewrite one block due to the cryptography that underpins the network.

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Once a transaction is included in a block and confirmed by miners, that block is linked to the previous block through a cryptographic hash. Each subsequent block reinforces the transaction’s validity, creating a deeper chain that would need to be altered in order to reverse the transaction. To tamper with a confirmed transaction, a malicious actor would have to re-mine not only the block containing the original transaction but also all subsequent blocks, which would require vast amounts of computational power. The more blocks that follow a transaction, the more secure it becomes. This concept of "block depth" or "confirmations" is why a transaction is generally considered irreversible after six confirmations, as the cost and effort to modify the blockchain grows with each new block added.

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If PoW mining were not used in bitcoin and each node was given an equal vote in the consensus process, the network would be open to Sybil attacks where the operator of the most nodes is able to corrupt the accounting process. Instead, PoW mining creates a situation where only those who are willing to provably expend resources (and therefore need the bitcoin block reward to recoup their expenses) are able to participate in consensus. The miners are thus financially incentivized to act according to the demands of the nodes on the network that are using bitcoin and providing its monetary value in the first place.

Bitcoin Is Secured By A Structure Of Incentives

This point regarding miner incentives helps illustrate the point that the bitcoin network as a whole is able to operate successfully due to the way in which its technical aspects are implemented rather than the simple use of technology itself. The economic incentives at the core of the system have a lot to do with why bitcoin has been able to function properly without many hiccups for more than a decade.

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These incentives were most clearly demonstrated during the bitcoin block size war, especially when it came to the role of PoW miners in the system. While many prominent users of the bitcoin network, such as Coinbase and the vast majority of miners, claimed that miners effectively have the power to vote on hard-forking changes to the bitcoin protocol rules, the revolt that ensued from bitcoin node operators indicated that these entities were wrong. A lot about bitcoin security can be learned from the blocksize war, and our article on the history of the event should be seen as complementary reading to this article.

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Public-Private Key Encryption

In terms of the security of bitcoin transactions themselves, everything is based around the concept of public-private key encryption. Each user’s public bitcoin address, of which a user can have an unlimited number of, also has an associated private key. The structure here can be seen as similar to a username and password in traditional online services. The public bitcoin address is shared with others for the purpose of receiving payments, and the private key associated with the bitcoin address is required to sign off on any transactions being sent from that address. This aspect of the bitcoin system is closely associated with the “not your keys, not your coins” mantra that is often touted by the cryptocurrency userbase.

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As a technical sidenote, it should be pointed out that a bitcoin address is not actually the public key derived from the private key. Instead, it is a hashed derivation of the public key that has effectively shortened the public key’s character length.

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This public-private key encryption method relies on complex mathematical problems—typically factoring large prime numbers or using elliptic curve cryptography—that are easy to compute in one direction (encryption) but extremely difficult to reverse without the corresponding private key (decryption). Most notably, this encryption method does not involve sharing private keys or encrypted data with a trusted third party, which is a critical reason as to why it is used in bitcoin. A system where a trusted third party also had access to users’ private keys would be a complete departure from the philosophy behind bitcoin and more similar to the traditional online banking system.

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Public-private key encryption is a rather old concept that can be traced back to the 1970s when cryptography moved from being the exclusive domain of military and government institutions to the wider world of academia and technology. In 1976, Whitfield Diffie and Martin Hellman introduced the concept of public-key cryptography in their paper “New Directions in Cryptography,” which proposed a method allowing secure communication over insecure channels. Their innovation centered around the idea of using two keys—one public and one private. Shortly after, in 1977, Rivest, Shamir, and Adleman developed the RSA algorithm, a practical implementation of public-private key encryption. RSA relies on the difficulty of factoring large prime numbers to ensure security, and it quickly became one of the most widely adopted encryption methods in digital security. This encryption method underpins the modern security of online communications, from email encryption to secure financial transactions.

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In addition to being used in on-chain bitcoin transactions, there are also a variety of alternative use cases of public-private key encryption in bitcoin. For example, a private key associated with a particular address can be used to sign any kind of message, not just a protocol-compliant bitcoin transaction that transfers some bitcoin to another address. This can be useful for proving ownership over some bitcoin associated with a particular address without moving the bitcoin. Additionally, nonbroadcasted bitcoin transactions are critical infrastructure for various bitcoin Layer 2 networks, such as the Lightning Network.

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Varying Degrees Of Security In Different Bitcoin Layers

There are also technical differences in bitcoin security found at different layers of the overall bitcoin protocol and application stack, as bitcoin can be held in a wide variety of different ways and forms. For example, as previously explained, many of the most important security features of the bitcoin asset are lost when it is held in a bank-like structure, such as Coinbase or another cryptocurrency exchange, rather than a non-custodial wallet that is not directly connected as a node on the bitcoin network.

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The differences between interacting with bitcoin directly as opposed to the bitcoin banking layer found in traditional financial structures are quite clear, but there are also different layers of the bitcoin network as a whole that are more directly tied to the initial intentions of Nakamoto’s creation. In other words, there is a spectrum of security and decentralization found in various bitcoin applications.

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The most well-known Bitcoin Layer 2 network is the Lightning Network, which is effectively a system of cached bitcoin transactions that is able to lower costs and increase the speed at which bitcoin-denominated payments can happen. Since this Bitcoin Layer 2 network is literally just signed transactions that have not yet been broadcast to the greater bitcoin network, the Lightning Network is able to retain much of the security that is found at the base layer.

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However, there are still notable trade-offs made here. Perhaps most notably, loss of funds can occur if a counterparty on the Lightning Network cheats, and a cryptographic proof of that cheating cannot be published to the blockchain, due to either congestion on the network or nefarious intentions from a majority of miners. Many other Layer 2 bitcoin networks that are currently live or in development, such as Ark, also rely on the ability to get a message included in the blockchain in order to prevent loss of funds. Additionally, a light bitcoin client that is not directly connected to the network can be lied to by their middleman node if that node is also colluding with a majority of the network hashrate.

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There are also various sidechains to bitcoin that come with alternative security models than what is found at the base layer. Many of these sidechain systems, such as Liquid and Rootstock, effectively rely upon trust in a federation of entities, as the bitcoin that is used on those sidechains are held in multisig addresses.

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Recently, it was found that an innovation known as BitVM may create a situation where only one of the entities in the federation needs to be honest in order to guard against potential theft or a hack of the federation. Additionally, there are now sidechains based on proof of stake (PoS), such as Lorenzo Appchain, rather than multisig federations. When using any sidechain, it’s important to understand the trade-offs in security that are made as compared to bitcoin’s base blockchain.

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At the end of the day, there are serious trade-offs made when it comes to balancing security with convenience in bitcoin, and it’s critical for these details to be understood in order to use bitcoin properly.

Challenges To Bitcoin's Security

Indeed, making bitcoin easier for the average person to use is a major challenge for the security of the cryptocurrency network. While the Coinbase app makes it much easier for the average person to store and transact with their bitcoin, the reality is they aren’t really interacting with the bitcoin network at all. There is an inherent challenge in making bitcoin more user friendly due to the fact that the whole point of the system is to allow users to take more personal responsibility over their digital finances. Due to the need to preserve decentralization, there is also a limit to the amount of activity that can take place at the base layer, which can also make the system more costly and less user friendly. Scaling the system to more users is a closely related security challenge; however, the current plan is to allow bitcoin to scale via multiple layers for specific use cases, allowing users to opt into different security models depending on their needs.

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Mining centralization also poses significant security risks to the bitcoin network, as a small number of mining pools controlling the majority of the network's hashrate undermines the decentralized ethos of bitcoin. When just two or three mining pools dominate the network, they can theoretically collude to launch a 51% attack. This would allow them to double-spend coins, deny anyone from using the network, steal coins from certain types of Bitcoin Layer 2 networks, and more.

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Perhaps more troubling, mining centralization also increases the risk of regulatory interference if governments target these pools, potentially forcing them to comply with rules that have previously been applied to traditional banks, such as identification requirements for every bitcoin user. In terms of potential solutions to the challenge of mining centralization, changes to mining protocols, such as ones that give individual miners more power over the transaction selection process, could be helpful. Additionally, privacy improvements at the base layer would make it less possible for certain types of bitcoin transactions to be discriminated against, as all transactions would effectively look the same.

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In addition to the security challenges that bitcoin already faces today, there are longer-term issues that could eventually materialize in the future. For example, the potential development of quantum computing could break the encryption that secures the bitcoin currently associated with bitcoin addresses on the network today. However, there is at least one proposal for fixing this potential issue via a soft fork.

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Additionally, there are concerns regarding the long-term security budget of bitcoin in terms of the incentive for miners to point their computing power at the network. The block reward currently includes a subsidy that is cut in half roughly every four years, and eventually the system will need to be secured by nothing more than transaction fees. A lower economic incentive to mine bitcoin means it could become less costly for a malicious party to gain enough of the network hashrate for the purpose of attacking bitcoin. While many predict that the further development of Layer 2 bitcoin networks will allow on-chain fees to dramatically rise, while keeping fees relatively low for end users on secondary layers, this is not something that is definite.

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Another lurking concern is the potential introduction of technical bugs when upgrading critical, consensus-level software such as Bitcoin Core, which has happened multiple times in the past. Such a development could potentially force a hard fork of the bitcoin protocol rules, which would not be an easy task in an increasingly decentralized environment. However, if a hard fork were to succeed in the future, it would likely be one where the bitcoin network is literally broken without the implementation of the hard-forking change. That said, there exists a hope that the bitcoin protocol will eventually ossify, meaning that the base layer can remain completely unchanged while more experimentation and technical development takes place on upper-layer protocols.

The Future Of Bitcoin Security

To review, bitcoin’s security operates fundamentally different from traditional online banking, relying on decentralization and cryptographic methods instead of trusted third parties like banks. Each bitcoin user is in control of their private keys, which allows them to own and transact their assets independently. This shift from central control to personal responsibility is underpinned by bitcoin’s decentralized network of nodes, which is key to bitcoin’s security.

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By distributing the process of transaction validation across a large number of participants, the network becomes more resilient against attacks and failures. However, as scalability becomes a challenge, especially with bitcoin’s base layer only processing a limited number of transactions per second, Bitcoin Layer 2 networks, such as the Lightning Network and Lorenzo Appchain, offer a path forward. These secondary layers enable faster and cheaper transactions while retaining a sufficient degree of decentralization necessary for the security of various financial activities.

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In the long run, ossification of the base layer could play a crucial role in preserving bitcoin’s security, ensuring that its core protocol remains resilient while allowing innovations to continue at other levels. Either way, the health of the network will continue to rely upon individuals taking the initiative to run their own nodes and take full responsibility for securing their digital assets.

Bitcoin has reshaped our understanding of currency, transactions, trust procedures, and value systems at large. The backbone of this new trustless cryptographic exchange is a process known as " mining."  But what exactly does mining mean in this context, and why is it so crucial to the innovation of the bitcoin network?

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This article elaborates on the world of bitcoin mining, expanding on its mechanisms, significance, and controversies.

Understanding The Bitcoin Ledger And Mining

After a bitcoin transaction is initiated, it must be verified and added to the decentralized ledger.

In a traditional financial system, some authority verifies transactions and updates its central ledger. In this new decentralized system, there is no authority to manage the ledger of transactions; therefore, a novel method for recording transactions is required. This is the duty of miners.

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After passing initial verification, a bitcoin transaction enters a pool where it waits to be picked up by a miner and included in a block—a digital record of recent transactions. Miners can't include every pending transaction in the block they submit, therefore they pick the transactions offering the highest fees.

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With transactions selected, miners seek to add their block to the blockchain, aka the bitcoin universal ledger. 

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This happens through a process called mining, hence the participants are called “miners.” Let's break down this process in more detail.

Bitcoin Mining: A Proof Of Work

The process of adding a block to the blockchain is called mining because it involves work on the miners’ part, and they are rewarded for this work with bitcoin. This is a bit like “discovering” or “unearthing” the bitcoin because it is the only way for new bitcoin to be minted.

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The "work" of mining is a competition of solving complex computational puzzles. By solving these puzzles, miners verify “blocks" and link them to a chain of previous transaction entries, earning the fresh bitcoin and transaction fees for their work.

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The competition among miners is as much about computational power as it is about speed. The process is essentially a brute-force guessing game. Miners attempt to find the correct hash—a specific string of characters—through trial and error. The miner with the most computational resources typically has a better chance of discovering the correct hash first.

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The first miner with the correct hash wins the right to add their block to the blockchain. This method is known as the proof-of-work consensus mechanism. 

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Consensus mechanisms enable network participants to agree on the current state of the ledger. Different mechanisms use various methods to decide who gets the privilege of adding a new block to the blockchain. In the proof-of-work system, this right is granted to the miner who first solves the mathematical puzzle by finding the correct hash.

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After finding this hash, they broadcast their solution to the entire network. If everything checks out, the new block is added to the blockchain, and the successful miner receives a reward in the form of newly minted bitcoin, plus any transaction fees.

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The Mining Process Step-by-Step

• Transaction Collection: Miners gather pending transactions from the network's memory pool and assemble them into a candidate block.
• Block Validation: They ensure transactions are valid, unspent, and comply with the network's rules.
• Proof-of-Work Calculation: Miners compute the hash of the block header until they find a hash that meets the network's target.
• Block Broadcasting: Upon finding a valid hash, the miner broadcasts the new block to the network.
• Verification By Nodes: Other nodes verify the block's validity. If accepted, the block is added to the blockchain, and the miner receives the block reward.

Securing The Network

Visualize miners continuously adding blocks of data to an ever-growing chain, each agreeing on which block is correct—this is the essence of proof-of-work security. To further clarify, it helps to break down the mechanisms of mining that keep the network secure.

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The puzzles miners solve involve hash functions—mathematical algorithms that convert input data into a fixed string of characters. The hash for each block is generated based on both the transactions within that block and the hash of the preceding block. 

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This means that altering any transaction in an earlier block would change the hashes of all subsequent blocks, which would be immediately noticeable to the network of miners who previously agreed on the correct chain. All nodes in the network accept the longest valid chain of blocks as the true blockchain. 

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The only way a malicious actor could attack such a network would be by controlling 51% of the hash rate. The hash rate represents the total computational power of the bitcoin network. With over half the hash rate, the attacker can mine blocks faster than the rest of the network combined.

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Because bitcoin nodes follow the longest valid chain, by consistently adding blocks, the attacker can make their version of the blockchain the longest, causing the network to accept it over others. A higher hash rate, therefore, increases network security, making it more resistant to attacks.

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The bitcoin network is the largest and most distributed blockchain in the world; acquiring sufficient mining equipment to exceed 50% hash rate involves astronomical costs. Further, once such an attack is carried out, the value of bitcoin would plummet due to it being compromised.

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Mining, therefore, secures the bitcoin network by making an attack almost completely impossible computationally, and always impractical economically.

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Evolution Of Mining Hardware

In bitcoin's early days, mining could be performed using a regular computer's CPU. New hardware soon became needed because the bitcoin network adjusts the mining difficulty every 2,016 blocks (targeting approximately every two weeks as the intended average) to ensure that blocks are added roughly every 10 minutes. 

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If miners collectively are solving puzzles too quickly, the difficulty increases; if too slowly, it decreases.Due to this, as the bitcoin network becomes more popular, the computational resources needed to compete in mining grow alongside it.

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Today, mining is predominantly conducted using ASICs (application-specific integrated circuits), specialized hardware designed explicitly for mining bitcoin, offering significantly greater efficiency and higher hash rates.

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Due to the increasing hardware costs of running a mining operation, mining pools have sprung up to continue allowing everyday bitcoin users to participate in network security. 

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Solo mining involves a miner working independently to find blocks, which is akin to winning a lottery. Mining pools allow miners to combine their computational resources, providing more consistent and predictable rewards. Participants in a mining pool contribute their hash power and receive a portion of the rewards equivalent to their computational contribution. 

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The Great Bitcoin Energy Controversy

Bitcoin mining is energy-intensive due to the computational power required as the mining difficulty increases. Estimates suggest that bitcoin's annual energy consumption rivals that of some small countries. The exact figure fluctuates based on the hash rate and energy efficiency of mining hardware.

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Environmental concerns are the main controversy behind bitcoin mining. Environmental activists argue that this extreme energy can lead to significant greenhouse gas emissions because most electricity for mining comes from fossil fuels.

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Bitcoin advocates typically respond to these concerns by pointing out three things:

• Renewable Energy: An increasing number of mining operations are powered by renewable sources like hydro, solar, and wind energy. The value created by bitcoin mining can further push innovation and capital in green energy sources.
• Energy Efficiency: Advances in ASIC technology aim to reduce energy consumption per hash. As bitcoin mining technology advances, energy consumption will decrease.
• Layer 2 Solutions: As more bitcoin transactions come off the native chain, congestion and computational demands on the PoW network will be alleviated.

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The Future Of Bitcoin Mining

Bitcoin mining is a foundational component of the bitcoin network, ensuring security, validating transactions, and introducing new bitcoin into circulation. While it presents opportunities for profit and technological advancement, it also poses significant challenges, particularly concerning its environmental impact. 

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As mining moves forward, the balance between reaping the benefits of this groundbreaking technology and mitigating its drawbacks will define the trajectory of bitcoin and its role in the global financial system.

True ownership is the core value proposition of cryptocurrencies. Without a decentralized solution to ownership, property can only owned via a trusted third party such as the government.

Bitcoin, the first cryptocurrency, was created to bring ownership out of the hands of a central authority and back into the proverbial hands of the owners themselves. Since its inception, owning bitcoin has become the gold standard of self-custody, and millions of people around the world have clamored to hoard some themselves.

Bitcoin has attracted a diverse range of investors, from individuals to corporations to governments. Bitcoin ownership, however, is far from evenly distributed. A small number of wallets hold a large portion of the total supply, which could have serious implications for the market.

For this reason, the question of who owns the most bitcoin has always been a topic of great intrigue, especially considering bitcoin’s role in the future of decentralized finance and the world at large. This article will categorize the major global bitcoin holdings and elaborate on the entities that control them.

Individual Holders

Satoshi Nakamoto

No discussion on bitcoin ownership can begin without mentioning Satoshi Nakamoto. Nakamoto is believed to have mined around 1.1 million bitcoin in the early days of the network.

Mysteriously, these coins have remained untouched since Nakamoto disappeared from the public eye in 2010.

Holding about 5% of the total supply, Nakamoto is estimated to be the largest bitcoin owner, controlling coins worth over $30 billion, as of November 2024​. Despite this massive fortune, Nakamoto has never spent nor transferred these coins a single time, adding to the enigma surrounding bitcoin’s creator.

This immobility of Nakamoto’s stash reassures the cryptocurrency community that these holdings won’t suddenly flood the market, an undeniable risk when a single entity controls so much of the supply.

The Winklevoss Twins

Cameron and Tyler Winklevoss, famously known for their legal battles with Mark Zuckerberg over Facebook, became some of bitcoin’s earliest and most vocal proponents. Their belief in the long-term potential of bitcoin has cemented their position as some of the most influential figures in the digital assets space.

The twins reportedly bought 70,000 BTC in the early 2010s, and their holdings have grown substantially since then. This investment helped them establish Gemini, a regulated cryptocurrency exchange that is one of the largest in the world.​

Tim Draper

Venture capitalist Tim Draper is another significant individual holder. Draper is the founder of Draper Fisher Jurvetson, Draper Venture Network, and Draper Associates, just to name a few.

He purchased 30,000 BTC in 2014 from the U.S. Marshals auction, following the Silk Road seizure, and invested in over 50 cryptocurrency companies, including Coinbase, Ledger, Tezos and Bancor. His initial bitcoin investment alone has grown substantially, making him one of the richest bitcoin billionaires​.

Michael J. Saylor

Michael Saylor, CEO of MicroStrategy, has become one of the loudest proponents of bitcoin. His company’s decision to use bitcoin as its primary reserve asset has led to the accumulation of 279,420 BTC, the largest amount held by any publicly traded company​ (more on this below).

Outside of his company, Saylor also has stated that he personally holds around 17,000 BTC, making him one of the largest individual holders. Saylor is a bitcoin evangelist in the strongest sense and sees bitcoin as the best (if not only) long-term store of value.

Changpeng Zhao (CZ)

As the founder of Binance, the world’s largest cryptocurrency exchange by trading volume, CZ is another core deity in the cryptocurrency pantheon.

While his personal bitcoin holdings aren’t publicly known, his net worth is estimated at roughly $96 billion. At a minimum, CZ’s early investment in bitcoin (when he sold his apartment to buy bitcoin in 2014) is publicly known, and alone makes him a billionaire.

Mr. 100

Although many large whale wallets are anonymous, none are more infamous than “Mr. 100.”

Since November 2022, after the collapse of FTX, this wallet has consistently received 100 BTC, almost daily, amassing 52,996 BTC (valued at over $3.5 billion) as of 2024. This accumulation spree has made the wallet the 14th-largest holder of bitcoin globally — one of the largest held by an individual, if “he” is one. Blockchain intelligence suggests that the wallet may be used for managing Upbit’s cold storage, although this has not been officially confirmed.

Corporations: Investment vs. Custody

When investigating the largest corporations that hold bitcoin, it is important to divide between those who invest in bitcoin and those who hold it on behalf of users, such as cryptocurrency exchanges.

Company Investments

MicroStrategy

MicroStrategy has led the corporate adoption of bitcoin as a treasury reserve asset. The company holds 279,420 BTC, which represents a significant portion of the company’s balance sheet.​ CEO Michael Saylor has convinced his investors that bitcoin is the ultimate store of value and has continually raised money to make large bitcoin purchases. This bold strategy has positioned MicroStrategy as the penultimate institutional holder of bitcoin.

Tesla, Inc.

In early 2021, Tesla made a significant move by purchasing $1.5 billion worth of bitcoin. As of 2024, Tesla holds 10,500 BTC, valued at around $698 million.​ Tesla’s decision to invest in bitcoin was part of its broader strategy to diversify its holdings and provide liquidity for future transactions. Tesla even briefly accepted bitcoin as payment for its vehicles. However, the company suspended this initiative, citing environmental concerns related to bitcoin mining.

Galaxy Digital Holdings

Galaxy Digital, founded by former hedge fund manager Mike Novogratz, is a financial services firm with three operating businesses: Global Markets, Asset Management, and Digital Infrastructure Solutions. Galaxy currently holds 17,518 BTC, worth over $1 billion​, and plays a key role in institutional bitcoin adoption by supporting businesses and infrastructure.

Marathon Digital

A major bitcoin mining company, Marathon Digital holds 13,716 BTC, primarily obtained through its mining operations. Marathon focuses on becoming the largest bitcoin mining operation in North America, leveraging low-cost energy sources to fuel its massive bitcoin mining infrastructure.​ Although Marathon occasionally sells bitcoin to pay for operations, it keeps a significant amount of its balance sheet as an investment vehicle.

Largest Bitcoin Custodians

Coinbase

Coinbase, one of the most popular cryptocurrency exchanges in the U.S., is the largest custodian of bitcoin. Coinbase is a core entry point for both retail and institutional investors, it even helps manage funds for the U.S. government. The company now holds approximately 1 million bitcoin as part of its operational reserves and user assets.​

Binance

Binance is the world’s largest cryptocurrency exchange by trading volume and holds significant amounts of bitcoin in custody on behalf of its users. As of 2024, Binance controls 643,546 BTC, spread across several wallets. These holdings are managed as part of its trading and exchange operations​. Binance’s size and global reach make it the international key player in the bitcoin ecosystem.

Bitfinex

Bitfinex, one of the oldest advanced cryptocurrency exchanges, retains a loyal user base of retail and institutional investors. The company has been reported to hold approximately 204,338 BTC​ as of 2024. Despite past regulatory challenges and security breaches, Bitfinex remains one of the largest bitcoin custodians, providing liquidity to the market and facilitating large scale trading.

Robinhood

Robinhood, the popular U.S.-based trading platform, reportedly holds 118,300 BTC in a single wallet, making it one of the largest custodians of bitcoin​. Robinhood’s bitcoin custody includes assets held on behalf of its users, many of whom are retail investors who prefer the convenience of using a traditional brokerage platform for cryptocurrency trading.

Companies that have ETF products

Since the creation of bitcoin ETFs, much of bitcoin has fallen under the control of institutions that provide these products. Many of these entities are traditional banking giants positioning themselves as safe points for entry into the cryptocurrency world.

The largest BTC holders among the ETF titians are:

BlackRock: 357,548 bitcoin

Grayscale: 221,841 bitcoin

Fidelity Investments: 174,926 bitcoin

Ark Invest / 21Shares: 45,008 bitcoin

Governments

United States

The United States government holds the largest amount of bitcoin, totaling 213,297 BTC, valued at approximately $14.82 billion. These assets were primarily obtained through cryptocurrency seizures related to criminal activities. For example, a significant portion, about 69,000 BTC, came from the dismantling of the Silk Road alone.

China

Despite its ban on cryptocurrency trading and mining, China remains a significant holder of bitcoin. The Chinese government holds approximately 190,000 BTC, valued at around $13.2 billion. Most of these funds were seized from the PlusToken Ponzi scheme, one of the largest cryptocurrency frauds.

United Kingdom

The United Kingdom has also accumulated a substantial bitcoin reserve through law enforcement seizures, amounting to about 61,000 BTC. Much of this bitcoin was confiscated as part of a money laundering operation involving cryptocurrency exchanges operations in bad faith on U.K. territory.

El Salvador

Unlike other countries that primarily hold bitcoin through seizures, El Salvador has proactively purchased bitcoin as part of its national financial strategy. El Salvador became the first country to adopt bitcoin as legal tender and has been regularly purchasing bitcoin since. The country holds 5,800 BTC, valued at approximately $400 million.

Ukraine

Ukraine has received a significant amount of bitcoin through donations to support its defense against Russia during the ongoing conflict. So far, the government has received 651.3 BTC, while the Come Back Alive Foundation has received 685.1 BTC. These donations are actively used to fund war efforts, leaving a current balance of 186.18 BTC.

Bitcoin Total Supply

After detailing all the major holders of bitcoin, its important to put these holding in the context of the current total supply.

40% of bitcoin ownership falls into the above categories of identifiable participants such as individuals, companies, miners, governments, and dormant supply.

14% of the total supply is dormant, assumed to be lost or inaccessible. This includes Satoshi Nakamoto’s mined coins, comprising 5.2% of the total BTC supply.

Exchanges control 11% of the total supply, with Binance and Coinbase leading the pack at 3.12 and 4.51% respectively.

Mining companies alone control about 9%, with Marathon being the largest holder.

ETFs compose 3.63% of the total, led by BlackRock and Greyscale.

Public companies control only 1.18%, the top being MicroStrategy and Tesla.

Governments control only 1.16% of the total supply. The U.S. is by far the largest holder with a 0.92% share in the total supply.

Whale wallets of individuals control about 20% of the total supply, although this number is difficult to calculate. None of the top identifiable holders even reach half a percentage point of the total supply

Although the bitcoin supply may seem to be controlled by only a few powerful wallets, the data shows that the picture is not so bleak. No single entity controls more than 5% of the supply, and even these companies are not beholden to the wishes of a single person. At the end of the day, the bitcoin network is likely safe from the massive sales that would send the price into a tailspin, and the core holders of bitcoin are resolute holders, if not dedicated to the cause.

Decentralized finance (DeFi) is one of the cryptocurrency industry’s biggest and most in-demand use cases.

There’s approximately $100 billion of value currently locked into DeFi protocols, and by using these protocols, investors can trade tokens, lend and borrow, earn yield, and more — all without using any financial institutions or other third-party intermediary gatekeepers.

But bitcoin, despite being the most popular and highest-valued cryptocurrency to date, is largely incompatible with the broader DeFi ecosystem due to the scalability issues inherent to its underlying technical design. Its slow consensus mechanism, lack of smart contract compatibility, and limited data storage capacity make it currently impossible to build a DeFi ecosystem around bitcoin, and limits bitcoin’s primary use case to being that of a store of value — and a clunky, but reliable internet currency as its second-best.

But what if there was a way to move bitcoin away from being just a store of value into an active asset that can be used across multiple blockchains for an array of DeFi use cases?

Lorenzo’s bitcoin liquid staking protocol aims to do just that, by helping solve some of bitcoin’s native limitations and unlock bitcoin liquidity, by building a secure path to convert bitcoin assets into smart contract-compatible formats.

Understanding Bitcoin’s DeFi Limitations

There’s plenty to love about bitcoin. It’s verifiably scarce, incredibly secure, and has been the best-performing asset class across all markets since its 2009 inception.

But as an asset to be used as part of the broader DeFi ecosystem, bitcoin has some massive limitations which, to date, have stunted its adoption.

These include:

Limited Data Storage

Among bitcoin’s biggest issues is the fact it simply can’t store that much information. Each bitcoin block can only hold 1 megabyte (MB) of transaction data, which makes it impossible to process DeFi transactions — such as lending or liquidity pooling — in bitcoin’s native state. Since many DeFi transactions rely on the ability to process and store significant amounts of data, bitcoin’s limited data capacity would inevitably lead to network congestion, especially during periods of high demand.

Bitcoin’s blockchain, in an ideal state, can only handle about seven transactions per second (TPS), compared to 20,000 TPS on Sei’s blockchain, just for example. In the DeFi ecosystem, where fast transaction settlement is paramount, such limitations would create untold missed opportunities and multiple gross inefficiencies.

Lack Of Smart Contract Compatibility

At the core of the functionality of every DeFi protocol are smart contracts that help automate financial transactions based on algorithms or predetermined rules. But bitcoin’s scripting language can’t integrate with these smart contracts.

Instead, bitcoin supports just the most basic functions, an intentional decision by its pseudonymous creator to maximize its security. But bitcoin’s inability to integrate with smart contracts makes it impossible for bitcoin to natively execute the complex actions that DeFi platforms require for computing-intensive calculations, such as automatic interest calculation, yield farming strategies, and dynamic liquidity pool management.

Liquidity Issues In Staking

Currently, the staking options available for bitcoin hodlers require users to lock their tokens up for extended periods of time. But in markets like the DeFi ecosystem, much of the appeal is in DeFi’s ability to offer fluid and dynamic financial opportunities. When bitcoin is forced to be locked up, it means investors lose an inherent ability to respond quickly to market conditions or capitalize on new opportunities, which limits the flexibility, utility, and long-term financial potential of their bitcoin.

The Opportunity Of Bitcoin DeFi

The DeFi ecosystem is a $100 billion (and growing) market that is going to serve as the underpinning of a future financial system that utilizes digital assets. So, why shouldn’t the most secure and most liquid cryptocurrency play a significant role in its growth?

Bitcoin becoming compatible with DeFi protocols will facilitate a variety of use cases for the currency, beyond being just a store of value.

Turning Bitcoin Into An Active Asset

To many, bitcoin is seen as “digital gold.” But that’s only because it’s not yet compatible with the rest of the digital token economy. By solving some of bitcoin’s native limitations, bitcoin has the potential to become a yield-generating asset that allows investors to earn rewards without sacrificing liquidity. Through the conversion of bitcoin into DeFi compatible formats, users can more seamlessly use bitcoin as collateral for lending or borrowing, as well as for a variety of yield-farming strategies currently only available to investors by using other cryptocurrencies.

Unlocking Bitcoin Liquidity

Currently, one of the biggest problems facing bitcoin is that the billions of dollars of liquidity that comprises bitcoin’s $1.3 trillion market cap is essentially locked up due to bitcoin’s limitations, plus the limitations of existing staking solutions.

Ensuring bitcoin’s compatibility with the DeFi ecosystem means that investors could leverage their bitcoin for a variety of purposes, without needing to sell any of their tokens. Unlocking bitcoin liquidity also helps deepen the liquidity of DeFi protocols, which strengthens and helps the ecosystem work more efficiently overall.

Since bitcoin is the cryptocurrency asset with the most liquidity, users having the ability to bring their tokens into liquidity pools or to lending or borrowing protocols, for example, can create better capital efficiency, less volatility on DeFi platforms, and more stable financial products.

Cross-Chain Interoperability

The future of the cryptocurrency ecosystem is a cross-chain one. That means building ways for bitcoin to be compatible with DeFi protocols won’t merely enhance bitcoin’s utility — it would foster a more robust and unified cryptocurrency-based financial system overall.

Bitcoin being able to be seamlessly moved across blockchains means that bitcoin’s security features can be used to secure other blockchains, while also earning yield for bitcoin hodlers. And for bitcoin hodlers who primarily have only interacted with bitcoin’s blockchain to date, cross-chain opportunities for bitcoin can help bring new users and liquidity to different corners of the DeFi ecosystem.

How Lorenzo Protocol Is Making Bitcoin DeFi Possible

Lorenzo’s liquid staking is a novel approach to scaling bitcoin and building a cross-chain bitcoin token economy that allows bitcoin hodlers to participate in staking on proof-of-stake blockchains, while also maintaining both their personal liquidity and bitcoin’s built-in security benefits.

The solution enhances liquidity for bitcoin hodlers and DeFi protocols by bringing democratized access to staking (as there are no staking minimums or lockup periods) and enhanced security for the cryptocurrency and Web3 ecosystem overall, since bitcoin is being used to help secure other proof-of-stake blockchains.

Through Lorenzo, users can move their assets onto PoS networks through Babylon via liquid staking tokens pegged 1:1 to the value of their underlying staked bitcoin. Babylon is a two-sided marketplace between stakers and PoS networks, where networks that need the security provided by staking reward bitcoin stakers with yield generated from those PoS networks.

When using our liquid staking protocol, users can choose from a list of the PoS networks to stake on and a staking period, and once their bitcoin is staked, they’ll receive an equivalent amount of stBTC, Lorenzo’s liquid staking token. With stBTC, which is smart contract compatible, investors can earn yield on other PoS networks, or use their tokens’ collateral to participate in a whole new emerging world of potentially very lucrative DeFi applications.

Liquid staking is the only viable solution to create a robust, multi-chain bitcoin token economy, as it allows for the simple conversion of bitcoin into smart contract-compatible formats without imposing the native limitations of bitcoin’s network, or other Bitcoin Layer 2s. We expect quite literally billions of dollars worth of bitcoin to be staked in the coming years, and as the staking market for bitcoin grows, stBTC will eventually have a cross-chain DeFi economy built around its utility, where investors use stBTC for liquidity pools, for trading, as collateral for lending or borrowing, and more.

Advancing Bitcoin

Lorenzo’s Protocol represents a significant advancement in the evolution of bitcoin into a multi-chain, DeFi-compatible asset. Liquid staking for bitcoin helps address some of the native network’s fundamental limitations, while also facilitating the conversion of bitcoin into an active asset with use cases beyond being just digital gold.

Looking ahead, as the liquid staking market for bitcoin continues to grow, Lorenzo’s roadmap also includes plans for launching Bitcoin Layer 2-as-a-Service (L2aaS). Through offering Bitcoin Layer-2-as-a-service, users and developers will be able to tailor blockchain networks to their specific needs without extensive technical expertise, while also enhancing bitcoin’s scalability, while reducing transaction costs.

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Liquid staking is among the most transformative blockchain innovations in recent history, due to how it has helped unlock new potential for on-chain liquidity, decentralization, and yield generation.

Staked tokens are left locked up and illiquid with traditional staking mechanisms, creating massive liquidity constraints. With liquid staking, however, users can stake their tokens while retaining their liquidity, bolstering that blockchain’s decentralization and its DeFi ecosystem.

As more proof-of-stake blockchains have proliferated throughout the cryptocurrency ecosystem, a variety of liquid staking protocols have launched, helping solve for some of traditional staking’s limitations and to expand cryptocurrency use cases.

In this article, we’ll explore the history and evolution of liquid staking, key innovations that have shaped its development, and how it has become a vital component in the cryptocurrency landscape.

The Origins Of Liquid Staking

As proof-of-stake blockchains began to gain favor over proof-of-work due to sustainability and scalability concerns, the introduction of staking mechanisms became commonplace with blockchains, wherein staked tokens worked to help secure the network and ensure sufficient decentralization.

With this method, though, staked tokens typically couldn’t be used for other financial activities, creating a massive capital inefficiency, as generally a large portion of a network’s tokens end up getting staked. Ethereum, for example, has nearly 30% of its circulating supply staked, while Avalanche has 54% of its total supply staked, and Solana’s staking ratio sits at 65%.

Liquid staking emerged as a solution to help unlock this trapped liquidity. Once a user stakes tokens using a liquid staking protocol, they’ll receive a derivative token (or liquid staking token) that represents the value of their staked assets. While their original tokens work to help secure the operations of that blockchain, these derivative tokens can be used for a variety of DeFi purposes, such as trading or collateral for loans.

In 2020, the implementation of ETH 2.0 allowed users to stake their tokens in preparation for the network’s transition to proof of stake. But doing so meant they couldn’t unstake until ETH’s transition to a proof-of-stake network was fully complete (which didn’t happen until Sept. 2022).

Lido was among the earliest liquid staking platforms, launching in 2020 amid this transition to proof-of-stake to help users retain their liquidity.

Users who stake using Lido receive a derivative token, stETH, which represents their staked ETH, plus any earned rewards. These stETH tokens can then be used within DeFi protocols like Aave and Compound, or for a variety of yield farming strategies, allowing users to earn yield from both staking, and from any activities conducted with their derivative tokens.

Since launching on ETH, Lido has also launched liquid staking on a variety of blockchains including Polygon, Optimism, Arbitrum, and BNB Smart Chain.

The Rise Of Liquid Staking Across Blockchains

As Lido gained popularity and quickly emerged as the preeminent liquid staking platform, the concept began to spread to other blockchains, with each protocol adapting to that blockchain’s unique technical and economic environments.

Solana

Marinade Finance, which launched in 2021, was the earliest liquid staking protocol released on Solana. Similar to Lido, users of Marinade receive a derivative token, mSOL, in exchange for their SOL, and can use mSOL across Solana’s DeFi ecosystem. Marinade’s liquid staking strategy involves automatically distributing stakes across dozens of validators, which helps reduce risks associated with a validator going offline, or changing their commission fees.

Other liquid staking platforms on Solana include Jito, SolBlaze, and marginfi.

Polkadot

Acala, also launched in 2021, was the first liquid staking protocol available on the Polkadot network and is significant for how it pioneered liquid staking for Polkadot’s multichain architecture and helped unlock liquidity for its ecosystem.

Polkadot relies on a series of “parachains” which are application-specific blockchains connected to the main network, meaning any liquid staking token needs to be compatible with the network’s entire suite of parachains.

When staking using Acala, users receive LDOT in return, which can then be utilized across the entire cross-chain network of the Polkadot ecosystem. For Polkadot, which has around 60% of its supply staked, liquid staking has helped unlock a significant amount of liquidity and helped facilitate the groundwork for a cross-chain DeFi ecosystem.

Other liquid staking platforms on Polkadot include Parallel Finance and Bifrost.

Avalanche

Similar to other blockchains, the launch of BENQI on Avalanche in 2021 was a massive step toward unlocking liquidity and improving the usability of AVAX’s DeFi ecosystem. When users stake via BENQI, they receive sAVAX in return, a derivative token that was integrated into a variety of lending, borrowing, and yield-farming platforms early into its launch.

Users of sAVAX can yield farm on Pangolin and take out loans on Aave, while still earning rewards on their initial staked tokens.

Other liquid staking protocols on Avalanche include Ankr and Balancer.

The Arrival Of Liquid Staking On Bitcoin

While liquid staking has gained traction on proof-of-stake networks, Bitcoin’s proof-of-work architecture has largely prevented a similar boom native to the Bitcoin ecosystem. The Bitcoin network’s lack of smart contract compatibility, slow consensus mechanism, and low data availability, make it far from ideal to be used for complex transactions like liquid staking or DeFi applications.

But the emergence of liquid staking platforms, such as Lorenzo Protocol, has the potential to help unlock bitcoin’s massive liquidity, while also paving the way for a bitcoin-native DeFi ecosystem.

Currently, almost all of the liquidity that comprises Bitcoin’s $1 trillion-plus market cap is locked on Bitcoin’s main network, either in exchange balances or self-custody wallets. And it’s locked there due to Bitcoin’s inherent limitations.

But that liquidity represents a massive potential opportunity for bitcoin. What if that capital could be utilized across the DeFi ecosystem?

Using platforms like Lorenzo, the potential of that locked capital can finally be realized. Holders of bitcoin now have the ability to stake their bitcoin, similar to how they would any proof-of-stake token, and receive a derivative token in exchange, which can then be used across a variety of proof-of-stake networks.

With Lorenzo, users can request their bitcoin be staked, after which it gets sent to a verified financial institution, which serves as the staking agent and completes the staking execution. Upon confirmation that the BTC has been staked, users will then receive an equivalent amount of value in derivative tokens, stBTC. These tokens are smart-contract compatible and can be used for DeFi purposes across a variety of EVM-compatible blockchains.

Through facilitating the ability to make their bitcoin liquidity interoperable across multiple blockchains, liquid staking on Bitcoin represents a significant advancement in the evolution of Bitcoin into a multi-chain, DeFi-compatible asset.

What’s Next?

Liquid staking has emerged as a solution to address the liquidity constraints of traditional staking methods, enabling stakers to maintain liquidity while securing the network. With its rise across major proof-of-stake blockchains, liquid staking has significantly expanded DeFi use cases, enhanced decentralization, and has helped enable a more efficient DeFi ecosystem.

As its potential extends to bitcoin, expect a new range of financial applications for bitcoin that will be enabled by the unlocking of the asset’s massive liquidity.

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The bitcoin liquid staking protocol space is expanding rapidly, as the technical developments around bitcoin have more generally been happening much more quickly over the past couple of years.

Liquid staking protocols, built on top of bitcoin, have only been possible for less than a year, yet there is already an abundance of staking protocols to consider when getting involved in this new arena.

As a quick refresher, a bitcoin liquid staking protocol is a system that allows bitcoin holders to stake their bitcoin in a way that enables them to earn rewards, or yields, while still maintaining access to that underlying liquidity. The bitcoin is usually used to secure a proof-of-stake (PoS) network, although alternative use cases, such as participating in stake-based oracle networks, also exist. Meanwhile, the holder can still access a liquid form of value equivalent to their staked bitcoin in the form of a derivative token.

In addition to enabling bitcoin holders to generate yield at the base layer, liquid staking protocols also allow users to securely move their bitcoin to a Bitcoin Layer 2 network, unlocking bitcoin to be used in more flexible forms of decentralized finance (DeFi). Much like any of the other categories of DeFi protocols, different liquid staking protocols on bitcoin tend to focus on different niche features and attributes that set them apart from other options on the market. Additionally, many of the liquid staking protocols on bitcoin were empowered by the creation of Babylon, which is a protocol for handling bitcoin staking protocols at the base bitcoin blockchain layer.

Some of the most prominent platforms for bitcoin liquid staking right now are Lorenzo Protocol, Bedrock, Botanix, pSTAKE Finance, and UTXO Stack, but more are popping up every day. Let’s take a closer look at what each one of these bitcoin staking solutions has to offer and how they differ from each other.

Lorenzo Protocol

Key Features

• Liquid staking tokens split into yield-accrual tokens and liquid principal tokens
• Enables loop and leveraged staking
• Currently focused on Babylon but can also integrate with other premium bitcoin staking projects
• Simple and easy-to-understand staking process through bitcoin liquid staking plans offered by specialized providers
• No staking minimum
• Already launched

Lorenzo Protocol is intended to serve as the primary layer for bitcoin liquidity finance, facilitating the growing global demand for bitcoin through innovative Bitcoin Layer 2 networks that bring DeFi capabilities to the world’s most popular and trusted cryptocurrency. Through Babylon’s bitcoin shared security protocol, Lorenzo enables staking bitcoin liquidity into proof-of-stake chains in exchange for yield.

Lorenzo also takes Babylon’s capabilities multiple steps further by creating an efficient market for bitcoin holders to find optimal investment opportunities for their unused bitcoin liquidity via its Bitcoin Liquid Staking Plans (BLSPs), where project projects can outline the use of staked bitcoin and the associated rewards for stakers. Each BLSP details the rules and rewards for staking, with a fixed staking cycle for consistency.

Additionally, Lorenzo tokenizes staked bitcoin into liquid principal tokens (LPTs), which represent the right to reclaim the staked bitcoin principal, and yield-accruing tokens (YATs), which represent the yield accrued by that staked bitcoin collateral. This allows users to easily separate their base bitcoin collateral from the yield that it generates when using that liquidity in various DeFi applications.

The tokenization of staked bitcoin into separate LPT and YAT tokens also enables loop and leverage staking. Loop Staking leverages external DEX partnerships to allow users to stake BTC, borrow additional BTC, and amplify their staking rewards. Leveraged Staking simplifies the process by providing internal liquidity, allowing users to apply maximum leverage with a single click. Both products are designed to enhance capital efficiency and optimize staking yields.

While liquid staking for bitcoin is still a new concept, Lorenzo is one of the few offerings that is already live today, at least in a basic form. Additionally, there is no minimum staking amount involved with Lorenzo, as user funds are pooled together in an effort to democratize access to the bitcoin staking process.

While Lorenzo is currently focused on Babylon, it can technically integrate with any other bitcoin staking project that emerges.

Bedrock

Key Features

• Offers staking for BTC, ETH, and IOTX
• Bitcoin integration limited to two ERC-20 tokens issued on the Ethereum network
• Use of Wrapped Bitcoin instead of native bitcoin introduces a high degree of centralization
• Liquid restaking tokens do not separate the principal deposit and the yield
• Uses Babylon

Bedrock is a multi-asset liquid restaking protocol developed in collaboration with blockchain infrastructure company RockX. Backers of the project include Babylon co-founder Fisher Yu, IoTeX founder Raullen Chai, and OKX Ventures.

Instead of only focusing on bitcoin, Bedrock also allows users to restake ETH and IOTX (the native token of IoTeX). Notably, the bitcoin integration is limited to users of Wrapped Bitcoin (wBTC) and FBTC, which are bitcoin-backed ERC-20 tokens on Ethereum. wBTC is restaked through Bedrock’s uniBTC protocol via a partnership with Babylon. This integration allows wBTC and FBTC holders to earn staking rewards on the Ethereum network; however, it should be noted that wBTC is a highly centralized asset, as BitGo is its sole custodian.

Bedrock’s suite of products includes liquid restaking tokens (LRTs) for wBTC, ETH, and IOTX. Utilizing the universal (uni) standard, Bedrock maximizes liquidity and value for these PoS tokens through its uniBTC, uniETH, and uniIOTX offerings. This universal token model ensures that staked PoS tokens in Bedrock represent not only the principal assets but also all future staking rewards. The nonrebasing nature of uniTokens means their value increases over time, rather than their quantity, allowing holders to benefit from the growing value of each token alongside additional points from EigenLayer and Bedrock’s reward systems.

pSTAKE Finance

Key Features

• Backed by Binance Labs
• Built on Babylon
• Bitcoin cannot currently be unstaked
• 50 bitcoin deposit cap
• Liquid staking tokens will be available on Ethereum in September 2024
• Will add the ability to stake wBTC
• Has its own native token, known as PSTAKE

pSTAKE Finance is a bitcoin yield and liquid staking protocol supported by Binance Labs and built on Babylon. The protocol is live today and includes a 50 bitcoin maximum stake. However, pSTAKE Finance stakers cannot currently unstake or withdraw their bitcoin in this current, first version of the protocol. Additionally, the liquid staking aspect of the protocol is not live, but pSTAKE Finance plans to offer LSTs on Ethereum starting in September 2024.

Much like Lorenzo Protocol and Bedrock, the pSTAKE Finance platform enables users to deposit their bitcoin and contribute to the security of various app chains, earning rewards through the Babylon bitcoin staking protocol. As these PoS chains begin utilizing bitcoin for security, pSTAKE will manage and distribute these yields to users.

Looking ahead, pSTAKE Finance plans to introduce their V2, which is when the yBTC LST will be launched on Ethereum. This new token aims to provide auto-compounded bitcoin yields and will eventually be integrated into major DeFi ecosystems across various blockchains. The protocol is committed to expanding its yield offerings and making bitcoin more accessible, including options for staking wBTC and other bitcoin derivatives.

Additionally, pSTAKE Finance is focused on evolving its tokenomics and launching a fully self-custodial bitcoin yield solution, ensuring both security and accessibility for its users. pSTAKE Finance also has its own native governance and incentivization token called PSTAKE.

Swell Network

Key Features

• Non-Custodial Staking: Swell allows users to stake their WBTC directly from their non-custodial wallets, ensuring full control over their assets.
• Yield Generation: swBTC generates yield through restaking protocols such as Symbiotic, EigenLayer, and Karak.
• Liquidity: swBTC can be used as collateral in lending and borrowing protocols

Swell Network, traditionally an Ethereum liquid staking platform, has recently introduced a Bitcoin Liquid Restaking Token called swBTC. This ERC-20 token offers liquidity for users who want to stake their Wrapped Bitcoin in protocols like Symbiotic, EigenLayer, or Karak without locking up their assets. With swBTC, users can earn native yield from restaking platforms while leveraging the token across the DeFi ecosystem.

UTXO Stack

Key Features

• Backed by ABCDE, OKX Ventures, CMS Holdings, and Matrixport
• Sticks to bitcoin’s roots with the UTXO model
• Integrated with the RGB++ protocol
• Also integrated with Nervos Network, so not a bitcoin-only solution

UTXO Stack provides a technical framework for developers to easily issue Bitcoin Layer 2 solutions using the unspent transaction output (UTXO) architecture. Notably, Bitcoin itself differs from most other Layer 1 cryptocurrency networks in that it uses this UTXO-based model, as opposed to the more popular accounts-based setup. The bitcoin liquid staking protocol is backed by notable cryptocurrency investors, including ABCDE, OKX Ventures, CMS Holdings, and Matrixport.

UTXO Stack integrates the RGB++ protocol, enhancing the security of Bitcoin Layer 2 networks through a combination of restaking bitcoin, CKB (the native cryptocurrency of Nervos Network), and Bitcoin L1 assets issued via RGB++. UTXO Stack is attempting to be the “OP Stack + EigenLayer” of the Bitcoin world.

UTXO Stack’s adoption of RGB++ is its most unique property. Unlike many existing solutions that rely heavily on Ethereum’s EVM and bridging mechanisms, UTXO Stack and RGB++ maintain strong ties to the Bitcoin main chain and the UTXO model. RGB++ allows for the issuance and management of assets on Bitcoin, with transactions being executed on Nervos Network and recorded on Bitcoin as commitments. One of the key benefits of this approach is that it enables efficient “transaction folding” to reduce fees. Of course, the integration with Nervos Network will turn off many bitcoin purists.

Nomic

Key Features

• Plans to work with Babylon
• Has an LST called stBTC (which could be confused with Lorenzo’s offering of the same name)
• Has its own native token, known as NOM, which is used to secure its Layer 1 network
• Dual staking will be made available with bitcoin and NOM
• Works within the Cosmos ecosystem

Nomic is a Layer 1 blockchain network that operates within the greater Cosmos ecosystem. Cosmos is intended to create a more unified cryptocurrency ecosystem through interoperability across many blockchains, in addition to offering a viable scaling roadmap that involves the use of separate chains for different, specific use cases.

The Nomic DAO Foundation has plans to incorporate Babylon’s bitcoin staking protocol into its decentralized, non-custodial bitcoin bridge. This integration will introduce an LST known as stBTC, allowing bitcoin holders to benefit from both staking and liquidity. Nomic will enhance its security model with dual-stake support, leveraging both staked bitcoin and its native token, NOM.

By utilizing Babylon’s technology, stBTC will enable bitcoin holders within the Cosmos ecosystem to earn yield while maintaining liquidity for use in inter-blockchain communication (IBC)-compatible DeFi protocols. Nomic’s approach allows real bitcoin to be exchanged for nBTC tokens, which can be freely transferred across IBC-compatible chains. These nBTC tokens are backed by real bitcoin held in a reserve controlled by NOM token holders, who are also the validators of the Nomic chain. Through this system, users can stake nBTC to mint stBTC. Staking rewards will be distributed via IBC interchain account transactions.

stBTC is currently available on testnet, allowing users to explore its features before its official mainnet launch.

PumpBTC

Key Features

• Built on Babylon
• The current version uses WBTC, BTCB, and FBTC on alternative Layer 1 networks
• Partnered with crypto custodians Cobo and Coincover
• Smart contract audit performed by BlockSec
• PumpBTC points for extra rewards

PumpBTC plans to offer a liquid restaking solution through Babylon. Designed to simplify and enhance yield generation for bitcoin holders, PumpBTC allows users to stake their bitcoin and receive liquidity tokens immediately, bypassing the usual waiting periods. Much like other projects on this list, the goal is to bridge the worlds of DeFi and bitcoin, with PumpBTC describing itself as a way to effectively replace WBTC with a native yield-generating form of bitcoin for the DeFi ecosystem across multiple blockchains.

Currently, PumpBTC enables users to deposit their bitcoin for staking via various bitcoin-derivative tokens issued on alternative Layer 1 networks, such as Ethereum and Binance Smart Chain. Additionally, PumpBTC does not handle user funds directly, as this aspect of the protocol is taken care of by custodial partners Cobo and Coincover. While the PumpBTC smart contracts have been audited by blockchain security firm BlockSec, this heavy reliance on multiple layers of third-party custody is likely to turn off many bitcoin purists who prefer to stick to the principles of decentralization and permissionless finance. That said, PumpBTC claims they will eventually add the ability to stake native bitcoin directly in the protocol.

On top of the yield that PumpBTC users can generate on their staked bitcoin via the Babylon integration, users can also gain additional rewards via PumpBTC Points. That said, the exact future utility of these points is unknown at this time. In terms of total rewards, bitcoin stakers can receive their base staking annual percentage yield (APR), Babylon Points, PumpBTC Points, and FBTC Points all on one platform, with even more rewards expected to be added in the future.

Lombard

Key Features

• Backed by notable industry leaders including Franklin Templeton Investments and Polychain Capital
• Built on Babylon
• Current focus on making LBTC the major way bitcoin is used in DeFi
• Lombard Points available on top of Babylon staking rewards
• Backed by the Security Consortium of DeFi industry leaders
• Currently in private beta

Lombard aims to establish a universal standard for bitcoin, supported by aligned ecosystem partners. The key focus of this protocol is to allow yield-bearing bitcoin to seamlessly move across chains without disrupting liquidity, potentially driving significant new, untapped capital into DeFi.

Lombard’s core product, Liquid Bitcoin (LBTC), offers a 1:1 backed, yield-bearing, cross-chain liquid bitcoin, enabling holders to both preserve access to their capital and actively participate in DeFi activities, like staking and trading. Currently in Phase 1 on the Ethereum mainnet, Lombard is conducting a private beta where select users can stake bitcoin and mint LBTC. Phase 2, Lombard will open LBTC to the public with deposit caps and a waitlist to manage demand and reward early participants.

The governance and promotion of LBTC are also backed by the Security Consortium, which is tasked with the goal of heavy integration of the bitcoin token in existing DeFi protocols and blockchains. That said, the specific members of the Security Consortium have not yet been announced by Lombard.

Bitcoin holders can gain access to a range of yields via Lombard, including PoS staking, Lombard rewards, and DeFi opportunities. Other DeFi protocols can also benefit from LBTC through the creation of a new yield-bearing primitive, and destination blockchains can potentially see substantial new liquidity, with billions in bitcoin being integrated into the apps on these DeFi-focused chains.

Lombard’s mission is to position bitcoin not only as a store of value but also as a key player in DeFi, where it can be utilized for earning, staking, trading, and transferring at scale. Their vision sees bitcoin becoming a universal DeFi primitive, serving as optimal collateral across the ecosystem and providing enhanced security to PoS networks with Bitcoin-backed stability.

Solv Protocol

Key Features

• Investors include Binance Labs and Blockchain Capital
• UTXO-3525 enables non-custodial bitcoin swaps across chains
• Issues SolvBTC as a unified bitcoin liquidity asset
• Supports Bitcoin, Ethereum, BNB Chain, Botanix, and many other blockchains
• Audited by five separate firms
• Compliance Bridge enables participation from traditional finance

Solv Protocol is aimed at the establishment of a decentralized bitcoin reserve that can be deployed throughout the entire DeFi landscape, which they refer to as “BTCFi.” With their SolvBTC token, there is a focus on unifying bitcoin liquidity into one asset that can be used on all staking and other DeFi applications.

A long list of reputable investors have backed Solv Protocol, including Binance Labs, Blockchain Capital, CMS Holdings, and Bing Ventures. Additionally, the protocol has received five separate security audits from the likes of Quantstamp, CertiK, and others.

From a technical perspective, the three key aspects of Solv are the Liquidity Consensus Network (LCN), UTXO-3525, and the Compliance Bridge. The Liquidity Consensus Network manages the decentralized bitcoin reserve held in the Solv Protocol through transparent, auditable records and cross-chain liquidity management. UTXO-3525 is the protocol used to transfer assets from the base bitcoin blockchain to EVM-compatible blockchains. In addition to native bitcoin, UTXO-3525 can also handle Ordindals, Runes, and other assets issued on top of bitcoin. The Compliance Bridge is used to enable traditional financial institutions to participate in the protocol while also following their regulatory obligations. This includes the ability to tokenize U.S. spot bitcoin exchange-traded funds.

Currently, Solv Protocol has two separate LSTs in the form of SolvBTC.BBN for bitcoin staked via Babylon and SolvBTC.ENA for bitcoin staked via Ethena. Additionally, Solv plans to enable bitcoin yield opportunities via Ethereum, Binance Smart Chain, Botanix, and a number of other blockchains.

Acre

Key Features

• Has a governance token known as ACRE
• Built on top of the tBTC decentralized bitcoin bridge rather than Babylon
• Bitcoin stakers receive the stBTC LST
• Users can also earn Acre Points
• Currently operates on Ethereum
• Planned integration with the Mezo Bitcoin Layer 2 network

As a liquidity layer for Bitcoin Layer 2 networks, Acre offers a bitcoin-in, bitcoin-out staking service. When bitcoin is deposited into Acre, it mints stBTC, an LST that can be redeemed 1:1 for bitcoin. The deposited bitcoin is then invested in various yield-generating strategies across Bitcoin Layer 2 networks and DeFi platforms, with rewards accumulating to the stBTC token. This includes the use of the underlying bitcoin as the proof-of-stake asset that provides security for Bitcoin Layer 2 networks. The stBTC token contract is currently deployed on Ethereum. It is not rebased depending on the yield that it accrues, which means the value of stBTC should increase over time rather than the amount of stBTC held by a user.

Notably, Acre utilizes tBTC — a secure, decentralized bitcoin bridge to Ethereum and other EVM-compatible blockchains. This is in stark contrast to other bitcoin-backed tokens issued on EVM chains, such as WBTC, which are completely centralized. Bitcoin deposits made to Acre via the base blockchain are converted to tBTC before being staked. Endorsed by leading DeFi projects, tBTC plays a crucial role in enabling cross-chain coordination and enhancing the functionality of bitcoin within the Acre system.

Governed by a decentralized autonomous organization (DAO), Acre operates under the governance of users holding ACRE tokens.

The State Of Today’s Offerings

In examining the various liquid staking platforms discussed, common themes and distinctions set platforms apart.

Flexibility And Cross-Chain Integration

Most platforms, emphasize cross-chain compatibility, allowing users to interact with multiple blockchain networks. For example, Chakra supports cross-chain liquidity movement, while Lombard enables staking across various networks, increasing users’ opportunities to earn yield. Similarly, Swell introduces restaking capabilities, enabling Wrapped Bitcoin holders to leverage liquidity.

Yield Optimization And Reward Mechanisms

All major platforms are focused on yield generation, but Lorenzo Protocol stands out with its leveraged staking option. It enables users to maximize yield potential by using staked Bitcoin as collateral to borrow additional BTC for further staking. Lombard and Bedrock offer enhanced yield through their partnerships, while PumpBTC incorporates real-time staking transparency and aggregation of points to unlock additional rewards.

BTCFi’s Bright Future

As the bitcoin liquid staking ecosystem rapidly evolves, the landscape presents exciting opportunities and unique features across various protocols.

These innovations allow bitcoin holders to earn yields while maintaining access to their liquidity, opening the door to diverse DeFi applications in the Bitcoin ecosystem. The diversity in liquid staking protocols for bitcoin not only enhances user choice but also stimulates further innovation within the Bitcoin DeFi space.

Looking ahead, the growth of bitcoin liquid staking protocols is set to redefine how bitcoin holders interact with the broader blockchain ecosystem. As these platforms mature and expand, they promise to unlock even greater functionality and accessibility, making bitcoin a more versatile and productive asset.

Since it’s still extremely early days for this space where many of the protocols have yet to launch, it’s vital to track the latest developments in this new realm of bitcoin expansion. That said, the quantity of new projects in this space indicates the future is bright for earning yield through bitcoin staking.

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The introduction of the Ordinals protocol in January 2023 marked a significant turning point in bitcoin’s history. 

This development allowed users to inscribe data onto individual satoshis, the smallest unit of bitcoin, creating non-fungible tokens (NFTs) on the bitcoin blockchain—a capability that sparked a wave of digital art, collectibles, and even meme projects within the bitcoin ecosystem.

Building on this, developer Domo introduced the BRC-20 token standard in March 2023, enabling the creation of fungible tokens on bitcoin that are not bitcoin itself. This led to the creation of the bitcoin token ecosystem, admittedly almost completely meme coins.

While BRC-20 was a step forward in principle, it suffered from stifling inefficiencies, including high transaction fees and network congestion. These difficulties led to controversy; many bitcoin believers were offended by non-bitcoin tokens clogging the network and taking away from the real purpose of bitcoin. 

These issues prompted Casey Rodarmor, the creator of Ordinals, to develop the Bitcoin Runes protocol. Bitcoin Runes aimed to improve upon BRC-20, providing a more efficient, scalable, and user-friendly solution for tokens on bitcoin.​​

Although the Runes Protocol also saw its fair share of meme projects, this innovation finally also brought serious thinkers into the bitcoin token ecosystem and sparked ideas for diverse use cases.

This article will go over these core use cases as well as provide an overview of the current Runes infrastructure and token ecosystem.

But first, a quick recap on how Runes work.

How Bitcoin Runes Work

At its core, the bitcoin Runes protocol operates using bitcoin's UTXO model, similar to its predecessor BRC-20. However, instead of relying on Taproot-enabled wallets and the inscription-heavy process of BRC-20 , Runes uses a special area in bitcoin transactions known as OP_RETURN and skirts the Ordinals protocol altogether.

The process of creating a Rune is known as etching, where a "genesis UTXO" containing all the necessary token details is embedded in a bitcoin transaction. Once etched, these Runes can be minted, transferred, and split into smaller pieces.

This space within a bitcoin transaction stores important token information, such as the Rune's name, symbol, quantity, and the actions required for management. This method is more efficient because it avoids junk UTXOs that clog the network with BRC-20. It also reduces the overall size of transactions, leading to lower fees and better scalability. ​

The advent of Runes meant that having a full token ecosystem on bitcoin was now not only possible but viable on a practical level.

Key Use Cases For Bitcoin Runes

Bitcoin Runes have opened up a wide array of potential applications, bringing bitcoin into sectors that were previously dominated by Ethereum and other blockchain networks. 

Although most of these use cases are not yet realized, they show that bitcoin-based tokens can be used to bring diverse subsectors natively to bitcoin.

Stablecoins

Runes facilitate the issuance of stablecoins directly on bitcoin. These types of tokens can represent stable shares, i.e., digital versions, of fiat currencies. The inherent security and immutability of bitcoin provide a robust foundation for issuing and managing these tokens, while the efficiency of the Runes protocol minimizes the on-chain footprint and transaction costs.​

Decentralized Finance

The Runes protocol empowers various DeFi applications by creating a token ecosystem directly on bitcoin. DeFi activities, including lending, borrowing, and staking, can all be facilitated directly on the bitcoin network using Rune platforms. By leveraging the Lightning Network's low-cost, fast transaction capabilities, Runes platforms could offer near-instant transfers and minimal fees, enhancing bitcoin's competitiveness in DeFi​.​

Meme Coins

Although much decried, memecoins have become a significant part of the cryptocurrency market, and the Runes protocol ensures that the creation/trading of these tokens does not disproportionately clog the bitcoin network.

At the time of writing, the largest projects by market cap and by far the most popular Runes are meme coins (more on this in "Major Bitcoin Runes Tokens"). Projects like WZRD and PUPS have even moved from BRC-20 to Runes due to the protocol's efficiency. By doing this, meme coins can engage communities through airdrops, rewards, and governance mechanisms while also benefiting from bitcoin's security.​

Real-World Asset Tokenization

Bitcoin Runes can be used to tokenize real-world assets, such as real estate, art, and commodities. These tokenized assets can be securely traded and transferred on the bitcoin blockchain, offering fractional ownership and improving liquidity in traditionally illiquid markets, while being protected by the bitcoin network.

Governance Tokens And Voting Mechanisms

Governance tokens issued through Bitcoin Runes enable decentralized decision-making in projects and protocols. Holders of these tokens can vote on protocol upgrades, funding allocations, and other critical decisions. By integrating governance into bitcoin's secure and decentralized network, Runes-based governance systems are transparent, immutable, and highly resistant to tampering.​

Gaming And Digital Collectibles

The gaming industry is another area where Runes shine. Developers can create in-game currencies using Bitcoin Runes, which players can trade, sell, or use within gaming ecosystems.

The secure nature of bitcoin ensures that these assets are protected from fraud or hacking, giving players confidence in the value of their digital assets.

The Runes Ecosystem

Although many of these use cases have yet to be realized, Runes infrastructure has started to bud in the last year, and many existing tools have added Rune support.

Marketplaces And Exchanges

The Runes ecosystem has rapidly grown with multiple platforms emerging to support the trading, minting, and management of Runes. Marketplaces like OKX, Magic Eden, and UniSat offer users the ability to create, manage, and trade Runes tokens, each with unique features.

Several decentralized exchanges have also popped up for Rune traders. Platforms like Dotswap and Runes DEX offer automated market-making systems that allow users to trade Runes with minimal friction. Fluid BTC and Saturn BTC provide peer-to-peer platforms for exchanging and lending Rune tokens.​

Rune Wallets

Rune wallets play a crucial role in managing and storing Runes tokens on the Bitcoin blockchain. Two prominent wallets supporting Runes are Leather and Xverse. These wallets connect to hardware like Ledger, providing an extra layer of security for users engaging with the Runes ecosystem​. Such tools make it easy for users to securely manage their Runes tokens, perform transactions, and engage with decentralized applications within the Runes ecosystem.

Lending Platforms

Lending platforms like Liquidium allow users to borrow and lend Runes, providing liquidity and generating interest on BTC holdings. Borrowers can use Runes as collateral, while lenders earn interest from lending out their bitcoin. The success of Liquidium foreshadows the potential future for DeFi projects on bitcoin.

Launchpads

Magic Eden and Meta Runes operate launchpads for new Rune projects, helping developers issue and distribute Runes tokens. These platforms support a wide range of initiatives, from community airdrops to strategic partnerships with global brands.

Analytics Platforms

Runealpha and Ord.io are analytics tools that track Rune transactions, trading volumes, and performance, providing valuable insights for traders and developers.​

Major Bitcoin Rune Tokens

The Bitcoin Runes ecosystem is filled with popular and high market cap projects. However, at the moment, all top Rune projects are meme coins. This disparity between use cases and popular Rune tokens demonstrates how much room for growth exists in the market.

DOG•GO•TO•THE•MOON (DOG) is one of the most prominent Runes, with a current market cap of around $250 million. As the first meme coin launched on the Runes protocol, it has a strong following and has generated millions in trading volume since its launch. It was airdropped to holders of the Runestone Ordinals project and now boasts over 74,000 holders, making it the most widely held Rune​.

RSIC•GENESIS•RUNE (RSIC) is another major project within the ecosystem, with a market cap of around $14.5 million. Known for its symbolic value (being the eighth Rune and connected to the number 8 for "luck"), RSIC is particularly popular for its game-like token mining experience, where users can compete to earn tokens. It has a growing community and over 21,000 holders​.

SATOSHI•NAKAMOTO is a tribute to bitcoin's creator. This token's supply is capped at 21 million, mirroring the total bitcoin supply, and it has over 19,000 holders. ​These projects not only reflect the growth of the Runes protocol but also showcase the variety of assets that can be created within this ecosystem, from meme coins to symbolic tokens tied to bitcoin's history.

BILLION•DOLLAR•CAT (BDC) This project combines meme culture with the aspirational "billionaire lifestyle" narrative, attracting a loyal following and generating substantial trading volumes.

Side Note: Why Runes Have Long, Unusual Names

The names of Runes often appear in all caps and can seem strange or lengthy, but there's a reason behind this convention. Built into the Runes protocol is a minimum name length requirement to prevent name squatting—the practice of registering commonly recognized names or trademarks to later profit from their value. This safeguard ensures that names like "PEPSI" or "APPLE" aren't immediately claimed by opportunistic users.

Rune names must be between 1 and 28 characters long, using only uppercase letters from A to Z, and must be unique—even spaces matter. The naming rule starts with longer names, which are then shortened by one character every 17,500 bitcoin blocks, creating a dynamic environment for naming Runes.​​

The Future of Bitcoin Runes: Expanding Utility and Adoption

Bitcoin Runes mark a pivotal evolution in Bitcoin’s functionality, addressing the inefficiencies of previous token standards like BRC-20 while enabling a diverse range of use cases. From stablecoins and DeFi to gaming and governance, Runes introduce a scalable and efficient way to create and trade tokens on Bitcoin—without compromising the network’s integrity.

While meme coins currently dominate the ecosystem, the underlying infrastructure for more sophisticated applications is steadily taking shape. The growing support from marketplaces, wallets, lending platforms, and analytics tools signals that Runes are becoming a lasting fixture within Bitcoin’s broader financial ecosystem.

As the protocol matures, the real test will be whether Runes can move beyond speculation and power meaningful financial instruments, decentralized applications, and real-world asset tokenization. If adoption continues at its current pace, Bitcoin could emerge not just as digital gold, but as the foundation for a fully-fledged token economy.

Move is one of the more interesting developments in the cryptocurrency space over the past few years, as it addresses some of the key security issues with digital assets that have been found in previously existing blockchain programming languages.

While Sui and Aptos are the two key Layer 1 cryptocurrency networks that have integrated the Move programming language, there are also rising attempts to bring this technology to the Ethereum and Bitcoin ecosystems. While Ethereum has always tended to quickly adapt any new blockchain technology as it appears, this new Move ecosystem is emerging around the same time as various bitcoin liquidity layers on top of bitcoin, which makes it possible for Bitcoin Finance (BTCFi) to join in on these new capabilities.

So, who are the key players in the Move ecosystem, and how will bitcoin make its way into this emerging area of DeFi? Let’s take a closer look at Move and how it can merge with BTCFi.

What Is Move?

The Move programming language was originally developed by Meta for the Diem (formerly Libra) project. It is built to support secure asset handling in digital transactions. Inspired by Rust, Move offers a resource-based type system where assets behave as unique, non-clonable resources, ensuring that they have a single owner and are protected from duplication, which is a common vulnerability in blockchain environments. With these capabilities, Move addresses many limitations faced by existing blockchain languages, particularly Solidity, which underpins Ethereum and has a number of known security vulnerabilities such as reentrancy attacks.

Although Diem was discontinued due to regulatory pressures, Move’s foundational elements survived and found new life in new cryptocurrency projects like Sui and Aptos. Move also includes an efficient virtual machine, known as MoveVM, which is optimized for high performance, parallel execution, memory management, and compiler optimizations to enhance transaction speeds and throughput. Additionally, it provides modularity and composability, making it a straightforward tool for developers to create, connect, and deploy smart contracts.

Move’s strong type system and formal verification also make it particularly appealing for developers prioritizing asset security. By integrating these features with a modular design, Move empowers developers to create sophisticated decentralized applications on multiple layers of blockchain environments. Additionally, Solidity-based contracts can be deployed alongside Move-based contracts without any modifications, which enables seamless compatibility between the two ecosystems.

Key Existing Projects In The Move Ecosystem

While still somewhat nascent, a number of projects built around the Move programming language have already been deployed, and many others are in the works. These projects include Layer 1 cryptocurrency networks like Sui and Aptos, an Ethereum Layer 2 network called M2, and Sui’s liquidity protocol known as Navi.

Sui

Sui is a Layer 1 blockchain designed for seamless, high-speed digital asset transactions. Initially contributed to by Mysten Labs, whose team members include former Meta engineers from the Diem project, Sui reflects lessons learned from Diem’s development.

The architecture of this cryptocurrency network enables sub-second finality and low transaction costs by processing transactions in parallel. This approach not only improves scalability but also allows Sui to handle complex on-chain assets, as its object-based model, which includes improvements over Move’s original design, supports more dynamic digital asset management. In fact, Sui has extended the Move language into Sui Move, which notably enables new features specifically for NFTs.

Sui’s consensus mechanism is rather complex and uses a combination of delegated proof of stake (DPoS), Byzantine fault tolerance (BFT), and directed acyclic graph (DAG) to make sure all nodes are on the same page with transaction ordering in a way that maximizes low latency and high throughput. The BFT-based protocol consensus is known as Mysticeti and is the main vehicle for consensus generation, while DAG and DPoS are used for specific tasks. The key innovation here is to use a combination of different consensus mechanisms for different needs in order to maximize efficiency.

Since its mainnet launch, Sui has shown notable growth with millions of active accounts and billions of transactions. In particular, the gaming niche has been a key area of focus for this network’s growth.

NAVI

NAVI is the main liquidity protocol on the Sui blockchain, which enables users to borrow assets or provide liquidity in return for yield in a manner similar to the well-known DeFi app Aave.

While it has many similarities with Aave, NAVI also comes with additional features and goes beyond what other liquidity protocols have offered in the past. For example, NAVI is designed with advanced features like automatic leverage vaults, which enable users to automate strategies related to their leveraged positions, and “Isolated Market,” which limits the risk associated with newly listed assets. Additionally, it offers dynamic collateralization ratios that move based on market demands.

Aptos

Aptos is another Layer 1 blockchain aimed at delivering high-speed, scalable, and developer-friendly solutions for decentralized applications. Launched on October 12, 2022 by Avery Ching and Mo Shaikh, Aptos is capable of reaching up to 160,000 transactions per second with under one-second finality. Much like Sui, this efficiency stems from the use of the Move programming language.

A key attribute of Aptos is its Parallel Execution Engine (Block-STM), which allows multiple transactions to be processed concurrently and avoids delays caused by single transaction failures. This further increases transaction throughput and reduces latency. Aptos’s consensus mechanism is somewhat similar to Sui’s, using a combination of BFT and proof of stake (PoS); however, Aptos uses traditional PoS as opposed to Sui’s use of DPoS.

Since launch, Aptos has rapidly grown, attracting strong community engagement and significant institutional support, including over $350 million in funding from investors like a16z, FTX Ventures, and Coinbase Ventures.

Cetus

Cetus stands out as the leading DEX in the Move ecosystem, renowned for its concentrated liquidity protocol that enhances trading efficiency while delivering a seamless user experience. By fostering a flexible and robust liquidity network, Cetus accommodates a wide array of assets and use cases. Its permissionless architecture further empowers users, developers, and applications to easily integrate and leverage its protocols.

Key Features include:

• Deep liquidity pools enabling low-slippage trades
• Permissionless architecture for developer flexibility
• Comprehensive support for diverse assets

Movement Labs

Blockchain development firm Movement Labs has raised funding from the likes of Polychain Capital and Aptos Labs to accelerate the integration of Move solutions within Ethereum’s ecosystem. With its Ethereum Layer 2 network known as Movement, Movement Labs aims to enable a theoretical transaction capacity of over 160,000 transactions per second while simultaneously improving smart contract security.

Movement uses its own Move-EVM (MEVM), which allows users from both MoveVM and EVM-based systems to use the Layer 2 network. This feature significantly reduces the risk of attacks such as reentrancy and arithmetic errors, which have plagued many Ethereum-based protocols. The Movement network’s infrastructure will also offer the flexibility to launch custom rollups that are secure and compatible with Ethereum.

Through their specific approach to developing with Move, Movement Labs hopes to merge the massive Ethereum user base with the power of the Move programming language.

Bringing BTCFi To The Move Ecosystem With Lorenzo

Lorenzo Protocol is at the forefront of integrating Bitcoin and BTCFi into the Move ecosystem as the first omnichain Bitcoin liquidity layer within the MoveVM landscape. This innovation allows Bitcoin liquidity to seamlessly flow through the Move ecosystem while leveraging liquid staking solutions to enhance potential returns for Bitcoin holders.

By collaborating with key projects featured in this article, Lorenzo bridges Bitcoin’s history of decentralization and security with Move’s advanced architecture, tailored to meet DeFi’s evolving demands. While Bitcoin remains a cornerstone cryptocurrency, its legacy technology and limited scripting capabilities hinder its application in modern decentralized systems. Lorenzo overcomes these limitations by unlocking Bitcoin’s potential for use in DeFi.

The simultaneous rise of Move-based DeFi platforms and Bitcoin’s integration into this ecosystem, driven by projects like Lorenzo, represents a significant evolution in blockchain technology. Platforms like Sui, Aptos, and Movement are merging Move’s enhanced security features and efficient processing capabilities with Bitcoin’s established market presence.

This convergence showcases how blockchain technology continues to evolve, combining Bitcoin’s reliability with Move’s cutting-edge features to create a more secure, efficient, and interconnected DeFi landscape. As Bitcoin liquidity becomes more accessible and Move’s ecosystem expands, we are likely witnessing the foundation of a more interoperable and widely adopted decentralized financial future.

This union of Bitcoin’s trusted asset status with next-generation blockchain technology could be pivotal in driving mainstream DeFi adoption.

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Bitcoin Ordinals are the latest milestone on the road to bitcoin adoption and the spread of blockchain technology. Ordinals combine the latest innovations in the bitcoin blockchain with the budding world of non-fungible tokens (NFTs).

But what are Ordinals? And why are people buying them? The answer to these two questions is couched in the combination mentioned above.

What Bitcoin Ordinals are is a technical question requiring a nuanced explanation of some of the most recent developments in the bitcoin space, such as the SegWit and Taproot upgrades. These technical enhancements are the necessary components that allow for embedding additional data into a bitcoin transaction. More specifically, it involves associating more data with a single satoshi (the smallest unit of bitcoin)

Why would people buy a single satoshi with a bit of additional data? To understand this, one has to understand why people are buying NFTs. The core ideas motivating the world of NFTs are convincing investors to buy Ordinals: ideas such as rarity, uniqueness, and artistic/historical value.

In short, the Ordinals are sats turned into NFTs: NFTs baked directly into the bitcoin blockchain.

Confusing as it may sound, before learning about the technical details of “what” Ordinals are, it is best to start with the “why” and focus on what makes NFTs valuable.

Why Buy NFTs?

NFTs are non-fungible tokens. Fungibility is the ability for something to be replaced perfectly by another thing. For example, one dollar for another dollar. It doesn’t matter which dollar someone has, as no value or functionality has been lost by exchanging one for another. Bitcoin is fungible in this way, one bitcoin is exactly the same as any other bitcoin.

Something is non-fungible when it can’t be replaced, aka it’s completely unique. Artwork is the best example of this; the Mona Lisa can’t be equivalently exchanged for another artwork, and more so, it can’t even be replaced by an exact replica of the Mona Lisa. The object we keep in the museum is the original, irreplaceable, and unique work of Leonardo Da Vinci. Non-fungible tokens share this property; they are not equivalent to any other tokens.

NFTs are created on a blockchain with a unique identifier for every token. This identifying information is typically connected via metadata to an external piece of media, such as a picture. Creating a token and linking its metadata to something is called minting.

In the NFT space, minting an NFT is seen as owning the associated piece of media. Like owning a famous piece of art, investors rarely hold the art in their homes, but instead, they have a certificate of ownership. An NFT is more like such a certificate than it is like physically possessing the art itself. Regardless, this certificate is sold for the price the piece of art is valued at, NFTs are traded based on the perceived value of the unique item it is connected to.

This is more than an analogy; in the NFT world, trading these tokens connected to digital media is participating in a collectors market. Such a market values ownership over unique individual items of some historical or creative significance.

What Are Bitcoin Ordinals?

Time for the nitty-gritty of what an Ordinal technically is.

Ordinals are a numbering system applied to satoshis. Like a serial number, each sat has a unique ordinal number associated with it. This number is an individual identifier for each sat based on when it was mined.

In principle, such a numbering system is all that is needed to make sats non-fungible. Every sat is completely unique and identifiable through its individual number.

However, to function like NFTs, the sat has to connect to external media. This is where SegWit and Taproot come in.

Segregated Witness (SegWit)

SegWit was an update to the bitcoin blockchain that “segregated” the witness data (the signature) into a separate section that supported additional arbitrary information. This upgrade means users can store a larger amount of data inside bitcoin’s 1 megabyte blocksize. The introduction of this arbitrary data is what helps enable Ordinals.

Taproot

The Taproot upgrade was built on the foundation SegWit established. Taproot allows multiple signatures to be batched together and validated as one. Along with increasing efficiency and scalability, this further reduced the limits on the amount of arbitrary data that could be included in a bitcoin transaction.

By allowing efficient sizable amounts of arbitrary data in bitcoin transactions, SegWit and Taproot add the missing component needed to make Ordinal-defined satoshis into NFTs. These sats are now completely unique and ready to hold the metadata associated with media, such as text or pictures.

However, it’s important to note that Ordinals do not suddenly make bitcoin non-fungible in general. The Ordinal numbering system is not a part of the bitcoin blockchain; rather, it is a tool to track individual sats and their associated transaction data. The blockchain still treats all sats as any other; the additional data makes no difference to their on-chain functionality.

How Are Ordinals Created?

Creating an Ordinal involves adding the wanted media content to an individual satoshi through a process called inscribing. The inscription of an Ordinal is the information one wants to attach to a particular token; this is the metadata determining the content of the NFT, such as a picture.

To attach such information, a user adds the media file to the witness data of a transaction by sending a single sat to a Taproot-enabled wallet. This might sound simple, but users must identify the sat they wish to send and ensure it isn’t used for the network fee. Remember, the bitcoin blockchain does not natively recognize Ordinals any differently from other sats.

At first, only operators of a full bitcoin node with a special wallet could manipulate sats in this way. Nowadays, there are plenty of tools associated with Ordinal wallets, and there are also marketplaces that streamline the process.

Although Ordinals are units of bitcoin, trading and transferring them is not the same as sending bitcoin or traditional NFTs. Ordinals need to be tracked and held separately from normal bitcoin so they are not mistakenly used in other transactions. This requires specialized Ordinal wallets with specific functionalities to handle Ordinals.

Further, normal NFT marketplaces do not support bitcoin assets. This has spawned a distinctive subsection of NFT marketplaces specializing in selling and promoting Ordinals.

NFTs vs Ordinals

The previous discussion makes it seem that Ordinals are the same as NFTs, but there are some key differences between traditional NFTs that new collectors need to understand.

1. On-chain hosting: An inscription is housed directly in the data on the blockchain, unlike traditional NFTs which are usually just links connected to an externally hosted file. This makes inscriptions more secure and permanent because they are directly a part of the decentralized and immutable bitcoin ledger.
2. Token type: A traditional NFT is not just an individual unit of a network currency like ether; it is its own type of token traded on the network. In this way, a traditional NFT could never be mistaken for a normal network unit and used for gas fees, etc.
3. Scarcity: There will never be more than 21 million bitcoin. This gives a hard cap to the amount of Ordinals that can be created (although an extraordinarily high number). Traditional NFTs, on the other hand, can be minted in unlimited quantities.
4. Smart contract support: Ordinals do not support complex smart contract functionalities such as detailed attributes, ownership rights, royalties, and other programmable functionalities that can trigger under specific conditions.

The Controversy

Ordinals bring a major branch of the Web3 industry firmly into the bitcoin ecosystem. It might seem that the bitcoin community would naturally welcome Ordinals with open arms. But any collector under this impression will be surprised at the heated debate and hatred for these new digital artifacts in the bitcoin community.

Bitcoin maximalists and conservatives have pushed back against the advent of Ordinals for clogging the bitcoin blockchain with meaningless transactions. Some even call it an attack on the bitcoin infrastructure.

The debate centers on two points. That the bitcoin network should only be used for financial transactions and that the additional transactions make bitcoin more expensive to use. Without a doubt, Ordinals increase the number of on-chain transactions, which can drive up fees. This only gets worse as Ordinals become more popular and accessible.

Proponents of Ordinals often point out that Layer 2 innovations can make bitcoin more scalable and accommodate Ordinal transactions. Regardless, some bitcoin maximalists feverishly oppose Ordinals and see NFTs broadly as corrupting cryptocurrency’s original mission.

It is the responsibility of the individual investor to decide where they stand on these issues. As the blockchain industry evolves, many solutions to these core problems are sure to emerge. In the meantime, early Ordinal adopters will continue to buy and hold their assets, hoping for untold future value.

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Although the cryptocurrency industry pioneer, bitcoin has faced challenges in recent years keeping up with the ever-changing world of blockchain. Compared to other blockchains, bitcoin is slow, expensive, and lacking in features like smart contracts that are now underpinning the industry.

Layer 2 (L2) solutions have emerged to address these challenges, bringing upgrades and improvements to the bitcoin network.

Blockchains consist of an execution layer and a consensus layer. The execution layer manages users’ transactional activities, while the consensus layer protects and validates these transactions. Conceptually speaking, the execution layer maintains the blockchain activity while the consensus layer maintains the blockchain’s identity. The structure of an L2 is typically to improve the functionality of the execution layer while being sufficiently connected to the consensus layer.

In short, let the blockchain do more while still being the same blockchain.

Examining L2s requires understanding what capabilities they add this to bitcoin. Because the basic ideas and terms of this technology have alienated many bitcoin enthusiasts, this guide aims to help users grasp Layer 2 solutions by explaining their functionalities and types.

Upgrading Bitcoin

L2s enhance the bitcoin network by removing inherent limitations such as high fees, low speeds, and lack of smart contracts — all qualities which favor an unhackable, uncensorable maximum security model, as well as decentralization — qualities which will not be surrendered by the base layer. Improvements to blockchain execution capabilities are generally described in terms of scalability — the amount of transactions that can be processed on the blockchain in any given time period.

Because “scaling” a blockchain is too broad a descriptor for the variety of functionalities added, this section instead breaks down the main improvements to the execution layer and what this means in terms of what bitcoin can do.

Faster And Cheaper

Due to its transaction fees and block size limitations, bitcoin’s native chain is expensive and slow. These limitations are cited as the main bottleneck inhibiting broad functionality and adoption. Layer 2 solutions, at the most basic level, seek to solve this problem. They try to increase the network’s speed and output while keeping fees as low as possible.

The most obvious use case for making bitcoin faster and cheaper is microtransactions. Microtransactions are the small frequent transactions people make everyday. No one will use bitcoin to buy a coffee or a toothbrush if the transaction fee is half the total cost and takes 30 minutes to be confirmed.

The most popular and oldest layer 2 for bitcoin focuses on exactly this problem. The Lightning Network allows users to conduct micro-transactions with minimal fees and almost instant confirmation times. Reducing the cost and speed of transactions allows for the everyday usage necessary for mass adoption, such as tipping, small purchases, or running a business that accepts bitcoin.

Smart Contracts And DAPPs

Smart contracts are computer programs built on a blockchain that automatically execute a set of rules. The distributed computing power of the underlying blockchains executes a smart contract in a decentralized manner. Smart contracts can be used to make a digital agreement between parties with no third party to authorize the terms. Further, smart contracts are the foundation of decentralized applications (DAPPs). These are computer applications that use the decentralized execution technology in a blockchain to run programs without a centralized third party.

Smart contracts are the essential infrastructure powering the entire decentralized economy, all its platforms, tools, and organizations run on these programs. Bitcoin was not originally designed to support complex smart contracts and their development requires much higher TPS than bitcoin can natively mange. Therefore, things like DeFi and DAOs have traditionally been exclusive to smart contract-compatible blockchains such as Ethereum.

However, Layer 2 solutions can use their increased throughput and additional programmability to add such capabilities to bitcoin. For example, Rootstock and Stacks are layer 2 solutions that support smart contract execution, enabling the development of a decentralized infrastructure on bitcoin.

How Layer 2 Solutions Work

Layer 2 solutions function by transferring some computational execution off the main blockchain while maintaining a connection to the native bitcoin network. The methods for doing this can be broadly categorized into sidechains, state channels, and roll-ups.

Although there is additional nuance to many layer 2 solutions and not all fit perfectly into these categories, such distinctions allow for a general picture of the core types of layer 2s.

Sidechains

Sidechains are independent blockchains that run in parallel to the bitcoin main chain.

Sidechains that have some systematic dependence on the native chain, this dependence is generally seen through a pegging mechanism. Users lock their bitcoin on the main chain, which is then mirrored by minting equivalent assets on the sidechain. This relationship between the blockchains allows users to interact with the sidechain’s unique features (such as smart contracts) while still being anchored to the bitcoin network.

Further, sidechains often have their own consensus mechanisms, such as Proof of Stake or federated consensus, to secure the network independently of the bitcoin main chain. Through these consensus mechanisms, such chains can create their own incentives for participation, such as alternative rewards or their own native tokens.

Notable Side Chains:

• Rootstock: This sidechain introduces smart contract functionality to bitcoin, allowing developers to build dApps and more complex financial instruments.
• Liquid Network: Liquid focuses on fast and confidential transactions, particularly beneficial for exchanges and traders needing quick and private transfers.
• Stacks: Stacks is a blockchain and cryptocurrency for smart contracts, decentralized finance, non-fungible tokens, and dApps.

State Channels

State channels allow participants to conduct multiple transactions off-chain and then record the final state on the bitcoin blockchain. This process significantly reduces the number of transactions that need to be processed on-chain.

State channels maintain a connection to the bitcoin network through multi-sig addresses. With these addresses, multiple parties must sign off on a transaction, ensuring that off-chain transactions are secure and agreed upon by all involved parties. This method provides a secure link to bitcoin by ensuring that off-chain transactions within the state channel can be finalized and enforced when added to the main chain. Additionally, state channels will use security entities like “Watchtowers,” who are users that monitor the network for malicious activity and receive rewards.

The most well-known implementation of state channels for bitcoin is the Lightning Network. Here two parties open a channel by locking a certain amount of bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel is recorded on the bitcoin blockchain network.

Rollups

Rollups work by aggregating multiple transactions into a single batch. Rollups interact with the bitcoin network by periodically committing aggregated transactions to the main chain. This process ensures that the state of the rollup is consistent with the main chain.

There are two main types of rollups: optimistic rollups and zero-knowledge rollups (zk-rollups).

• Optimistic rollups: These are “optimistic” because they assume transactions are valid and only perform a check if a dispute is raised. This approach minimizes immediate computational load but requires a mechanism to handle disputes effectively.
• zero-knowledge rollups These use cryptographic proofs to verify transactions according to minimal information about the transaction. This method retains higher privacy and speed, although it can be more complex and dangerous to implement.

Rollups are just starting to be seen on Ethereum and other blockchains, while implementation with bitcoin is still in the conceptual stage and has yet to be launched outside of research.

Challenges For Layer 2s

Despite the variety of use cases and the serious commitment by most of the bitcoin community, Layer 2 solutions face several challenges.

• Security risks: While Layer 2 solutions aim to enhance security, they also introduce new attack vectors. For instance, rollups must handle potential fraud disputes, and sidechains need to ensure their consensus mechanisms are resistant to attacks.
• Complexity: Implementing and maintaining Layer 2 solutions can be complex. Developers need to ensure seamless integration with the bitcoin network while maintaining usability and security.
• Interoperability: Different Layer 2 solutions often operate independently, which can lead to fragmentation. Ensuring interoperability between various Layer 2 solutions is a significant issue that needs to be addressed to realize the full potential of these technologies.

The Obvious Solution

It is almost universally agreed upon that Layer 2 solutions are needed for bitcoin to reach mass adoption. By enabling microtransactions and smart contracts, they expand bitcoin’s use cases to compete with the latest blockchain movements.

A basic understanding of the mechanisms of rollups, sidechains, and state channels, along with their security measures and connectivity to the bitcoin network, is essential for users to navigate emerging projects. Bitcoin Layer 2 solutions represent a crucial evolution in the bitcoin ecosystem, as they allow bitcoin to reclaim its role as the foundation and center of the blockchain industry.

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Layer 2 (L2) solutions aim to alleviate the well-known scalability issues of the bitcoin network, but these very issues characterize the prevailing and most widely accepted narrative surrounding bitcoin: that it is a commodity, not a currency.

A commodity is a useful or valuable raw material that can be bought or sold. Bitcoin is often compared to commodities such as gold, the bitcoin community even describes it as “digital gold.” This has highlighted bitcoin’s ability to serve as a superb store of value, but doesn’t help bitcoin’s case for being a viable currency.

L2s not only answer the charge that bitcoin can’t be a global currency, they add functionality to the network that extends its influence far past a payment network. But with that answer comes several questions:

• Can technological advancements force the bitcoin community to change its narrative?
• How can the bitcoin community support this narrative when L2s force them to renege their original reasons for presenting it?
• In what sense is bitcoin a raw material analogous to gold?
• How do layer 2 solutions support or diminish this analogy?

This article aims to answer these questions and more while investigating the economic position of bitcoin post-layer 2s.

Digital Currency To Digital Commodity

The original bitcoin narrative goes as follows: Bitcoin was created as a form of digital currency; its creator intended it to be a decentralized replacement for fiat currency.

This digital money was designed to be scarce and deflationary with a supply forever capped at 21 million via its mining mechanism, which halves the amount of bitcoin created every four years. The miners who secure the network are then paid transaction fees once all the bitcoin is mined. The idea that bitcoin mass adoption implies being used frequently in transactions like a global currency is baked into the protocol structure itself.

Shortly after bitcoin started to gain a following users pointed out some problems with the original vision of bitcoin as a currency. This primarily had to do with problems of scalability and the ability to process a high volume of transactions. A native bitcoin transaction is too slow and costly for everyday transactions such as buying a coffee, yet the definition of currency requires the item to be used as general use money. Unfortunately, the transaction pace and fees are unchangeable features of the native blockchain and, therefore, seem to permanently bottleneck global adoption as a currency.

Instead of giving up on bitcoin, the narrative surrounding its economic position changed to “digital gold.” The idea was that because bitcoin isn’t feasible as a currency, the community should instead treat it as a basic digital object useful for storing value by virtue of its scarcity and immutability. This narrative caught on, and laws even followed suit, with many countries officially classifying bitcoin accordingly as a commodity.

This conversation continues as an important debate within legal regimes as regulations differ surrounding the ownership, sale, and exchange of currencies vs. commodities. The legal definition of bitcoin characterizes how it can be adopted in various countries; a misclassification can stifle or even ban its existence.

How Layer 2 Solutions Challenge The Bitcoin Narrative

A layer 2 solution is a blockchain built on top of or alongside another that extends the functionality of the base chain. Typically, the goal of a layer 2 solution is to make the native blockchain scalable. For Bitcoin, at least at first, this meant making transactions cheaper and faster.

The most popular layer 2 solution to do this is the Lightning Network. The Lightning Network operates by creating payment channels between users. Two parties can open a channel by locking a certain amount of Bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel, once it is closed, is recorded on the Bitcoin blockchain.

By moving small transactions off the main blockchain and settling them after the fact, L2s can make bitcoin transactions nearly instant and fees practically non-existent. Such upgrades force one to reconsider if bitcoin can be a system of money in general use:

Everyday Use
With low cost and fast transactions bitcoin can become viable for everyday transactions such as buying a coffee.

User Growth
As bitcoin becomes more practical for daily transactions, the user base can expand to those previously restricted by fees. This reinstates the possibility of bitcoin as a universal global currency.

Adoption by Businesses
Lower transaction costs and faster settlement times make Bitcoin more attractive to merchants and businesses.

Spending
Now that bitcoin can be used as easily as any other currency, this new functionality promotes spending bitcoin as opposed to holding. This permanently affects the economics of Bitcoin as it implies a circulating supply similar to a currency widely used.

At face value, the advent of bitcoin layer 2s seem to deter its classification as a commodity, the original gripes with bitcoin being widely adopted as a currency are at least in principle defeated. Further, the basic economic dynamics of bitcoin must change with the expectation that it will be changing hands more frequently. The original considerations that led the global community to accept bitcoin as a commodity no longer hold. If the lightning network becomes globally adopted, bitcoins main use will be a general money and it will better fall within the classification of currency.

However, scaling bitcoin past its original limit gave it far more use cases than being used as money. This additional usefulness of bitcoin beyond being simple money forces one to reconsider the way it is defined as a commodity.

Layer 2s Beyond Lighting: An Explosion Of Use Cases

Ironically, the cryptocurrency industry has moved far past “currency.” Elements such as smart contracts, dApps, and NFTs have brought more functionalities to blockchain technology than bitcoin’s creator could have imagined.

As layer 2 solutions use secondary blockchains to extend the functionality of the base chain, it’s natural that bitcoin layer 2 solutions would emerge to give bitcoin the capabilities revered in other blockchains.

Layer 2 solutions such as Stacks and Rootstock built methods to connect smart contract compatible blockchains to the native bitcoin network. The execution of smart contracts on the bitcoin blockchain opens up the world of decentralized infrastructure. Decentralized applications such as DeFi protocols, video games, and social media platforms can now be powered and secured by the bitcoin network.

Furthermore, scaling solutions and other innovations allow for non-fungible tokens (NFTs) to be created and traded on the bitcoin blockchain. This brings the ecosystem of art, collectibles, and other NFT use cases directly onto bitcoin.

A new vision of bitcoin is starting to solidify among followers of these developments. The possibility of the bitcoin blockchain acting as the ultimate foundation for the entire decentralized ecosystem. Through these layer 2 solutions, developers can create any tool or application and access the robust decentralization and security of the bitcoin network.

Bitcoin is by far the most decentralized and secure blockchain network that exists; by building on bitcoin, developers leverage these unmatched properties of the bitcoin network and can apply them to their projects.

The Gold Analogy Revisited

Although bitcoin may be used in the future as a global currency, its expanding functionality due to layer 2 solutions points back to the definition of commodity. Usefulness is a core feature of commodities. Raw materials are useful in a variety of ways, such as art, building materials, food, and stores of value.

If bitcoin was just used as a medium of exchange and a store of value, like general money, it would be more similar to a global digital currency. But layer 2 solutions demand that bitcoin be so much more. The bitcoin network is set to be the foundation for the future of all decentralized infrastructure, a kind of ultimate digital commodity. This can be seen clearer by revisiting the gold analogy.

In the shape of a coin, gold can be used as currency. If put in wiring or as a building material, it can lend its properties to help build physical infrastructure. Seen just as a pretty mineral, it can be made into a piece of art. Gold is a simple material with certain characteristics that allow it to take on many roles.

Similarly, bitcoin can be used as a currency via the lighting network. It can be built into decentralized infrastructure to make it more secure by using programs like Stacks. It can even be minted into an art piece via the ordinal protocol. Here, we can see bitcoin as the ultimate digital material used in various ways in a variety of final products.

The features of the bitcoin network correlate with the properties of materials like gold. The robustness of bitcoin security, the wide reach of the network, and the history of its use are all analogous to mineral properties (shininess, hardness, conductivity, etc.) that make them useful.

In the end, layer 2 solutions challenge but do not defeat the narrative that bitcoin is a digital commodity. Although the bitcoin community is forced to reconsider in what way bitcoin is a commodity, the narrative of bitcoin is stronger for it. Layer 2s reveal an even more grandiose narrative for bitcoin, and the use cases they allow for bolster the case for bitcoin as a commodity more than was previously conceivable.

Comparing bitcoin to gold does bitcoin a disservice; the ultimate usefulness of Bitcoin as a commodity extends far past what gold ever achieved.

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Bitcoin has remained the largest cryptocurrency in the market since its inception in January 2009; however, bitcoin is far from the only cryptocurrency in the market. Currently, bitcoin’s dominance of the cryptocurrency market share is measured at just under 55%, and the dominance metric has been on a downward slide since the 95% level it once held, all the way back in 2013.

The bitcoin dominance index (BDI) is far from a perfect measurement of the cryptocurrency market, but it’s undeniable that alternative cryptocurrencies have become more prominent over the years, especially in times of large boom cycles.

That said, recent developments in the Bitcoin Layer 2 network ecosystem could reverse this trend. While cryptocurrency users have opted for alternative networks in search of specific use cases not available on bitcoin in the past, such as enhanced privacy or more expressive smart contracts, the boom in new networks pegged to bitcoin can enable all of these use cases and more on the world’s oldest and most valuable cryptocurrency network.

Layer 2 networks have the potential to bring all of the innovation that has taken place outside of bitcoin back to the world’s first blockchain, a feat that has been theorized for at least ten years. Does this mean the cryptocurrency market’s current total valuation of $2.4 trillion will all be sucked up by bitcoin?

Let’s take a closer look at how this return to bitcoin could happen and how it could affect the bitcoin price going forward.

Bringing The DeFi Market To Bitcoin

When it comes to cryptocurrencies other than bitcoin, the vast majority of the market is built around blockchains with more expressive smart contracting capabilities. Ethereum, which is the second largest cryptocurrency network by its market cap of $408 billion as of this writing, is the most obvious example here. There are also a number of chains that have built off the success of Ethereum by copying the technology and building out networks that are compatible with the Ethereum Virtual Machine (EVM). Some of the most prominent examples of Ethereum copycats include BNB Chain, Avalanche, and Tron. Additionally, Solana has attempted to carve out its own niche with its own development environment and a focus on on-chain scaling. Ethereum itself has taken a similar approach to bitcoin in terms of scaling via a multi-layer approach.

With these blockchains that enable more expressivity in smart contract development, decentralized applications (dApps) have been built that are intended to enable cryptocurrency use cases other than simple payments. Protocols for decentralized exchanges, lending, liquid staking, and more are some of the more prominent examples of dApps that have been built on Ethereum and other, similar chains. Due to the applications that can be used on these cryptocurrency networks, they’re also where stablecoins are generally issued — despite the fact that the largest stablecoin, Tether USD, was originally issued on a meta protocol on top of bitcoin. Non-fungible tokens (NFTs) and meme coins also first rose to prominence on these sorts of blockchains; however, the developments of Ordinals and Runestones has already brought those use cases back to bitcoin.

Decentralized finance (DeFi) has become an enormous aspect of the overall cryptocurrency market, with DeFiLlama estimating the total value locked (TVL) in various protocols at just under $100 billion. However, less than 2% of that TVL is found on bitcoin and its various Layer 2 networks. In fact, most of the DeFi activity that involves bitcoin currently takes place on Ethereum via the wrapped bitcoin (WBTC) ERC-20 token, which involves the backing of a centralized custodian.

Bitcoin Layer 2 Networks For DeFi

While there is some DeFi-related activity found on bitcoin’s base blockchain, the possibilities are rather limited due to the lack of expressive smart contracts at that layer. For this reason, many of the DeFi apps built around bitcoin are likely to be found on L2 networks. Many of these L2s, such as Lorenzo App Chain, are compatible with the EVM and can deploy any DeFi app that has already been deployed on Ethereum.

In some ways, Ethereum itself is already an L2 of sorts for bitcoin due to the level of success achieved by the aforementioned WBTC up to this point. However, there is plenty of room for improvements that can be made via true L2s that can enable more secure two-way peg mechanisms and remove the need for a non-bitcoin cryptocurrency to pay for gas. Indeed, the recent improvements to the two-way peg model based on federated, multisig custody made possible by BitVM were a key catalyst for the recent revival of Bitcoin Layer 2 developments.

This puts into question the need for alternative blockchains at the base layer, especially for those who view bitcoin as the base money of the cryptocurrency market. Additionally, this allows bitcoin’s base, monetary layer to remain sufficiently decentralized and begin to ossify while also extending the capabilities of the cryptocurrency via L2s. After all, it is the credibility of bitcoin’s unwavering monetary policy that differentiates it from other, more centralized cryptocurrencies on the market. This is one of the main reasons it makes sense to use bitcoin as the base layer of a greater DeFi ecosystem.

The Alternative Cryptocurrency Market

Outside of smart contracts, the other major use case for cryptocurrencies outside of bitcoin is payments. There are two main categories of payment-focused cryptocurrencies that offer potential advantages over bitcoin: privacy cryptocurrencies and cryptocurrencies with low transaction fees.

In terms of privacy-focused cryptocurrencies, Monero and Zcash are the two most prominent examples. Notably, the core technologies used in both of these cryptocurrencies were first proposed for bitcoin itself; however, those changes were never made to bitcoin due to the associated tradeoffs in various areas such as scalability and auditability.

While bitcoin’s main on-chain privacy enhancer, CoinJoin, has faced legal attacks in the form of the arrests of the founders of Samourai Wallet and the complete shutdown of Wasabi Wallet, there are a variety of ways to enhance privacy through L2 networks. Ark is a notable L2 payments protocol that also provides a high degree of privacy for its users. Mercury Layer also enables off-chain coin swaps that can provide privacy gains for users. Additionally, Fedimint enables traditional anonymous digital cash via a federated custody model.

In terms of more hypothetical L2s that could enhance bitcoin privacy, there is nothing to stop an anonymous developer from deploying a version of Tornado Cash on any of the EVM-compatible L2s. Additionally, a Zcash drivechain may eventually find its way to the Bitcoin L2 ecosystem. Of course, a privacy-focused proof-of-stake L2 could be launched using Lorenzo’s existing staking liquidity as well.

There have been many cryptocurrencies marketed as cheaper alternatives to bitcoin. Some of the major examples include XRP, dogecoin, bitcoin cash, and litecoin, which account for over $50 billion of the cryptocurrency market when combined. Of course, bitcoin’s answer to this particular use case is the Lightning Network. However, there are still some potential usability issues here, especially when it comes to the need to make a potentially expensive on-chain transaction to open a channel. The aforementioned Ark protocol may eventually turn into an alternative to the Lightning Network, which doesn’t necessitate an on-chain transaction to get started. There’s also the possibility for a sidechain with a large block size limit to develop; however, it’s important to remember that solution comes with tradeoffs in terms of centralization.

While payments-focused cryptocurrencies tend to be a smaller part of the entire cryptocurrency market cap, they’re still an important aspect of bitcoin’s development over the long term, as it evolves from a store of value to also becoming a more prominent medium of exchange.

$600 Billion And Beyond

The current total cryptocurrency market cap of $2.4 trillion can be misleading, as this metric oftentimes includes errors in the form of double counting the same underlying asset in multiple forms (e.g. bitcoin and wrapped bitcoin) or overstated market caps of tokens with highly centralized supply distributions. Additionally, there are some crypto tokens, such as NFTs and meme coins, that bitcoin is inherently unable to replace.

That said, it’s clear that there is a $600 billion or more opportunity for bitcoin here in terms of replacing the most popular DeFi platforms and alternative cryptocurrencies with L2 solutions. After all, just Ethereum and Solana combined are currently worth more than $470 billion.

Of course, the current overall cryptocurrency market cap is also not the limit on how large bitcoin can grow. And centralizing all major crypto use cases around bitcoin as the base currency is a major step on the cryptocurrency’s path towards becoming, as Twitter and Square co-founder Jack Dorsey puts it, the native currency of the internet. Once bitcoin establishes itself as the king of the digital financial realm, it can obtain the necessary liquidity and network effects to then begin to make an impact in the real world.

In other words, before bitcoin can rival gold and the U.S. dollar in any real way, it must first defeat the likes of ETH, XRP, and DOGE. Additionally, access to a more liquid and stable cryptocurrency benefits the DeFi apps themselves, as that cryptocurrency would perform better as collateral for various use cases. It also makes things less mentally taxing for the end user, as they only need to worry about one form of digital money. While stablecoins are the dominant medium of exchange in the crypto market today, their centralized nature makes them subject to restrictions and regulations. In many ways, stablecoins are more of an evolution of the preexisting, fiat currency system rather than a revolution in money and finance from the base layer.

Through the development of various Bitcoin L2s, whether it be the Lightning Network for payments or Lorenzo App Chain for Ethereum-esque DeFi apps, it’s clear that bitcoin has the ability to adopt all cryptocurrency use cases and therefore usurp the vast majority of the cryptocurrency market cap (outside of non-fungible tokens and meme coins). Additionally, further developing bitcoin’s network effects by bringing altcoin liquidity back to the original cryptocurrency will lead to a stronger and more stable native currency for the internet.

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