Arkstream Capital: Exploration and Breakthrough of Bitcoin Layer-2
In the Bitcoin ecosystem, the rapid development of Layer-2 technology is opening up new possibilities, offering a glimpse into the future of cryptocurrency. ArkStream Capital has gathered some of the industry’s heavyweights for a discussion that reveals the latest dynamics in the exploration and breakthrough of Bitcoin Layer-2. We were fortunate to invite Jeff, the founder of Merlin Chain, Liu Hanzhi, the co-founder of Nubit, BMAN, partner at ABCDE Capital, and well-known opinion leaders in the Bitcoin ecosystem, Wizard (@0xWizard) and Lilyanna (@lilyanna_btc), to delve into the technical challenges and market opportunities as we explore the new frontier of the Bitcoin ecosystem.
Highlights of Guest Insights:
Hanzhi @Nubit: If Data Availability (DA) is the icing on the cake for the already capable Ethereum ecosystem, then it can be considered a lifesaver in the Bitcoin ecosystem.
Jeff @ Merlin Chain: The core value of the Bitcoin ecosystem still lies in its security and decentralization. Fair asset launch is an important embodiment of the Bitcoin decentralization spirit.
BMAN @ABCDE: The Fisher Equation (MV=PQ) explains why we need the Bitcoin ecosystem and why unleashing Bitcoin’s liquidity is crucial for the next prosperity in Crypto.
BMAN @ABCDE: The Bitcoin ecosystem in Asia has a unique advantage in Go-to-Market strategies, with Merlin Chain’s 3.5 billion TVL astonishing investors worldwide.
Wizard (@0xWizard): The development direction of Bitcoin Layer 2 is either community and product-focused like Merlin or technology innovation-focused like CKB. The key to uncovering opportunities in the Bitcoin ecosystem lies in making choices based on one’s judgment of industry development, opting for projects that align with one’s views and have strong execution.
Lilyanna (@lilyanna_btc): Apart from technological innovation and decentralization, a critical consideration for choosing projects is whether the project team has the willingness and capability to “cover the bases.” For example, I have experienced situations where the project team proactively compensated investors for losses, which greatly respected and reassured retail investors.
Our selected Transcript:
Warren Fang (Partner at ArkStream Capital)
Good evening, everyone. I’m Warren, tonight’s host. ArkStream Capital, founded by Crypto Native individuals, is a crypto fund focusing on primary market and liquidity strategies, investing in the most native and cutting-edge innovations of Web3, aiming to promote the growth of Web3 unicorns. Since its establishment in 2020, ArkStream Capital has invested in over 100 Web3 companies.
We will host a series of Twitter Space events in the future, inviting heavyweight guests to discuss the hottest areas with significant Alpha and discussion. Today, our Space theme is “Exploration and Breakthrough in Bitcoin Layer-2.”
Over the past year, we’ve witnessed the flourishing development of the Bitcoin ecosystem, from the dominance of the Ordinals protocol to the blossoming of various protocols, from a thin sidechain ecosystem to the widespread emergence of Layer2. Today, we are honored to have invited 5 heavy-hitting guests who have contributed significantly to the construction of the Bitcoin ecosystem early on.
Jeff (Founder of Merlin Chain)
Hello everyone, I’m honored to join this ArkStream space. Our product, Merlin Chain, launched in February, is a Bitcoin scalability solution. Currently, our daily on-chain transaction volume has surpassed 500,000, even higher in the past few days, and this is even before our Dapps have launched. Many Dapps are awaiting launch, and we plan to announce our Dapp ecosystem plan this weekend. The market performance and the overall excitement about Merlin Chain have been overwhelming, thanks to the community’s support. We hope to offer more interesting, safer, and long-term oriented products going forward. Thank you.
Hanzhi (Founder of Nubit)
Hello, I’m Hanzhi, the founder of Nubit. I pursued my Ph.D. in Computer Science at the University of California and have been involved in the security audits and proof development for multiple Ethereum and ZK Stark projects. Nubit is the first Bitcoin native data availability layer, created by a team of top scholars in the blockchain and security fields. We are well aware of the technical challenges facing the Bitcoin ecosystem, such as data availability issues. Currently, Bitcoin Layer2 solutions are limited by data throughput, resulting in high data availability costs. Nubit aims to provide a native data availability solution for the Bitcoin ecosystem, emphasizing censorship resistance and enhancing security through native Bitcoin staking solutions like Babylon. Our research team is developing a high-performance consensus algorithm specifically designed for DA, with the goal of enabling participation by over 200,000 Bitcoin stakers. Compared to existing DA solutions, Nubit is committed to achieving Bitcoin-level censorship resistance and security. We launched the Prealpha testnet in early February, attracting over 20,000 expressions of interest in testing and are now inviting early participants to build on Nubit. We are also collaborating with Doomo to develop a decentralized modular index solution based on Nubit DA, reducing communication costs through stateless computation and verifying the original protocol’s correctness. We are establishing broad cooperation within the Bitcoin ecosystem to explore Nubit’s application scenarios.
BMAN (Co-founder of ABCDE Capital)
Let me introduce myself. Hello, I’m BMAN, co-founder of ABCDE. We noticed the Bitcoin ecosystem when the Ordinals exploded in May last year, so we decided to allocate 1/3 of our fund to the Bitcoin ecosystem. We were honored to support Merlin at the earliest stage, along with Bismiley, Babylon, BRC.link, B Square, Unisat, B Layer, etc. Our goal is to support at least 10 unicorns in the Bitcoin ecosystem through our efforts. We will continue to evangelize the Bitcoin ecosystem and support its growth. We will host Bitcoin Singapore on March 9 and Bitcoin Day, collaborating with Bitcoin Magazine in May to contribute to the construction of the Bitcoin ecosystem. Thank you to all the builders and audience members here today for joining us in building the Bitcoin ecosystem.
Wizard (@0xWizard)
Hello, I’m the Wizard. I entered the Bitcoin ecosystem around the same time as Bman, around May last year. My judgment at that time was that the BTC ecosystem seemed like a new bull market engine. Therefore, I focused all my efforts on this ecosystem and was fortunate to participate in projects like ORDI, Merlin, 420, and a series of outstanding BTC ecosystem projects early on. I feel fortunate that the path I chose essentially aligns with the rhythm of this bull market. Indeed, the Bitcoin ecosystem has now become a particularly noteworthy direction.
Including today’s discussion topic, the Layer 2, which we started talking about in November last year during the inscription bull market, mainly revolved around the first-layer asset protocol issuance. I’ve discussed on Twitter before that if there’s another inscription bull market, it might focus more on generating assets and making them move. The most important venue for making assets move is the Bitcoin L2 space. So, I’m quite happy to discuss the BTC L2 topic with everyone today.
Lilyanna (@lilyanna_btc)
Hello, I’m Lilyanna, mainly a Bitcoin ecosystem science blogger. I enjoy researching innovative protocol assets and keeping an eye on technological trends. Usually, I do some popular science on Twitter, maybe posting tutorials or interpretations of new protocols and assets. Lately, I’ve been focusing more on RaaS-related projects and mainly the Bitcoin Layer 2, particularly Merlin Chain. I’ve been following Merlin and the evolution and development of the previous 420. I’m very honored to exchange ideas with all the great minds in this space today.
Warren @ ArkStream Capital
Let’s start our roundtable discussion.
The first question is, the recent Bitcoin price has broken through $69,000, largely benefiting from the approval of Bitcoin spot ETFs, which brought a large amount of incremental funds to the market. Within the crypto market, the Bitcoin ecosystem is also flourishing. Compared to the narrative of “digital gold” for value storage, what kind of narrative does the Bitcoin ecosystem tell? What stage has the Bitcoin ecosystem developed to? What is the biggest challenge to overcome?
Bman @ ABCDE
I use the Fisher Equation (MV=PQ) to explain the importance of the Bitcoin ecosystem. Bitcoin, as a reserve currency with a fixed total supply and low velocity, limits market vitality (MV). The goal of the Bitcoin ecosystem is to increase Bitcoin’s velocity (V), enhancing its liquidity, thereby promoting more asset generation and value growth (PQ). This not only unleashes the potential of Bitcoin but is also key to pushing the crypto industry into the next prosperity phase. We are working hard to encourage Bitcoin to circulate from static addresses, increasing overall market liquidity and vitality, driving industry development.
Jeff @ Merlin Chain
Last year, the narrative of Bitcoin was brought into focus by the Ordinals project, challenging previous perceptions of Bitcoin. Ordinals promoted new play methods like content on-chain and fair launches, demonstrating Bitcoin’s security and decentralization, enhancing its value as a stable and antifragile network. The expansion of Bitcoin’s narrative has shown its profound market potential, looking forward to more developers joining and promoting these ideas.
Hanzhi @ Nubit
To mature the Bitcoin ecosystem and attract more low-risk preference HOLDERS to participate, the key is to gradually solve security issues. Establishing security is not an overnight effort, and the lack of corresponding infrastructure will limit the potential of the Bitcoin ecosystem. The blockchain industry has been building trust, exploring native staking, and cross-chain solutions for years, which are challenges that need to be overcome.
@0xWizard
The narrative development of the Bitcoin ecosystem presents several new trends. Besides traditional fund inflows like ETFs, I see a few key directions: first, the assetization of content, represented by protocols such as BRC20 and 420, exploring turning content into on-chain assets. This not only strengthens the consensus and security of the Bitcoin chain but also provides new play methods and narratives. Another direction is asset issuance based on the UTXO model, fundamentally different from Ethereum’s account model. Under this model, protocols exploring UTXO-based asset issuance methods, like atomical, RGB, ruins, bring entirely different new play methods to the Bitcoin ecosystem than Ethereum.
I’m also paying attention to Layer2 solutions like Merlin, which pave new paths for asset liquidity and Bitcoin DeFi plays like swaps, staking, and IDO platforms. New asset issuance modes based on UTXO, like RGB and Ruins, signify unseen market vitality and innovation.
@Lilyanna_btc
The challenges include lowering the barrier for new users, enhancing transaction efficiency, reducing costs, especially through technological simplification and Bitcoin Layer2 solutions. For example, protocols like Runes and Bitcoin Layer2 solutions like Merlin, through technological innovation and structural optimization, have improved transaction efficiency and reduced costs, solving usability barriers in the Bitcoin ecosystem. These advancements are expected to propel the Bitcoin ecosystem into the next development stage.
Warren @ ArkStream Capital
This question is mainly for Jeff and Hanzhi. As developers, what do you think is the most important thing in building a new BTC Layer2? Is it technology, market, developers, funds, or something else?
Jeff @ Merlin Chain
My view emphasizes two points: practical operation and user demand.
Firstly, as the market has entered a bull phase, it’s crucial to maintain practical operability. Many Bitcoin Layer2 or sidechain projects struggle to progress due to choosing impractical solutions. For instance, the lack of smart contracts in Bitcoin’s first layer multi-signature function limits the security and practicality of asset cross-layer transfers. Therefore, selecting feasible solutions and not missing market opportunities is crucial.
Secondly, the focus should be on user demand rather than just pursuing technological innovation or satisfying the wishes of a specific small group. Like city construction, blockchain ecosystem construction should pay attention to its culture, operating mechanism, and how to meet the needs of those living in it. For example, the existing users, assets, and community enthusiasm in the Bitcoin ecosystem show its intrinsic value. Ignoring these elements would make it difficult for new projects to succeed.
Regarding technology choice, most developers are familiar with the EVM ecosystem, not the UTXO model. Therefore, adopting EVM for Bitcoin Layer2 projects can lower the development barrier, attracting more developers to participate. This is not only an adaptation to reality but also a better service to the user and developer community.
Hanzhi @ Nubit
As a developer, I’m eagerly anticipating the technical progress of Layer2, especially the implementation of the BitVM solution. I hope such technology can solve user experience and interaction issues similar to state channels (e.g., the Lightning Network). From the current competitive landscape, the focus should be on the prosperity of the ecosystem, closely related to the project team’s mindset, marketing strategies, and relationship with the community. In other words, we should develop products based on community needs. To support developers in building community-favored infrastructure on the DA chain, reliable infrastructure, high community participation, a good ecosystem, and an attractive story are needed to draw more developers into Bitcoin ecosystem development. The prosperity of the ecosystem and the growth of the community size are mutually reinforcing. The growth in community size will attract developers because they are drawn to the large user base and active community, further promoting ecosystem construction. Different solutions have their strengths, but the key to success lies in the choice of ecosystem.
Warren @ ArkStream Capital
We’d also like to ask Bman, as an investor, what’s your view on this sector?
BMAN @ ABCDE
We expect to see at least 10 Bitcoin Layer2 projects with a market value of over 1 billion USD, considering Bitcoin’s current 1 trillion USD market value and its stronger liquidity demand compared to Ethereum. We believe the development of Bitcoin Layer2 will go through two phases: first, the market entry phase, focusing on attracting the ecosystem and total value locked (TVL). In this phase, Asian projects like Merlin show strong competitiveness. Next, the phase of technical originality and orthodoxy, where technological innovations like BVM drive development. We invest in projects that stand out in these two phases, aiming to invest in at least 10 Bitcoin Layer2 projects. We believe these Layer2 projects will promote the prosperity of the Bitcoin ecosystem, attracting more developers and users to participate.
Warren@ArkStream Capital
Next, we will discuss the ecosystem applications on Bitcoin Layer 2, especially compared to Ethereum-led DeFi and games. I would like to ask developers and opinion leaders, like you, what types of applications do you hope to see on Bitcoin Layer 2? For opinion leaders like Lily and Wizard, as market participants or users, which applications do you prefer? Traditional DeFi or Dex derivatives exchanges, or more innovative applications?
Jeff @ Merlin Chain
Our upcoming Merlin ecosystem will showcase the application portfolio we are building on Bitcoin Layer 2. First, like any blockchain, basic products such as data services, oracles, cross-chain protocols, and DEXs are necessary, similar to essential infrastructure like fire stations, hospitals, and police stations in a city. Second, we pay special attention to the innovation of Bitcoin-native applications, an area many teams and VCs have not fully appreciated. We support innovations in Bitcoin-native product forms, such as the Blue Wand on 420 and Mineral. These innovations reflect a quick response to past blockchain needs unaddressed, such as using Layer 2 to reduce costs, improve efficiency, and increase user traffic. Third, we explore how the Bitcoin ecosystem can better solve problems that Ethereum could not, such as conducting AI projects on Bitcoin and providing censorship-resistant, immutable communication and social platforms. These three points are the focus for Bitcoin ecosystem developers in the future.
Hanzhi @ Nubit
As an ecosystem builder, I hope to see applications that not only embody Bitcoin’s characteristics but also integrate better with the main net. The Bitcoin inscription ecosystem is a core and vast ecosystem. Establishing safer, less attackable indexing standards on Bitcoin Layer 2 to ensure the ecosystem runs smoothly would be highly beneficial. Based on these indexes, we can build oracles and chain bridges on Layer 2, thus deriving a series of applications closely related to the inscription ecosystem. I believe the future development of the ecosystem should not be limited to the Ethereum model but should incorporate the unique features of the Bitcoin ecosystem more.
Warren @ ArkStream Capital
We’d like to ask the two KOLs, could you share your experiences in discovering alpha and holding positions, and how such experiences can be applied when facing a new track like BTC Layer2?
@0xWizard
My current focus on Bitcoin Layer2 projects is mainly on Merlin and CKB, each with its unique advantages. Merlin deeply understands the native Bitcoin community, focusing on content assetization, like BR320 and Audience protocols. Their projects showcase a deep understanding of community needs and trend grasping. CKB shows innovation in technical solutions, such as the BDVM solution, exploring asset issuance and smart contract capabilities on top of UTXO, demonstrating a deep mastery of technology.
When choosing Bitcoin Layer2, it’s important to see how projects match community needs and technology trends. Merlin, with its strong operational capability and community-driven strategy, has already demonstrated a leading position in TVL, representing a development direction centered around products and community. On the other hand, CKB, with its technological innovations, develops asset issuance and smart contracts on UTXO, presenting a new path different from traditional models.
My view is that the development direction of Bitcoin Layer2 is either community and product-focused like Merlin or technology innovation-focused like CKB. The key to finding opportunities in the Bitcoin ecosystem lies in making choices based on one’s judgment of industry development, selecting projects that align with one’s views and have strong execution.
@Lilyanna_btc
My main focus is currently on Merlin Chain. I’ve been following this project, team, and community. In my observation, a very apparent theme is respect, which I summarize in one word. When choosing an ecosystem or deciding to invest one’s valuable BTC into a project, it’s not just about the technology or potential profitability. The primary considerations are the project’s stability and whether its token economy is reasonable, ensuring fair returns for investors.
Apart from technological innovation and decentralization, a critical consideration for me in choosing projects is whether the project team has the willingness and capability to “cover the bases,” i.e., support investors in adverse situations. For instance, I’ve experienced cases where the project team proactively compensated investors for losses, which greatly respected and reassured retail investors.
Regarding the issue of TVL (Total Value Locked), some people worry that high TVL means less return. However, I believe that high TVL and a large user base actually signify the project’s popularity and trustworthiness. Like choosing a restaurant, people tend to prefer ones with waiting lines over empty ones. This is a choice of the community and the market, indicating trust and certainty.
In exploring new opportunities, my approach is based on my experience with the 420 project, first paying attention to community feedback and official information. Especially in Layer2, I focus on whether projects adhere to a bottom-up principle, i.e., respecting the community. I also note that asset issuance must occur on the first layer to ensure the reliability and future value of assets. Moreover, the project’s wallet compatibility is a crucial consideration, especially for Bitcoin users.
Warren @ ArkStream Capital
It’s been a great conversation. A big thank you to Jeff, Hanzhi, Bman, Wizard, and Lilyanna for your insights today! Whether it’s your perspectives, alpha information, or your views on the Bitcoin ecosystem, you’ve provided a lot of food for thought for both me and our audience.
At ArkStream Capital, we’re very optimistic about the development of Bitcoin’s Layer 2 in this cycle. We’ve actively invested in several Bitcoin ecosystem projects, including Merlin Chain and Nubit. Tonight, we’re also releasing a research report to delve into Merlin Chain’s technology stack and ecosystem development. Please follow ArkStream on Twitter for more high-quality alpha content and Twitter Spaces.
Thanks to all our guests and the audience!
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