What Is Bitcoin Mining?

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.

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Bitcoin Mining: A Proof Of Work

The process of adding a block to the blockchain is called mining because it involves work on the miner’s’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 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.

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While the bitcoin network was originally launched as a way to disrupt many aspects of the traditional financial system, some of the largest financial institutions and asset managers in the world are now becoming key nodes on the network.

Most representatives of the traditional financial system were extremely critical of bitcoin as an asset in its early days, but much of the sector has now come around to the idea that the cryptocurrency could at least operate as a potential source of portfolio diversification. With more institutional investors demanding access to bitcoin price exposure from their financial services providers, many of the largest asset managers and financial advisors in the world have completed a 180-degree turn in terms of their public statements on bitcoin and other cryptocurrencies.

With this in mind, let’s take a look at what the top five asset managers in the world (according to ADV Ratings) think about bitcoin.

1. BlackRock ($10.4 Trillion AUM)

BlackRock’s stance on bitcoin has evolved quite significantly in recent years. Initially, the firm was cautious about cryptocurrencies, viewing them as speculative and too volatile for institutional portfolios. In fact, BlackRock CEO Larry Fink referred to bitcoin as an “index of money laundering” back in 2017.

However, as digital assets matured and demand from investors grew, BlackRock has shifted its perspective. Indeed, as bitcoin infrastructure developed — such as the rise of secure custodial services and increased regulatory clarity — BlackRock saw potential in offering easier, more structured access to the asset. The firm also recognized bitcoin’s appeal to younger generations, high net worth individuals, and financial institutions who were increasingly demanding exposure to digital assets.

In 2023, the company made a bold move by filing for a bitcoin exchange-traded fund (ETF), which signaled a pivotal moment for institutional adoption of the cryptocurrency. This filing helped reshape how major financial institutions view cryptocurrencies due to BlackRock’s pivotal role in the global economy and its status as the largest asset manager in the world. Now, BlackRock manages the largest bitcoin ETF, known as the iShares Bitcoin Trust, offering streamlined access to the asset for traditional investors, without the security and usability burdens of direct cryptocurrency exchange trading.

Fink himself has also embraced bitcoin’s potential as a store of value, describing it as a way of “digitizing gold.” He emphasized the demand for transparent, digitized assets and recognized that bitcoin could play a significant role in diversifying portfolios. The BlackRock CEO has also highlighted how bitcoin and blockchain technology align with his vision of modernizing financial systems. Additionally, he expressed optimism about the transformative potential of digital versions of real-world assets (RWAs), noting that they can improve efficiency and transparency in the global financial system.

With all that said, BlackRock Head of Digital Assets Robbie Mitchnik has made it clear that there is not much interest from their institutional clients in digital assets outside of bitcoin, with some interest in Ethereum’s native ether cryptocurrency being the only slight exception to that general observation.

2. Vanguard ($9.3 Trillion AUM)

Vanguard has taken a notably conservative stance on bitcoin and other cryptocurrencies, at least when compared to the more proactive approach taken by some of its competitors on this list. The financial titan has often cited concerns about price volatility, lack of regulation, and the speculative nature of cryptocurrencies as key reasons for their caution. Vanguard has historically prioritized long-term, yield-producing investment strategies.

Digital assets like bitcoin, with their dramatic price swings, have not historically aligned with this philosophy.

In addition to not creating their own spot bitcoin ETF offering, Vanguard also does not even allow their clients to access crypto-related products on its brokerage platform. This strong resistance to allowing their clients any access to bitcoin price exposure clearly makes Vanguard the most critical asset manager on this list in terms of its view of the cryptocurrency asset class, and some bitcoin enthusiasts have even moved their assets elsewhere in response to this policy.

In a now-infamous post on its corporate blog from Vanguard Global Head of ETF Capital Markets Janel Jackson and multiple communications with investors, the firm has consistently emphasized the risks and volatility associated with digital assets. “In Vanguard’s view, crypto is more of a speculation than an investment,” said Jackson. “This is at the root of our decision to not offer crypto products, whether our own or others.”

Vanguard claims that cryptocurrencies lack intrinsic value since they don’t generate income like stocks or bonds, and are subject to extreme price swings, which makes them unsuitable for the average investor. For longtime cryptocurrency market observers, these takes can come off as extremely naive and outdated. Vanguard also warns that even a small allocation of bitcoin in a portfolio can dramatically increase risk due to its high volatility. Furthermore, Vanguard has pointed out that while blockchain technology, which underpins cryptocurrencies like bitcoin, has the potential to improve the existing financial order, cryptocurrencies themselves are not a fit for their investment offerings.

Of course, Vanguard’s past criticisms of bitcoin and other cryptocurrencies do not necessarily mean that they will continue to take this view in the future. In fact, the financial institution’s new CEO Salim Ramji was the ETFs lead at BlackRock at the time they launched their bitcoin ETF. Such leadership could push Vanguard to reconsider digital assets as viable investment options, allowing them the opportunity to catch up with their competitors in terms of exposure to the emerging digital asset class. While this is the first time Vanguard has hired a new CEO from an external source, whether it will lead to a change in its view of the cryptocurrency market remains to be seen.

3. Fidelity ($5.3 Trillion AUM)

Fidelity was among the first major institutions to offer services related to digital assets through the launch of Fidelity Digital Assets in 2018, which was established to provide institutional clients with custody and trading services for bitcoin and other cryptocurrencies. In fact, the financial giant was mining bitcoin in 2017 as a way to learn about this emerging asset class.

Fidelity views bitcoin as a distinct asset within the broader cryptocurrency ecosystem, often referring to it as “digital gold” due to its decentralized nature, scarcity, and use case as a store of value. While they support the development of and experimentation with other cryptocurrencies and blockchain-powered technologies, Fidelity emphasizes bitcoin’s unique potential to serve as an inflation hedge and a long-term investment, distinguishing it from other cryptocurrencies that may be more speculative or tied to specific, technology-focused use cases.

For individual clients, the firm provides a cryptocurrency trading platform through its Fidelity Crypto service, allowing users to buy and sell bitcoin and ether directly within their existing Fidelity accounts. This integration simplifies the process for retail investors looking to dip their toes into digital assets, while maintaining the familiar interface of their traditional investment platform. Additionally, Fidelity has launched spot bitcoin and ether ETFs, both of which are the third-largest offerings when compared to their respective competitors.

In a previous report, Fidelity recommended an allocation of up to 5% of a young investor’s portfolio. Additionally, Fidelity CEO Abby Johnson has also doubled down on her long-term conviction around bitcoin through multiple cryptocurrency bear markets.

4. State Street ($4.3 Trillion AUM)

State Street took its first significant steps into the cryptocurrency space in 2018 through a strategic partnership with cryptocurrency exchange Gemini. The partnership with the Winklevoss twins’ exchange enabled its clients to have a bridge between traditional finance and the burgeoning world of cryptocurrencies, and was initially focused on providing a reporting mechanism for users of Gemini’s custody services. This allowed State Street’s clients to consolidate their holdings of digital assets alongside traditional investments in a single interface.

Building on this early venture, State Street significantly expanded its cryptocurrency ambitions with the launch of State Street Digital in June 2021. This dedicated division represents a more comprehensive approach to digital assets and blockchain technology, and illustrates the firm’s long-term commitment to the sector. State Street Digital aims to evolve the company’s existing digital capabilities into a unified, multi-asset platform that integrates cryptocurrency, blockchain, and other emerging technologies. This expansion goes beyond mere custody services, encompassing areas such as tokenization, distributed ledger technology, and central bank digital currencies (CBDCs).

It’s possible that regulatory issues prevented State Street from getting more involved in bitcoin and other cryptocurrencies around the time State Street Digital was launched, as the original head of the subsidiary referred to the U.S. Securities and Exchange Commission’s (SEC) SAB 121 rule–where traditional banks are required to keep an equivalent amount of cash on hand for all of the cryptocurrency assets they custody on behalf of their clients–as an “insane” policy.

More recently, there has been a strategic overhaul of State Street Digital, which initially included layoffs at the State Street department focused on digital assets. Having said that, State Street Digital has also been rejuvenated with new projects and partnerships.

Notably, a specific project explored by State Street Digital included the potential issuance of a stablecoin backed by customer deposits, according to a report in Bloomberg. And while State Street did not get involved in the bitcoin and ether ETF boom of 2024, they’re exploring more advanced, managed cryptocurrency ETF offerings through a partnership with Galaxy Digital. While they’ve taken a more cautious approach than other asset managers on this list, it’s clear that State Street sees the potential of this technology and has plans to make up for lost ground.

That said, State Street is still very much in an exploratory stage when it comes to digital assets and blockchain technology in general. The financial institution’s stance on bitcoin and other cryptocurrencies remains unclear, as they’re involved with a number of experiments in distributed ledger technology (DLT) as well. For example, State Street is a shareholder in Fnality International, which is more about making traditional institutions more efficient and productive rather than building on an entirely new monetary system on the bitcoin network.

5. Morgan Stanley ($3.6 Trillion AUM)

Finally, the fifth-largest asset manager in the world, Morgan Stanley, perfectly illustrates the average traditional financial giant’s usual evolution on bitcoin and other cryptocurrencies. While one of the bank’s analysts claimed bitcoin’s value could be zero in 2017, another analyst recently referred to the cryptocurrency’s massive growth in 2024, in addition to the development of stablecoins and CBDCs, as potential threats to U.S. dollar dominance.

While not necessarily promoting the merits of bitcoin in the past, Morgan Stanley analysts have kept an eye on the digital sector as a whole, releasing reports on the future of the asset class on a somewhat regular basis. Additionally, Morgan Stanley had bitcoin on its books even prior to the approval of various spot bitcoin ETFs by way of holdings in the Grayscale Bitcoin Trust in various funds before it was converted to an ETF.

More recently, Morgan Stanley revealed holdings of $188 million worth of BlackRock’s iShares Bitcoin Trust, in addition to smaller holdings of two other spot bitcoin ETFs. Additionally, some of its financial advisors are now able to reach out to specific clients and recommend an allocation to bitcoin via the ETFs offered by BlackRock and Fidelity. This action followed a due diligence process where the bank did a deep dive on the merits of bitcoin and its potential long-term value proposition.

Despite this new activity around the bitcoin ETFs, the bank’s own view around the cryptocurrency remains unclear, as its former CEO and current executive chairman James Gorman referred to bitcoin as a speculative asset that should play a very small role in any wealthy individual’s portfolio as recently as January 2024. That said, it’s important to remember that there can be varying opinions within institutions as large as the ones included on this list.

What These Views Mean For Bitcoin

When looking at how the five largest asset managers in the world are currently valuing and interacting with bitcoin, it’s clear that “digital gold” is here to stay. The emergence of regulated spot bitcoin ETFs in the U.S. market absolutely changed how this asset is viewed in traditional finance, and it has even forced the hands of those who aren’t at all convinced of the cryptocurrency’s value proposition. Additionally, the claims from large banks that bitcoin is nothing more than a Ponzi scheme or some other type of speculative scam are almost entirely gone.

That said, it’s important to remember that the bitcoin network’s original purpose was to replace many of the services provided by the financial institutions covered in this list, namely in the areas of payments and value storage, with a more decentralized alternative. Additionally, the emergence of Ethereum has shown that there is the potential for further disruption through the decentralization of other financial activities, such as asset exchange and lending.

While protocols like Lorenzo are helping the bitcoin network develop into a complete replacement for the traditional financial services industry, institutions such as BlackRock, Fidelity, and others covered in this article will still have a major role to play in the coming years in terms of onboarding the average person to the world of decentralized finance.

These institutions will become increasingly involved as more regulatory clarity in the U.S. (where all of these institutions are based) is achieved, and they’ll also provide critical assistance to bitcoin as key nodes on the network offering ease of use, liquidity, and a higher degree of trust in the asset. For better or worse, this acceptance from institutions that people already trust can do wonders for how the masses view bitcoin.

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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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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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Ordinals are the latest treasures of the decentralized digital realm.

Like traditional NFTs, they sit at the nexus of art, finance, and blockchain technology. Also, like traditional NFTs, news coverage has decried either their immense price or their threat to the sanctity of the blockchain industry.

Ordinals are controversial, complicated, and (in some cases) extremely valuable. No wonder crowds are blindly scrambling into whatever marketplace is selling them!

But before the hasty Ordinals investor inputs their information into the first marketplace on Google, they should know the top players and how to differentiate them. Before even this, it’s important to have a refresher on what Ordinals are.

What Are Ordinals?

Most people know Ordinals as NFTs for bitcoin. While this is technically true, the real picture is more complex.

Ordinals are serial numbers assigned to satoshis (the smallest unit of bitcoin) based on when they were mined. The Ordinals protocol inscribes additional data, such as an image or text, to a satoshi using its unique serial number.

Learn more about Ordinals:

https://medium.com/@lorenzoprotocol/the-beginners-guide-to-ordinals-9092e9db9954

This makes the associated satoshi a non-fungible token that is tradable and embedded in the bitcoin blockchain.

Inscribed satoshis are similar to rare coins; their value is no longer dependent solely on being a unit of currency but rather on being a collector’s item in its own right, i.e., possessing numismatic value beyond the minted face price of the coin. In the same vein, they shouldn’t be put in the same wallet as currency to spend because they aren’t meant to be traded equally to any other coin. This is why Ordinals require their own digital wallets; this protects users from perhaps accidentally spending the inscribed sat when they use their bitcoin wallet.

What Is An Ordinals Marketplace?

An Ordinals marketplace is a platform that enables you to trade, inscribe, and discover bitcoin Ordinals.

When Ordinals first appeared in January 2023, early adopters traded the digital artifacts peer-to-peer, primarily using Discord servers. Trading in this way carries a higher risk of being scammed, and access to the right servers is extremely limited. Ordinals marketplaces emerged to meet the demand for secure, seamless trading.

For collectors, Ordinals marketplaces offer an easy way to see new releases, recent sales, and what’s popular. Marketplace teams can also restrict bad actors and scams, making traders feel more confident when trading Ordinals.

For creators, marketplaces offer a streamlined way to enter the Ordinals realm. Creators without a technical background can benefit from straightforward inscription services and development assistance programs offered by major platforms.

Platforms offering development assistance carefully select which artists to showcase and collaborate with. These selected artists can benefit from the enhanced legitimacy and exposure that this brings.

Choosing A Marketplace

Picking the best Ordinals marketplace will largely depend on individual goals. Different marketplaces might be better for creators, collectors, or have a niche community presence.

The following are general criteria to help anyone interested in Ordinals compare marketplaces:

• Popularity: How many users are registered
• Liquidity: How many sales are being made
• Wallet compatibility: How can it connect with the needed wallet
• Security: How robust is the security of the platform
• User experience: How easy the platform is to navigate and use
• Fee structure: How expensive it is to use the platform

Top 5 Ordinals Marketplaces

These are the top five Ordinals marketplaces that every bitcoin participant should be aware of today.

Magic Eden

Magic Eden stands firmly as the largest ordinals marketplace, capturing over 60% of marketplace trading volume according to data from Dune Analytics. This makes it the most liquid marketplace for bitcoin Ordinals.

Magic Eden has brought a myriad of collector-centric features to the Ordinals space, implementing features such as bidding, rarity index, and automatic connection between their secondary marketplace and Launchpad minting platform.

The Launchpad platform provides development support to creators. Magic Eden accepts only 3% of all creator applications, so users can have confidence in the quality of the projects being featured.

Trades are subject to a 2% transaction fee. This is higher than other marketplaces on this list, but it may be worth the cost to users who want to benefit from the marketplace’s liquidity and ease of use.

Compatible with wallets: Magic Eden, Xverse, Unisat, Leather, OKX, Token Pocket

OKX

OKX has a competitive edge as a major international exchange serving users in over 100 countries. It already has the second-highest marketplace volume, and with the growth of such a large exchange, it will likely be onboarding traders at an unmatched pace.

In addition to being a marketplace, the platform features a wallet browser extension and inscription service. Users enjoy low trading fees of 0.060%, and OKX recently launched zero-fee Rune trading.

This makes OKX a fantastic combination of low cost and high liquidity. Additionally, users have access to the security and customer service of a large international exchange.

Unfortunately, U.S.-based users are unable to access the platform due to compliance and regulatory hurdles.

Compatible with wallets: OKX, WalletConnect, Phantom, Unisat, Xverse

Unisat

Unisat is a decentralized marketplace with additional wallet and inscription services. The easy-to-navigate platform makes it simple to discover new collections and stay informed of marketplace trends. Unisat also has a native wallet and a search engine that can query inscriptions within seconds.

Unisat offers 0% marketplace fees for users with over 500 Unisat points. Users who fall short of that number are subject to 0.5% trading fees. Users receive 1 Unisat point per inscription, and OG passholders receive a 20% discount across all marketplaces.

Overall, Unisat is a great platform for users who care about decentralization and low fees. The platform rewards users for participating — getting the most out of the Unisat marketplace requires users to commit time to its use.

Like other decentralized exchanges, Unisat suffers from lower trading volume and next to no customer support.

Compatible with wallets: Unisat, Xverse, Leather, OKX, Bitget, Phantom, Magic Eden, Enkrypt

Gamma.io

Gamma functions as both a marketplace and a no-code launchpad, providing a portal for artists and creators looking to make their mark in the bitcoin space. Gamma provided one of the first inscription services and at one point represented nearly 10% of all network inscriptions.

Collectors can enjoy curated collection drops while creators benefit from the Gamma Partner Program, inscription services, and handy guides to navigating creation in the NFT space.

Gamma is a destination for over 3,000 creators and 45,000 collectors. With over 600,000 items sold, Gamma facilitates fewer transactions than other marketplaces featured on this list. Still, it is well established and holds its own as an art-focused space for creators and collectors on the hunt for something unique.

Compatible with wallets: Leather, Xverse, Unisat

Ordinals Wallet

The Ordinals Wallet is the most popular Ordinals wallet on the market. To date, this wallet reports over $82 million in total trading volume, more than 470,000 wallets opened, the facilitation of over 545,000 successful trades, and more than 875,000 Ordinals Inscriptions created.

Ordinals Wallet includes a marketplace for trading Ordinals. The simple, effective design includes a list of Ordinals collections where users can track statistics like volume, change, and number of owners.

Despite its popularity as a wallet, the trading volume on the native marketplace is less than that of competitors and is more skeletal compared to the robust features of other marketplaces. Nonetheless, Ordinals Wallet stands as one of the oldest and most-respected projects in the Ordinals ecosystem.

Compatible with wallets: Ordinals Wallet, Unisat, OKX, Phantom, Xverse, Leather

Get Started With Ordinals

As Ordinals rise in popularity, the number of Ordinals markets have also grown significantly. Any of the above five Ordinals marketplaces are perfect for exploring the new world of bitcoin Ordinals.

However, it’s important to remember that this industry changes quickly and all the data provided is subject to drastic changes month over month. It’s best to keep up with the data proactively as one investigates marketplaces to interact with; the image below of marketplace trading volumes should be a great example of just how much these marketplaces can change in terms of liquidity in just one year.

Ready to take the next step towards trading Ordinals? Read our Ordinals wallet guide:

https://medium.com/@lorenzoprotocol/the-top-5-bitcoin-ordinals-wallets-4f6078f8b673

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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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