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Bitcoin Is Replicating Ethereum's Utility, And Investors Are Getting Excited

Bitcoin Is Replicating Ethereum's Utility, And Investors Are Getting Excited

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The days of Bitcoin's value going through the roof, with gains of 100x or even 1,000x, appear to be a thing of the past. But there is a lot of activity going on behind the scenes that might yet give Bitcoin's price growth some renewed momentum. 

Since Bitcoin was first created by Satoshi Nakamoto in 2009, its utility has always been pretty  simple. It's mostly seen as a store of value, and an alternative currency that allows users to transact in a peer-to-peer and decentralized way, outside of the influence of banks. These use cases initially resulted in some explosive gains, but those days have long since fizzled out. 

The problem is that, with its limited utility, Bitcoin is unable to support the kinds of ecosystems that have sprung up on rival blockchains such as Ethereum.

"It typically has not been viewed as the blockchain on which you can build," Chainalaysis said in a report in March. 

The lack of smart contract capabilities on Bitcoin puts it at a serious disadvantage to Ethereum and other chains. On Ethereum for example, investors can transact Ether for hundreds of different cryptocurrencies, referred to as ERC-20 tokens, engage with DeFi lending and yield farming applications, buy non-fungible tokens or NFTs, and more besides. With Ethereum now said to be heading towards its own spot ETF approval, the driving force behind Bitcoin's recent bullish run could trigger a similar appreciation for ETH. 

But there's another dynamic added to the mix, for Bitcoin is finally able to match Ethereum's flexibility. 

Bitcoin's booming L2s

Bitcoin developers have spent years trying to make the number one crypto asset more like Ethereum, but until recently those efforts never amounted to anything that took off. But this time, things are different, with a new generation of Bitcoin Layer-2 networks and sidechains finally making some progress in expanding the functionality of BTC, as well as developments on Bitcoin itself, such as the Ordinals protocol. 

Bitcoin L2s such as Mintlayer and Stacks are bringing to life the concept of "Bitcoin DeFi". MintLayer has built a layer that sits atop of the Bitcoin blockchain, and is building an ecosystem that enables native BTC tokens to be used with decentralized applications. Meanwhile Stacks uses a novel Proof-of-Transfer consensus protocol to settle its transactions on Bitcoin's blockchain, and is building a similar ecosystem of Bitcoin-based dApps. 

Some examples of Bitcoin DeFi dApps include ALEX, a DeFi hub that offers BTC lending and borrowing services, where users can lend their BTC tokens to others using smart contracts and earn a fixed annual yield for doing so. They can also borrow BTC using other crypto assets as collateral. 

ALEX has plans to build a Bitcoin-based DEX platform for trading Bitcoin-based tokens, as well as a yield farming platform for more complex DeFi activities, and a launchpad for other startups wanting to build on Bitcoin. 

Another Bitcoin DeFi protocol making waves is Solv, which has pioneered a liquid yield token called SolvBTC. This token gives BTC users the ability to earn compounding interest on their savings. It boasts integrations with Ethereum, Arbitrum, BNB Chain, and others, allowing SolvBTC to be used as liquidity in Bitcoin DeFi markets. 

Solv has gotten significant attention from Bitcoin users and recently attained a big milestone when it reached over $1 billion in total value locked to become the 32nd ranked DeFi protocol in the entire crypto industry, according to this metric. More recently, it has been looking to expand the utility of SolvBTC, such as by launching a new SolvBTC yield vault on Ethena, a yield farming dApp. With this, users can deposit SolvBTC to earn a combination of USDe stablecoins and satoshis (the smallest division of Bitcoin) as interest. 

The promise of Ordinals & BRC-20

Another equally exciting breakthrough is the Ordinals protocol, which makes it possible for Sats to be inscribed in order to create new digital assets such as BRC-20 tokens and NFTs on the Bitcoin blockchain. 

BRC-20 is an experimental token standard that relies on Ordinal inscriptions to mint and transfer fungible tokens on the Bitcoin blockchain. The BRC-20 tokens can be likened to ERC-20 tokens on Ethereum. Since launching in late 2022, Ordinals have driven huge activity within Bitcoin's ecosystem, and tens of thousands of BRC-20 tokens have been minted, achieving a combined market cap exceeding $2 billion

Most of these BRC-20 tokens don't really serve much purpose, as the majority are memecoins such as PEPE, or NFT collections of questionable value, such as Ordinal Punks, Bitcoin Shrooms and Bitcoin Rocks, though they have traded at some impressive values. 

That said, BRC-20 tokens have a lot of potential as they can replicate pretty much anything that has been built on Ethereum. For instance, they can be an alternative payment method for commercial platforms, metaverses and remittances. 

BRC-20 tokens can also be utilized in DeFi protocols as they support smart contracts. So they can be integrated with Bitcoin-based DEX platforms, lending protocols, yield farming systems and more. The tools for doing this are already in place. For instance, OrdinalsWallet has created a platform for minting new BRC-20 tokens and Ordinals NFTs, and is already seeing some adoption. 

In addition, BRC-20 tokens can be used to tokenize real-world assets, which is a use case on Ethereum that many believe has enormous potential. Tokenization enables fractional ownership of previously illiquid assets such as real estate and luxury art, making them accessible to millions of retail investors. Perhaps the most successful example of tokenization is USD stablecoins such as Tether and USDC, which are digital tokens that represent real world dollars on the blockchain, and can be exchanged on a one-for-one basis with fiat. 

Because BRC-20 tokens can support all of these use cases just as well as Ethereum, there's potential for Bitcoin to grow an enormous ecosystem, especially as the TVL locked in Bitcoin far exceeds any other cryptocurrency.

Bitcoin's next bull-run?

Some analysts speculate that these exciting new developments could spark a new bull run for BTC in the next two-to-three years. 

In a recent interview with Business Insider, Bitget Chief Executive Gracy Chen said that by replicating the functionality of Ethereum, Bitcoin's price could grow by five-times its current value. She based that forecast on the current TVL of assets staked on Bitcoin now, noting that it's roughly the same as the amount of TVL staked on Ethereum prior to its astonishing gain of 3,702% from 2020 to 2021. 

If BRC-20 enjoys the same pace of adoption as ERC-20 did back then, it will likely spark a big increase in the value of BTC, though she expects much more muted gains considering the high price of BTC already. Bitcoin won't grow as much because it already has a well-established user base and it's subject to increasingly stricter regulations, Chen said, but there may still be a significant increase.

She said that "even a twofold weaker surge could still result in a fivefold increase" in the value of BTC. 

As with everything in crypto, nothing is guaranteed. Investors should take note that BRC-20 remains an experimental standard and it's still in the very early stages of development. It remains to be seen what security-related shortcomings might arise from the adoption of BRC-20 tokens and protocols. There are some negatives to consider too, such as the added network congestion caused by trading of BRC-20 tokens. 

That said, people are working to solve these problems too, and there's a lot of optimism about the benefits that Bitcoin's Layer-2s, BRC-20 and Ordinals will bring to the table. One thing that seems certain, is that Bitcoin will continue making headlines for some time to come. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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