This is an editorial by Zack Voell, a market researcher and bitcoin miner.
One of the more interesting and controversial developments in the Bitcoin ecosystem are off-chain use cases. Many of these applications are not technologically identical, but all expand the list of potential use cases beyond the Bitcoin base class for a given bitcoin holder. And some of these products are completely outside the Bitcoin economy.
This article does not take a position on the unique value of any specific off-chain use for Bitcoin, but it does summarize some of the growth trends and data provided showing growth and pressure. used on Layer 2 protocols, bitcoin-backed tokens, and more. Using bitcoin in these ways is not suitable for every investor, but anyone interested in the wide range of Bitcoin adopters should take note of these trends to better understand where and how bitcoin works. moving.
Definition of ‘Offline Bitcoin’
Before looking at some of the data, this section hopes to minimize some of the potential mental blocks or prejudicial critiques the reader may have about these applications that could color the interpretation. their objective data in the following sections.
The all-category of “off-chain” bitcoin does not imply that all protocols mentioned hereafter are identical or even nearly equivalent. But it is a viable enough label for these tools to provide applications for bitcoin that are not directly on top of the base layer. Some of these share the characteristics of just holding assets on a custodial exchange, but one key difference is that almost all of these protocols are unlicensed, closed source. or centralized as exchanges. The following data focuses on these open financial instruments for alternative bitcoin use.
Bitcoin Layer 2 Capacity Overview
Protocols built in layers of Bitcoin technology on top of the base layer blockchain are often criticized for their meager adoption. Usually, these criticisms come from proponents of alternative blockchains. However, the data shows that growth has remained steady even if relatively slower.
The colored area chart below shows the bitcoin supply on Lightning Network, Liquid network and RSK in the past two years. It is clear that out of these three categories, some are seeing supply grow faster than others. But the overall growth trajectory is in stark contrast to bitcoin at present price action. Despite the bear market, adoption continues.
However, these three “bitcoin-based” protocols are not alone. Other Bitcoin contiguous networks like Stacks also support a synthetic bitcoin asset class. Built with the motto “Unleash Bitcoin’s Full Potential“Stacks announced the offering of a wrapped form of bitcoin in January 2021. The asset uses the ticker symbol xBTC.
Encrypted Bitcoin Data Overview
It’s no secret that synthetic bitcoin products on other blockchains are often ridiculed on Twitter and not widely used or welcomed by the broader Bitcoin community. But the data shows that a non-trivial number of bitcoin investors are increasingly using bitcoin-backed tokens.
The best example is the development of Wrapped Bitcoins (WBTC), an ERC-20 token launched by BitGo. The chart below is taken from Unit shows an unusual growth in the supply of WBTC over the past two years regardless of any bitcoin price action:
BitGo’s bitcoin-backed token is not the only asset of its kind on Ethereum. Six Other groups have launched similar assets, including tBTC, pBTC, yuan and more. Each offers slightly different features and protocol architectures to serve different user demographics.
Ethereum is also not alone in supporting synthetic bitcoin products beyond the Bitcoin blockchain. Other chains launched these products later as gimmicks (e.g.: Tron) or to try and mimic the success of Ethereum’s bitcoin-backed tokens (e.g.: Solana and avalanche). But Ethereum is by far the network with the largest number of synthetic bitcoin assets, thanks in large part to the “DeFi Summer” craze of 2020.
The bar chart below shows the current aggregated bitcoin supply on alternative blockchains:
Are These Bitcoin Products ‘Good’?
Mention cryptographic bitcoin products in a crowd and reactions are bound to be polarizing. In mainstream Bitcoin communities, Layer 2 protocols (e.g. Lightning and Liquid) are the easy ones to love, and their adoption is steady, even if relatively slow.
So, are these products “good”? All of these off-chain uses for bitcoin have various trade-offs, but the unique utility of each cannot be ignored. The question is whether people should choose a way to spend their money. Because being the reserve asset – of the global fiat economy or the internet-based “cryptocurrency” economy – is bitcoin’s most commonly accepted purpose, the products that achieve it, in general, are This goal should be encouraged. Lightning promotes utility in the Bitcoin native economy in the same way that tokenized bitcoin has had a direct and obvious effect on bitcoin, serving as a form of reserve asset for non-Bitcoin-based sectors of the world. broader cryptocurrency market.
Hypothesis is another common concern with most bitcoin financial products. Importantly, this concern does not apply to these off-chain products. The lack of re-hypothesis for Lightning products is obvious. And, in fact, nearly all of these products built on and off the Bitcoin protocol are designed to serve bitcoin-backed or swap-for-one assets, whether it’s a one-off simply transfer bitcoins from the base layer to the Lightning Network, or swap “real” bitcoins for bitcoin tokens to be used on other blockchains. For example, one of the top encrypted bitcoin products maintained by BitGo, publish proof of reserves backs the bitcoin tokens it has issues with.
The Future of Bitcoin Offline
Readers ideologically rejecting the inherent equalizer to cryptographic bitcoin products will certainly not be persuaded by anything in this article to change their minds, nor will they. criticized in this article. The purpose of this data and analysis is simply to show that some people (in fact, an ever-increasing number) see value in their choice to use bitcoin somewhere besides the Bitcoin blockchain – and even places outside of the original economy Bitcoin. After all, HODLing in cold storage is as valid for a use case as encryption.
This is a post by Zack Voell. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
