Hey there!

Welcome to the 11th episode of Onchain Lense. Today we are looking into how Bitcoin is scaling to offer Decentralised Finance (DeFi) applications through meta-protocols and layer 2 solutions.

Following things are covered in this edition of the newsletter:

• Bitcoin TVL Growth

• Ordinals, BRC-20, and Runes Transactions

• The State of the Lightning Network

• Native Token vs Ecosystem Market Caps

Bitcoin is the first cryptocurrency that was introduced in 2009 and it has steadily gained popularity over the years. As of today, it has a market capitalisation of $1.2 trillion, and is the real-time settlement layer for the entire crypto ecosystem.

Although it is the most widely adopted digital asset, its functionality is limited as compared to smart contract platforms like Ethereum, Solana, and others. Those platforms have a thriving ecosystem of DeFi applications, and NFTs, while processing many transactions at minimal costs. It is only recently that we can say this dynamic is starting to change, with the emergence of Bitcoin Layer 2 solutions, and meta-protocols. They promise to bring faster payments, borrowing and lending applications, fungible and non-fungible tokens, decentralised exchanges and many more use cases to the Bitcoin ecosystem.

The adoption of these scaling solutions has already started as it is reflected in the total value locked (TVL) numbers on the network. Bitcoin TVL was approximately $300 million at the beginning of this year, and as of today it is at $1 billion, more than triple in about six months. It reached an all-time high level of $1.37 billion in April 2024. This growth can be attributed to factors such as the launch of innovative protocols and DeFi applications that enable users to ear yield, integration with traditional financial institutions, and the general positive sentiment about the asset.

One of the major catalysts for the growth of Bitcoin DeFi has been the launch of meta-protocols on the network. They are Ordinals, a primitive that enables creation of non-fungible tokens of the smallest unit of a Bitcoin, also called a Satoshi, and BRC-20/Runes, which allows creation of fungible tokens like on any other smart contract platform. Ordinals was introduced in March 2023, and Runes in April 2024, and both have resulted in capturing a significant share of all Bitcoin transactions. Their emergence has at times resulted in very high network fees, benefiting miners responsible for processing transactions and keeping the network secured.

Another important development in Bitcoin scaling has been the Lightning Network. It is a layer 2 solution that enables faster and cheaper transactions. Users create payment channels between each other, conduct multiple transactions and broadcast them to the base Bitcoin network for settlement from time to time. As of today, the Lightning Network has 62,000 channels with a total value locked in them of 5,237 Bitcoin, which equals to about $320 million. This growth is driven by its integration with traditional businesses as well as the emergence of DeFi applications on top of this layer 2 protocol.

The value creation through Bitcoin DeFi is driven by the preference for Bitcoin blockchain to reflect the principles of decentralisation. It must serve as the base layer for tokenisation, and there is an increasing demand for greater productivity of the native asset. We are still in the early days of capturing this value, and most of it will be created by the ecosystem of fungible assets. Relative to Ethereum and Solana, the fungible token ecosystem on Bitcoin is very tiny, whereas it is close to the market caps of native assets on these other smart contract platforms.

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