“The beginning of the blockchain world is Bitcoin, and the endgame is the Bitcoin ecosystem.” - Jademont, co-founder of Waterdrip Capital

On December 20, 2023, the POWER 2023 HONG KONG WEB3 summit was held at Cyberport.

During the summit, Jademont, co-founder of Waterdrip Capital, delivered a keynote speech on the theme of “The Beginning and Endgame of the Blockchain World,” sharing insights on the development of the Bitcoin ecosystem, the second growth curve of miners, significant Bitcoin upgrades, the evolution pathway of blockchain technology, Ethereum, RWA, Lightning Network, Nostr protocol, and other aspects.

Key Highlights:

• The total computing power of the Bitcoin network has increased from 10 billion in 2021 to over 50 billion, a fivefold increase.
• The Lightning Network may become a global settlement network, and data packed on the Lightning Network layer1 will increase miners’ income to some extent.
• The blockchain world is evolving along two pathways: the Asset Pathway and the Technological Evolution Pathway.
• The market value of the Ethereum ecosystem is similar to that of Ethereum itself; the market value of Bitcoin itself is three times that of Ethereum, so the market value of the Bitcoin ecosystem is expected to catch up with or even exceed that of the Ethereum ecosystem.
• Ethereum’s advantage lies in its account model, suitable for the development of RWAs.
• It is expected that eventually, 10% of Bitcoin will be locked in the Lightning Network or Bitcoin layer2 network.
• If Bitcoin represents the first time in human history that private property has been secured by technological means, then Nostr represents the first time in human history that individual speech has been safeguarded by technological means.

The following is an excerpt from the speech by Jademont, Co-founder of Waterdrip Capital.

In the early days of the blockchain world, everything revolved around a single concept: Bitcoin. Reflecting on the year before 2014, it’s clear that Bitcoin was the entirety of blockchain.

Back in 2013, launching a project was a grassroots endeavor — it meant engaging directly with miners or community nodes, posting announcements on Bitcoin Talk, and then diving into the mining process together.

This approach is very similar to the popular inscription today. Project initiators had no inherent advantage, save for one: being an integral part of a nascent, tightly-knit community. the community was in the early stages of development and was small in size. As part of the community, the project parties could be more involved but also had to spend money as a cost. This foundational period, as I see it, set the stage for the evolution of blockchain.

The Current Development Status of the Bitcoin Ecosystem

Over the past 14 years, since its inception in 2009, Bitcoin has evolved significantly, now boasting over 16,800 full nodes worldwide. This figure, while seemingly modest, represents the backbone of Bitcoin’s infrastructure, supported by millions of mining machines tirelessly working to maintain and forward transactions. These nodes, often operated by dedicated miners, are critical not just for transaction verification but also for providing quick data access to numerous Bitcoin-based entrepreneurial projects.

As shown in the presentation, we can see that the nodes are already distributed globally. Therefore, the Bitcoin ledger is the most secure ledger in the Bitcoin ecosystem, or in other words, the entire blockchain world, maintained by more than 16,800 full nodes. On the PPT, we can also see that the computing power has been continuously and rapidly growing.

As a simple example, Waterdrip Capital’s initial foray into capital growth was significantly fueled by mining activities, a venture we chose not to pursue post-2021, leaving only our legacy machines in operation. This pivot came at a time when issue of green carbon led to regulatory changes in mainland China, effectively banning blockchain mining and prompting miners to seek opportunities abroad.

I remember very clearly, during the mining ban in 2021, it was a bull market, and the total network hash rate reached a record-breaking 100 EH/s. Fast forward just over two years, and the hash rate has escalated by fivefold, reaching over 50 billion. This exponential growth underscores the intense competition within the mining sector, where today’s output per machine is merely a fifth of what it was a couple of years ago.

The decrease in Bitcoin mining efficiency is not favorable for miners and the Bitcoin network because a reduction in miners’ income means that the number of nodes willing to mine may not continue to grow or may even decrease, making the Bitcoin network potentially less secure. Therefore, how to increase miners’ income is, to a certain extent, equivalent to how to make the network more decentralized and secure.

In addition to the fixed block reward, miners are also looking for a second growth curve. A path has already been taken, which is script engraving. Recently, the mining income for each Bitcoin block has basically doubled, or at least increased by more than 50%.

Transaction fees have become a significant part of the block reward, even exceeding the fixed block reward in some blocks. After the number of block outputs halving in 2024, transaction fees may often exceed the block reward, forming the second growth curve for miners.

Of course, there are some controversies regarding inscription, namely: compared to the value filled with a large amount of low-cost script engraving, the 4MB blocks on Bitcoin Layer 1 are more precious. We must prioritize the transmission of Bitcoin itself. A large amount of junk inscriptions certainly occupies the precious space of Layer 1. So, our view is that there can be inscriptions on Layer 1, but not too much. Some script engraving can be developed on Layer 2. When Layer 2 is mature enough to support enough functions, then the data or transactions that interact with Layer 1 can have significant value. If this value exceeds the Bitcoin on each block transmitted by Layer 1, this data cannot be considered insignificant.

Satoshi Nakamoto, in the early years of Bitcoin version 0.1, wrote a piece of code about the Lightning Network, with a vision to support Layer 2. He expressed in 2009 that 20 years from now, the Bitcoin network will either be worth nothing, or it will become the global settlement network. The realization of a global settlement network will definitely be on Layer 2 rather than Layer 1.” In summary, the Lightning Network could potentially be a backbone of a global settlement network, and its data being packaged onto Layer 1 could also increase miners’ income, which would be the second growth curve.

Regarding the Vital Upgrades of Bitcoin

While newcomers post-Ethereum may view Bitcoin’s last decade as stagnant, focusing solely on its basic transfer capabilities, the reality is that Bitcoin has undergone several very important upgrades. In 2012, Bitcoin introduced multi-signature technology.It was quite basic, supporting up to 15 people at most.

This is why Bitcoin was basically not involved in the last DeFi craze, because only WBTC and rBTC, these two tokens, crossed from the Bitcoin chain to the Ethereum chain in a multi-signature way, and because of their centralized characteristics, users did not dare to use the cross-chain function confidently, but now there are decentralized Bitcoin cross-chain methods.

The SegWit upgrade in 2017 has greatly increased the throughput and scalability of the Lightning Network. Something that the Ordinals inscription community and BRC-20 community should be thankful for, is the Taproot upgrade of 2021. This milestone not only spotlighted Bitcoin’s untapped potential for scalability and programmability but also aligned with Waterdrip Capital’s strategic pivot towards the Bitcoin ecosystem as a focal investment theme, recognizing the dawn of Bitcoin 2.0.

Despite Taproot’s potential to revolutionize the blockchain landscape, its launch coincided with the peak of the bull market frenzy surrounding NFTs, GameFi, and DeFi, leading to its underappreciation.Only within the Bitcoin OGs, people praised the advantages brought by this upgrade. Even many OGs who entered the field very early in 2013, having made enough money, felt that Bitcoin could realize more possibilities after a long silence and thus re-entered the industry to start new ventures. It is precisely because of the community’s neglect of Taproot technology that most people missed out on the Ordinals wave, especially users from the Ethereum community or other public chains.

Exploring Blockchain’s Evolution

The journey of blockchain technology post-Bitcoin is marked by two pivotal paths of evolution, shaping the industry’s future and unlocking new avenues for growth and innovation.

Asset Pathway: It’s straightforward: it involves contemplating methods to funnel traditional industry capital into the blockchain realm. This could be achieved through avenues such as DeFi, GameFi, BTC, or leveraging various DePIN concepts on Solana, among other tangible products. As long as traditional capital can be integrated into the blockchain industry, the industry’s assets will surge, making it a promising entrepreneurial path.

Technological Evolution Pathway: Technology must always serve humanity, delivering lower costs and higher efficiency. Let’s examine the technological evolution of the entire blockchain world post-Bitcoin. In the early days, Bitcoin 1.0 and various coins and chains in the blockchain industry were primarily capable of executing transfers — a straightforward process of issuing an asset transfer, with each chain supporting only one asset.

Later, people began considering whether assets could be issued on this chain and programmed with simplicity. Consequently, some projects were born at that time. However, due to their typically hard-coded smart contracts, they lacked flexibility and couldn’t be upgraded online. Each upgrade required miners to collaborate and fork, making the process complex and insufficiently decentralized. Subsequently, a revolutionary Blockchain 2.0 product emerged — Ethereum. Ethereum’s primary contribution lies in its realization of flexible, upgradable smart contracts, which are Turing complete. With Ethereum’s launch, competitors to Ethereum, also known as ETH killers, emerged.

In my view, ETH killers and Ethereum belong to the same generation of products. These products aren’t flawless; they often sacrifice one aspect to achieve another. For example, EOS sacrificed decentralization for greater efficiency. It’s worth noting that during the Blockchain 2.0 era, product performance was lacking, and products didn’t reflect the final outcome desired by everyone. Therefore, many attempted to improve Ethereum to present a better state.

In 2017 and 2018, discussions surrounding mainstream scalability solutions such as BCH, BSV, large and small blocks primarily pertained to Layer 1 expansion. This is because Layer 1 scaling enables complete decentralization. Unfortunately, even highly anticipated technologies like sharding presented significant technical challenges, with the Ethereum Foundation still grappling with unresolved issues after several years of research and development. Feeling the pressure of competition from other public chains, Ethereum ultimately decided to pivot its scalability approach to Layer 2 scaling, specifically Rollup, which gave rise to layer 2 networks.

However, layer 2 poses a critical issue — it is excessively centralized. It’s essential to recognize that Ethereum Layer 2 is essentially centralized. It lacks a blockchain and consensus mechanism, relying solely on a centralized sequencer to order, package, and interact with Layer 1 for validation by Layer 1 nodes. While it may seem to address trust issues, in reality, it is highly inefficient and the sequencer is prone to crashing. Just a few days ago, both Arbitrum and zkSync experienced crashes due to the inability of simple inscriptions to withstand excessive traffic. The sequencer’s crash results in the entire network becoming paralyzed. From this perspective, this Layer 2 scaling solution is not optimal.

Looking ahead to Blockchain 3.0, several potential development directions are worth noting. For example, full support for scalability at layer 1, such as Ethereum sharding, could be a game-changer if it achieves technological breakthroughs, offering Ethereum a chance to continue its development. Additionally, for current centralized Layer 2 solutions, they could easily be implemented on Bitcoin, offering a user experience and development difficulty similar to deploying on Ethereum, with only differences in the token used for gas fees and data availability.Of course, Bitcoin also has its native layer 2 solutions, such as RGB and Nostr, which are viable decentralized protocol solutions.

In summary, as illustrated in the slides, the size of the square represents market capitalization. Bitcoin’s market capitalization is over three times that of Ethereum, yet the market capitalization of the Ethereum ecosystem is similar to Ethereum’s market capitalization itself. The market capitalization of the Ethereum ecosystem encompasses the total value locked (TVL) in all projects on Ethereum, amounting to approximately $300 billion.

Currently, the majority of the Bitcoin ecosystem’s market value is derived from Inscription, with several Layer 2 solutions still in testing, totaling less than $5 billion. However, Bitcoin’s market capitalization itself is three times that of Ethereum, indicating significant potential for growth. This presents a significant alpha opportunity, possibly leading to the market capitalization of the Bitcoin ecosystem surpassing or equaling that of the Ethereum ecosystem in the imminent bull market. We are currently in the early stages of a bull market.

RWA Remains an Opportunity for Ethereum

Certainly, the potential within the Bitcoin ecosystem is immense, but this doesn’t imply that Ethereum lacks opportunities. One such opportunity lies in Real World Assets (RWAs). Because DeFi is currently favoring layer 2 solutions, it’s foreseeable that many DeFi projects will migrate to Bitcoin’s layer 2. In fact, some prominent Ethereum layer 2 teams are already transitioning to Bitcoin’s layer 2, such as Starknet.

One advantage Ethereum holds over Bitcoin is its account model, where interactions with contracts are conducted using the same address. However, its drawback lies in its lack of privacy; interactions with frontend web pages like MetaMask can easily be tracked back to individuals via retained IP addresses. In other words, Ethereum, along with various public chains, or the various addresses associated with this type of POS account model, are highly insecure. This insecurity refers to the vulnerability when engaging in malicious activities; of course, they are secure when used for legitimate purposes.

Bitcoin, on the other hand, utilizes UTXO, resulting in additional addresses with each transaction, making tracking difficult and ensuring strong privacy. However, the process is more cumbersome. Additionally, as RWAs typically undergo KYC, they are better suited to integrate with Ethereum in terms of privacy.

Therefore, for those who prefer Ethereum over the Bitcoin ecosystem, I recommend focusing on the RWA track, as it aligns well with Ethereum. However, besides RWAs, GameFi, DeFi, and other sectors can also migrate to the Bitcoin ecosystem.

Endgame: The Bitcoin Ecosystem

When it comes to the endgame, in my personal view, or rather the conclusion of Waterdrip Capital, it’s Bitcoin at the beginning and the Bitcoin ecosystem at the end. One of the most promising aspects of the Bitcoin ecosystem is Bitcoin’s Layer 2. This is because Layer 1’s capacity is too limited, and the rise of Inscription has sparked significant controversy, leading to inflated gas fees. We’re unable to enter the stage of massive adoption. We can only build Layer 2 solutions.

In January 2024, everyone can expect to see Bitcoin’s Layer 2, offering a user experience identical to Ethereum. For example, the BEVM project currently in the testnet phase is experiencing rapid growth in Total Value Locked (TVL). Another noteworthy project is Nostr and the Lightning Network.

Lightning Network

To understand the Lightning Network, we must trace back to Web2.0. It primarily involves two aspects: messaging over the internet and payment-related transactions, such as purchasing memberships, and so on. The Lightning Network is a decentralized asset transfer protocol, while Nostr is a decentralized messaging protocol. Both operate at the level of one million transactions per second (TPS), a level that no public chain, whether it’s Layer 2 or Layer 3, can achieve.

RGB employs native off-chain computation and client-side validation, making it extremely fast. It can serve as an extension protocol for the Lightning Network, supporting complex smart contracts. However, RGB is still relatively early-stage; it may take up to six months to implement a simple token issuance smart contract.

Regarding the Lightning Network, it’s worth noting that a snippet of code related to state channels was included in Bitcoin’s 0.1 version codebase, making the Lightning Network in line with Satoshi Nakamoto’s vision and considered the orthodox Layer 2 solution for Bitcoin.

Technically, the Lightning Network only needs you to remember two core concepts. One is RSMC, the Revocable Sequence Maturity Contract, which enables trading parties to collateralize Bitcoin. For instance, by collateralizing 10 bitcoins, a user can conduct business worth 10 bitcoins, or by collateralizing 100 BTC, a user can conduct business worth 100 bitcoins. This is the first core technology. Of course, a network can be formed through some shared intermediary nodes, which is why we call it the Lightning Network.

It can be predicted that if the Lightning Network continues to evolve, a large amount of Bitcoin will be locked in Layer 2, resulting in scarcity of Bitcoin available for trading. Consequently, the price of BTC may rise to some extent.

Currently, the Lightning Network’s capacity has reached 5,000 bitcoins, meaning 5,000 bitcoins are locked in the Lightning Network. This number may seem small because Taproot Assets have not yet officially launched, and the Lightning Network can only be used for Bitcoin transfers, such as buying coffee or paying at restaurants, so demand for it is still relatively low. If large-scale spending is required, Bitcoin may not be feasible due to its high volatility. However, Taproot Assets, or stablecoins on the Lightning Network, are expected to be launched in the coming months. Once launched, the capacity will be significantly increased. Some predict that eventually, 10% of Bitcoin, or millions of bitcoins, will be locked in the Lightning Network or Layer 2.

Nostr Protocol

The Nostr protocol is often underestimated within the entire blockchain ecosystem, even within the Bitcoin ecosystem. Its significance is comparable to that of Bitcoin itself. If Bitcoin represents the first instance in human history of using technology to safeguard private property from infringement, then Nostr signifies the first instance of using technology to safeguard freedom of speech from infringement.

Once deployed, the nodes within the Nostr network are impervious to interference from governments or regulatory bodies. The protocol itself is straightforward, as illustrated in the presentation slides. As long as individuals trust the same relay, they can communicate with each other, resembling a formative stage of the early internet. In the United States, the Nostr community advocates for decentralizing the internet, which has been centralized by governments, marking a grand vision for Nostr. Hence, I believe it is a significant invention that can be compared to Bitcoin in its magnitude, and it deserves attention.

Lastly, for any inquiries regarding RGB, you may consult Mr. Hong, who is one of the most experts in the field of RGB present here today. RGB is a native smart contract system based on UTXO within Bitcoin. It achieves speeds comparable to the Lightning Network and is Turing complete, capable of performing tasks similar to Ethereum smart contracts. However, its development technology is quite complex.

Conclusion

The Bitcoin ecosystem frequently gives rise to new technologies; however, many of these technologies find broader applications on other blockchains. If you find these protocols too complex, you can also engage in auxiliary roles within the Bitcoin ecosystem, such as payment node service providers or liquidity providers. There are also entrepreneurial opportunities in the business application sector.

I once shared my views on Twitter, pointing out that many public chains once touted as Ethereum killers were defeated by Ethereum during the previous bull market and are now on the brink of collapse. Their only chance of survival, or their chance to regain a foothold in the blockchain world, is to quickly join the Bitcoin ecosystem and provide services to it. Whether it’s alleviating the pressure on the mempool network or collaborating with Bitcoin to share traffic, these actions can help them survive in the blockchain world. Since they have proven themselves inferior to Ethereum, the best option is to swiftly return to the Bitcoin ecosystem. This is my advice.