Bitcoin developers see programmability as catalyst for BTC's next rally

By Olga Kharif, Bloomberg; Translated by Deng Tong, Golden Finance

After the long-awaited launch of the U.S. bitcoin exchange-traded fund in January and the once-every-four-years halving last month, the big question on many cryptocurrency investors’ minds is what will drive the next rally in cryptocurrencies?

Many developers think they have found the answer: adding programmability to the bitcoin blockchain. Today, bitcoin is viewed by many as digital gold — a cryptocurrency you hold for appreciation but can’t do much else with. While you can exchange tokens on the Ethereum network and earn yield using its biggest rival, Ethereum, the bitcoin blockchain lacks the ability to easily support applications through so-called smart contract features that allow for, among other things, automated execution of agreements stored on the blockchain.

For years, developers have tried to correct this deliberate design flaw in various ways. They’ve built bitcoin “Layer 2” networks, such as the Lightning Network, designed to scale bitcoin for applications such as payments. Some have proven unreliable, while so-called bridges (software infrastructure that moves tokens between networks) are vulnerable to hacks, discouraging many users from using them. Many bitcoin holders aren’t interested in using those BTC for payments anyway, holding onto them in a bet that prices will rise in the long term, a practice known as “hodling.” That’s changed recently, though, since Bitcoin Ordinals — a method for creating non-fungible tokens by embedding data onto a coin, the smallest denomination of bitcoin — came into use last year. Soon after, an anonymous developer named Domo proposed the BRC-20 token, which uses the same inscription mechanism to issue tokens on the bitcoin blockchain. That, in turn, has prompted development teams to look for ways to achieve greater bitcoin programmability. The bitcoin community is considering proposals like OP_CAT, which would be software upgrades to the network itself and make programmability easier to implement. Among the approaches being studied is one from the Layer 1 Foundation team, which Domo is a part of. Another approach comes from startup Arch, which just raised $7 million in a round led by Multicoin Capital.

“This is a huge unlock for bitcoin,” said Kyle Samani, co-founder of Multicoin. “It’s really good for users.”

Arch, which is expected to be open to all developers this month, runs an application platform on top of bitcoin using software that could allow apps for the Solana network to be ported to bitcoin, said Matt Mudano, Arch’s chief executive. Already, he said, there are about 20 development teams building apps for Ordinals lending, decentralized exchanges and stablecoins, among other features.

Meanwhile, the Layer 1 Foundation is building a programmable module for the so-called BRC-20 metaprotocol, which is essentially just messages stored in layered code on the bitcoin blockchain. Indexers can find those messages and run computations in a similar way to smart contracts on ethereum. Because bitcoin’s block confirmation times are much longer than ethereum’s (currently 10 minutes versus 12 seconds), there’s more time to perform computations, “and we can actually do a lot more,” said Eril Ezerel, founder of Best in Slot, the Ordinals aggregator and browser.

“This is like Chapter 2 of crypto,” Ezerel said. “It’s huge. It makes us question how we build things.” While building with a metaprotocol is simpler, it’s enough to support most financial applications, he said.

Not everyone in the bitcoin programming community is convinced it’s the future of the cryptocurrency. Jeff Garzik, a former bitcoin core developer and co-founder of crypto infrastructure and app builder Bloq, expects Layer 2s to ultimately win out because it will be cheaper to transact with them than to run apps on bitcoin.

“Bitcoin’s programmability is growing—with these new bitcoin L2s, it’s expanding the reach of bitcoin,” said Garzik, who is working on a fusion of bitcoin and ethereum’s Layer 2s. “It’s both a catalyst for the ethereum ecosystem and new competition for the ethereum ecosystem.”

Even so, startups are betting that this new kind of programmability could lead to an influx of decentralized finance apps on bitcoin. Currently, the total value of tokens locked in the Bitcoin DeFi market is about $1.1 billion, while Ethereum's total value of locked tokens is $52.7 billion, according to data tracking company DeFi Llama.

"The Bitcoin DeFi ecosystem could grow into the largest ecosystem in the cryptocurrency space," said Toby Lewis, founder of OrdinalsBot. "The Bitcoin DeFi ecosystem has the potential to grow into trillions of dollars in market value in the next few years, and it appears to be one of the main drivers of cryptocurrency growth in this cycle."

If demand materializes, this could be the next catalyst Bitcoin investors are waiting for.