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Newman Capital: Exploring Bitcoin’s Evolution and DeFi Horizons

May 8, 2024

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  1. Introduction
    1. The Evolution of Bitcoin: A Historical Overview
  2. Bitcoin vs. Ethereum: A Comparative Analysis
    1. Technological Foundations and DeFi Capabilities
    2. Ethereum’s Transition to Proof of Stake (PoS): Implications for DeFi
    3. Bitcoin’s PoW Model: Resilience and Security
  3. The Significance of the Taproot Upgrade
    1. Development of Sidechains and Layer 2 Solutions
    2. New Programming Languages and Smart Contract Integration
  4. Layer 2 Solutions in the Bitcoin Ecosystem
    1. Exploring Different Types of Layer 2 Solutions
    2. Case Studies: Lightning Network, Liquid Network, Stacks
  5. State of Bitcoin Post 2023
  6. The Nakamoto Upgrade: A Game Changer for Bitcoin DeFi
    1. Impact on Bitcoin’s Programmability and DeFi Potential
    2. Future Outlook Post-Upgrade
  7. Predicting the Future of Bitcoin DeFi
    1. Growth Trajectories and Emerging Trends
    2. Potential Challenges and Solutions
  8. Pioneering Ventures in the Bitcoin Ecosystem
  9. Runes & Latest Developments: Casey Rodarmor
  10. Conclusion


Bitcoin, conceived by Satoshi Nakamoto as digital cash for facilitating P2P payments, marked the beginning of a new era in finance, laying the groundwork for decentralized finance (DeFi). However, its design initially did not support advanced DeFi applications due to the lack of programmability. Ethereum filled this gap in July 2014, introducing deployable custom programs on its blockchain, thus birthing a new realm of financial applications.

While Ethereum pioneered this space, recent advancements have made DeFi feasible on Bitcoin as well, heralding a new chapter we like to call Bitcoin Defi. The Evolution of Bitcoin and its significance has been discussed in the timeline below:

Bitcoin vs. Ethereum: A Comparative Analysis

Bitcoin and Ethereum, while both trailblazers in the cryptocurrency world, serve distinct purposes and exhibit different technological characteristics.

Bitcoin vs. Ethereum: A Comparative Analysis

Taproot Upgrade and its implications

The Taproot upgrade, activated on the Bitcoin network in November 2021, was a significant development for Bitcoin, marking one of its most important upgrades. This upgrade enhanced Bitcoin’s scripting capabilities and privacy, and made the network more efficient and scalable.

The Taproot upgrade marked a pivotal evolution in Bitcoin’s network, significantly enhancing privacy by making complex transactions, such as multi-signature and smart contracts, indistinguishable from regular transactions. It also improved network efficiency and scalability by reducing transaction sizes, allowing more transactions per block, and introducing Schnorr signatures for signature aggregation in multi-signature transactions.

This upgrade significantly expanded Bitcoin’s smart contract capabilities with MAST and Tapscript, allowing for more intricate and conditional contracts, though not yet as flexible as Ethereum’s. Additionally, Taproot provided substantial support to Layer 2 solutions like the Lightning Network, improving their efficiency. Overall, Taproot was a crucial step in Bitcoin’s evolution, bolstering its role not only as a digital currency but as a platform for complex financial applications and setting the stage for future advancements.

Layer 2 Solutions in the Bitcoin Ecosystem

Layer 2 solutions are increasingly crucial in evolving Bitcoin’s capabilities beyond its original design as a peer-to-peer digital cash system. These developments address Bitcoin’s limitations in scalability, transaction speed, and smart contract functionality.

Types of Layer 2 Solutions:

  1. Sidechains like Rootstock, Liquid Network, and Stacks, which operate parallel to the main Bitcoin chain, allowing asset transfer and smart contract execution.
  2. State Channels, exemplified by the Lightning Network, which enable efficient off-chain transactions to alleviate on-chain congestion.
  3. Smart Contract Chains, offering expanded functionality over Bitcoin’s native smart contracts.

Layer 2 Case Studies Discussed :

  1. Lightning Network:A Layer 2 payment protocol on top of the Bitcoin blockchain.Designed to enable fast, scalable, and low-cost transactions.Utilizes state channels for transactions to occur off the main Bitcoin blockchain, reducing congestion and fees. Ideal for microtransactions and frequent, small payments. Increases Bitcoin’s transaction capacity by handling transactions off-chain and settling them on-chain in aggregate form.

  2. Liquid Network:A Bitcoin sidechain developed by Blockstream, Liquid Network facilitates faster Bitcoin transactions and supports the issuance of digital assets. Features enhanced privacy through confidential transactions. Uses a federated model with functionaries (trusted entities) for consensus, providing quicker settlement times compared to the main Bitcoin network. Empowers businesses and traders with the ability to issue and transfer assets quickly and securely on a network tied to Bitcoin’s security.

  3. Stacks:A Layer 2 solution that enables smart contracts and decentralized applications (dApps) on the Bitcoin blockchain. Utilizes the Clarity smart contract language, designed for predictability and security. Operates under a unique consensus mechanism that connects to Bitcoin, allowing for the mining of Stacks (STX) tokens and earning Bitcoin as rewards.Focuses on expanding Bitcoin’s functionality, including DeFi and NFTs, without modifying its core protocol. Stacks aims to leverage Bitcoin’s security and capital while offering advanced functionalities typically seen in other blockchain ecosystems like Ethereum. Each of these solutions represents a different approach to extending Bitcoin’s capabilities, whether it’s for improved transaction speed and scalability, asset issuance and privacy, or enabling complex smart contracts and dApps.

The rapid expansion of the Bitcoin L2 ecosystem suggests a promising future for Bitcoin in the DeFi space. Key factors driving this growth include global cryptocurrency adoption and technological advancements in Layer 2 solutions.These developments are crucial for the long-term sustainability and versatility of Bitcoin, as they address current challenges and open up new opportunities for users.

State of Bitcoin Post 2023

The year 2023 stands as a landmark period for Bitcoin, reflecting significant growth and diversification in its ecosystem. Key developments have propelled Bitcoin beyond its foundational use as a store of value, heralding its emergence as a multifaceted platform supporting a wide array of applications.

Ordinals: The Digital Art Renaissance

Casey Rodarmor’s development of Ordinals has marked a renaissance of digital creativity on the Bitcoin blockchain. This innovation allows for the creation of unique digital artifacts, similar to NFTs, by inscribing data such as images, text, and audio onto individual satoshis. The introduction of Ordinals represents a significant transformation in Bitcoin’s history, turning it into a platform not only for financial transactions but also for artistic expression and digital collectibility.

BRC-20 Tokens: Expanding Bitcoin’s Horizons

The introduction of BRC-20 tokens, developed by Ethereum developer Domo (@domodata), signifies Bitcoin’s entry into the realm of fungible digital assets. This breakthrough provides a method for token creation and transfer within the Bitcoin ecosystem. Utilizing JSON code inscriptions, BRC-20 tokens build upon the capabilities introduced by Bitcoin’s Taproot upgrade. This  has paved the way for innovative financial applications on Bitcoin and diversified its blockchain usage, playing a crucial role in the surge of development and adoption of Bitcoin-centric wallets that support new features such as Ordinals and BRC-20 tokens.

Some of the key metrics to understand the market overview for Ordinals & BRC 20 in 2023:

  1. Trading Volume: The total cumulative trading volume for Ordinals reached $596.4 million from January 1 to September 1, making Bitcoin the third most popular network for NFT trading volume.
  2. Mempool and Fees Impact: Ordinal activity led to significant congestion in Bitcoin’s mempool and influenced transaction fee dynamics.
  3. Infrastructure Development: Significant growth in Ordinals infrastructure with over 33 million inscriptions and improvements in wallet and marketplace support.
  4. Marketplaces Dominance: Magic Eden, Unisat, and OKX were the leading marketplaces for Ordinals trading in 2023.
  5. Inscription Innovations: Introduction of new techniques like recursion, reinscription, and envelopes for more efficient and creative use of inscriptions. There was an increase in interest in marketplaces for trading Ordinals inscribed on rare and unique satoshis.

Source:  Spartan Research

From DeFi platforms to NFT marketplaces, the types of applications being developed on Bitcoin in 2023 are diverse. They cater to a broad spectrum of users, from those interested in novel financial instruments to collectors and gamers seeking blockchain-based ownership. The new set of applications rose due to inscriptions of Ordinals & BRC20.

L2 Ecosystem Growth: DeFi and Beyond

The expansion of the Bitcoin ecosystem through Layer 2 solutions is about more than just new features and user acquisition. It’s about integrating Bitcoin more deeply into the global blockchain economy.

Stacks and other Layer-2 solutions have been instrumental in integrating smart contracts and dApps with Bitcoin, bringing complex DeFi functionalities to its robust and secure environment. The ecosystem now hosts a variety of applications, including swaps, bridges, wallets, and marketplaces, attracting users seeking a trustless financial era.

Image source: Stacks

The Bitcoin ecosystem is poised for significant breakthroughs in the mid-term, primarily driven by advancements in L2 technologies like Stacks’ Nakamoto Release and the introduction of sBTC. These developments are not merely incremental but transformative, especially in the realm of Bitcoin DeFi and other applications. The reduction in block times to 5 seconds and enhanced security are key for an Ethereum-like experience, driving developer interest and innovation in the Stacks ecosystem.

BTC ecosystem Key developments in 2023 :

  • ALEX labs laid the groundwork for DEFI infrastructure on Bitcoin & Stacks.
  • Fast blocks and sBTC enable efficient, BTC-denominated applications, particularly in NFT marketplaces.
  • Hiro is upgrading tools for developers across Bitcoin layers.
  • Wallets like Xverse, Leather, and Ryder focus on user-friendly experiences for adoption.
  • Major exchanges like Binance and OKX have launched Ordinal Marketplaces.
  • The New Bitcoin City project surpassed $1M in TVL in October 2023.
  • StackingDAO introduced liquid STX (stSTX) in December 2023 and attracted TVLs worth more than $ 10M in just 2 weeks.
  • The expansion of Bitcoin’s DeFi landscape includes new functionalities like lending and borrowing, supported by sBTC on Stacks.

These initiatives are part of a broader strategy to tap into Bitcoin’s market cap and user base, following Ethereum’s growth model. In conclusion, Bitcoin’s landscape in 2023 is marked by an impressive expansion, with innovations that have extended its influence in the digital asset space. The convergence of traditional Bitcoin features with new-layer technologies has set the stage for a future where Bitcoin is not just a cryptocurrency but a comprehensive platform for decentralized solutions.

The Nakamoto Upgrade on Stacks

The Nakamoto Upgrade is a significant development for the Stacks network, which aims to revolutionize DeFi (Decentralized Finance) on the Bitcoin network. This upgrade, often considered one of the most crucial events since the inception of Stacks, is poised to unlock Bitcoin’s economic value in a decentralized manner. Here’s an overview of what the Nakamoto upgrade entails and its potential impact on Bitcoin’s DeFi ecosystem:

The Nakamoto upgrade represents a significant evolution of Stacks, allowing it to fully leverage Bitcoin’s capabilities. This upgrade includes:

Impact on Bitcoin DeFi Ecosystem

The Nakamoto upgrade is poised to transform Bitcoin into a fully programmable network, unlocking massive potential for DeFi applications. This includes:

  1. Enabling actual DeFi use cases with Bitcoin.
  2. Enhancing scalability and efficiency in transactions.
  3. Unlocking over 400 billion dollars worth of Bitcoin for DeFi applications.
  4. Maintaining Bitcoin’s core values of open access and decentralization.

Predicting the Future of Bitcoin DeFi

Post-2023, the future of Bitcoin DeFi and the broader ecosystem is expected to evolve significantly. The Nakamoto Upgrade is predicted to drive increased Bitcoin adoption in DeFi, attracting a larger base of users and developers. This will likely result in a notable growth in the total value locked in Bitcoin-based DeFi platforms, enhancing their competitive edge against Ethereum-based counterparts.

The upgrade is anticipated to spur innovation in financial products, leading to a variety of new Bitcoin-backed services, thereby enriching the DeFi ecosystem. Improvements in scalability and efficiency are expected to enhance the user experience and potentially boost mainstream adoption. Furthermore, the enhanced functionality and security of Bitcoin DeFi could attract greater institutional interest. A significant impact could be on financial inclusion, with improved DeFi capabilities on Bitcoin potentially facilitating wider global access. Finally, Bitcoin’s ascent in the DeFi space may challenge Ethereum’s dominance, leading to a more diversified market and increased trust in DeFi platforms, underpinned by Bitcoin’s renowned security.

Newman Capital: Pioneering Ventures in the Bitcoin Ecosystem

Our investments span across the foundational infrastructure, advanced applications, and consumer-oriented platforms within the Bitcoin ecosystem. This demonstrates a belief in a multi-layered growth strategy where value is created not just in the underlying technology but also in user-facing applications and services.

Some of our key considerations during key decision making involve :

  1. Innovation and Integration Focus: The investments reflect a focus on innovative solutions and integrated services that can drive the next wave of Bitcoin’s growth. From enhancing Bitcoin’s core functionalities with Taproot Wizards to expanding its use in DeFi through Bitflow and Stacking Dao, we are focusing on projects that push the boundaries of what Bitcoin can do.
  2. Diversification and Resilience: By investing across different sectors within the Bitcoin ecosystem, We aim to diversify and capitalize on the growth of Bitcoin as both a technology and an asset class. This diversification suggests a recognition that the strength of the Bitcoin ecosystem comes from its varied applications, not just its role as a digital currency.
  3. Adoption and Accessibility: With investments in platforms like Xverse and Lolli, our commitment to making Bitcoin more accessible and functional for a mainstream audience, which is crucial for long-term adoption.

Our investment thesis is built on the premise of fostering an interconnected Bitcoin ecosystem where infrastructure, applications, and consumer engagement work synergistically to drive adoption and innovation. This thesis reflects a holistic view of the ecosystem, underlining the potential for Bitcoin to expand beyond just a store of value or medium of exchange to become a foundational technology in the future of finance and commerce.

What are Runes?

Runes are fungible tokens issued directly on Bitcoin using the Runes protocol. Ordinals creator Casey Rodarmor proposed the new protocol in September 2023, pitching it as a better and simpler alternative to the experimental BRC-20 standard for fungible tokens.

The Runes protocol is a mechanism for creating, minting, and transferring fungible tokens directly on Bitcoin. It seeks to be more efficient than the BRC-20 token standard by providing correct UTXO management and lowering the on-chain footprint. The Runes protocol achieves this by leveraging a UTXO-based model that fits naturally into Bitcoin’s architecture. Runes was proposed in September 2023 and will launch in April 2024.

Let’s take a look at the benefits and challenges of Runes.


  1. Minimizes on-chain footprint thanks to the UTXO-based model
  2. Simplifies the issuance of native fungible tokens on Bitcoin
  3. Its simplicity could promote innovation in the Bitcoin ecosystem
  4. Doesn’t require off-chain data to operate
  5. Allows open minting within terms set by the etcher


  1. Competition from the widely accepted BRC-20 token standard
  2. Token burns triggered by errors can adversely affect user experience
  3. Yet to establish itself as a viable Bitcoin token standard

The diagram below shows a detailed comparison between Runes and BRC 20 tokens

Source: Xverse

The Runes protocol improves the Ordinals-based BRC-20 token standard by adopting Bitcoin’s UTXO model. This allows it to operate within Bitcoin Layer 1, or the base blockchain, and reduce the production of unnecessary UTXOs. Therefore, Runes has a minimal on-chain footprint and improves overall efficiency.

Creating a new Rune token begins with etching, where elements such as name, token supply, number of decimals, and minting terms are defined. The token supply is assigned to a specific UTXO, allowing a single UTXO to contain any amount of any number of Runes, be it a billion, million, or less. UTXOs are used to keep track of the Rune token balances.


In conclusion, the intersection of Bitcoin and DeFi marks a significant shift in the landscape of digital finance. As Bitcoin continues to evolve and adapt, it promises to offer more robust, decentralized financial services and applications, showcasing its potential not just as a cryptocurrency but as a comprehensive platform for modern financial solutions.

This transformation is underscored by significant technological advancements, such as the Taproot upgrade and the emergence of various Layer 2 solutions, which have broadened Bitcoin’s scope beyond mere transactions, enhancing its scalability and enabling more complex financial functionalities. Comparatively, the article also highlights Ethereum’s role as a forerunner in the DeFi space, thanks to its early adoption of smart contracts. However, recent strides in Bitcoin’s technology are quickly bridging this gap, allowing it to emerge as a strong competitor in the DeFi domain.

There is still plenty of research and engineering to do in this nascent transacting paradigm and areas we didn’t cover in this post. If you find this or other Bitcoin Ecosystem research subjects enticing, please contact Vinay at vinay@newmancapital.com.

Disclaimer: This material has been shared solely for information purposes, and must not be relied upon for the purpose of entering into any transaction nor investment. Newman Capital is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. You are always advised to DO YOUR OWN RESEARCH before making any investment decision. Newman Capital is an investor in Xverse, Taproot Wizards and StackingDAO.

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