Exploring the BTCFI Rabbit Hole from the Perspective of Bitcoin's Programmability

HTX Ventures, the global investment division of HTX, released its latest research analysing Bitcoin's potential and challenges in the field of Bitcoin decentralized finance (BTCFI).

Global investment division of HTX, HTX Ventures, has released its latest research on Bitcoin’s potential and challenges in the field of Bitcoin decentralized finance (BTCFI). The report, titled Exploring the BTCFI Rabbit Hole from the Perspective of Bitcoin’s Programmability, aims to help readers understand the BTCFI sector better. The report explores the evolutionary path of Bitcoin programming, how Bitcoin programming can support various BTCFI applications, showcasing the current real-world BTCFI implementation scenarios, and explaining the underlying logic of BTCFI’s future growth and adoption.

HTX Ventures has been contributing to BTCFI for a long time. As stated in its 2024 Half-Year Investment Report, BTCFI is highlighted as one of HTX Ventures’ six key investment directions in 2024. Some of HTX Ventures’ portfolio companies in the BTCFI sector include Babylon, BounceBit, COREx, and more.

The new report once again shows HTX Ventures’ interest in BTCFI. It begins with the foundations of the Bitcoin contracts, which were laid fourteen years ago by Satoshi. Understanding the basics of Bitcoin programming involves several concepts, including Transaction Outputs (TXO), Unspent Transaction Output (UTXO), scriptSig, and Opcodes.

“Bitcoin script programming is about programming money and enabling a specific amount of money to respond to particular input data. By designing the scriptPubKey, opcodes, and the interaction process between users, we can offer cryptographic guarantees for the key state transitions of Bitcoin contracts, ensuring the contracts’ proper execution,” the report points out.

There are some mechanisms to be used to enable the implementation of different types of transactions, including MultiSig, Timelocks, Hashlocks, Flow Control, and SIGHASH. The report explains, “the basic model of Bitcoin programming is where UTXO locking scripts specify verification conditions, unlocking scripts provide data, and opcodes in locking scripts indicate the verification program. The funds can be spent once the verification program is passed.”

There are some core limitations, however, such as only a few verification programs being available, Bitcoin scripts having no computational power, and UTXO unlocking conditions being completely independent.

Unlike the computation-based Ethereum contracts, Bitcoin contracts are verification-based, which has brought many challenges in developing BTCFI products. Despite the difficulties, “over the ten years of developing Bitcoin contracts, the ingenious use of cryptographic algorithms and signatures has significantly enhanced privacy, efficiency, and decentralization, making BTCFI products possible,” the report states, and starts introducing Bitcoin programming milestones.

Innovative tools, such as the Discreet Log Contract (DLC), Partially Signed Bitcoin Transactions (PSBT), and MuSig2 bring new solutions to the problems in Bitcoin programming, driving the development of BTCFI.

The Taproot upgrade activated in November 2021 was revolutionary for the Bitcoin ecosystem, allowing Bitcoin to hold in custody large-scale smart contracts with tens of thousands of signatories while concealing all participants and maintaining the size of a single-signature transaction. This makes more complex on-chain BTCFI operations possible and significantly improves privacy and transaction efficiency.

Such technological innovations pave the way for BTCFI’s further development. Then in January 2023, Ordinals were proposed, which aimed to assign each sat a unique identifier and attribute, so as to transform it into a unique NFT. The creation and trading of Bitcoin NFTs were realized, not only expanding the uses of Bitcoin but also allowing users to directly create and trade digital assets on the Bitcoin blockchain.

This led to the introduction of BRC-20, a token system for on-chain recording and off-chain processing that uses JSON data’s ordinal inscriptions to deploy token contracts, mint tokens, and transfer them.

The naissance of Ordinals and BRC-20 created trading demand and blue-chip assets for BTCFI. More importantly, they offered many BTCFI projects new ideas based on indexer programming that enhanced Bitcoin’s contract capabilities.

Bitcoin’s programmability has come a long way and made great progress, forming a thriving BTCFI ecosystem with more and more application scenarios of BTCFI arising. The report lastly lists some notable BTCFI implementations, including BTC staking provider Babylon, asset issuance platforms Unisat and Magic Eden, lending protocol Liquidium, BTCFI scaling solution Fractal Bitcoin, and more.

The emergence of BTCFI applications indicates that its market potential is becoming evident. With Bitcoin becoming more and more mainstream, the market demand for BTCFI use cases will also increase, fostering a new financial ecosystem centered around Bitcoin.

“The formation of this ecosystem will propel Bitcoin further beyond the ‘digital gold’ narrative, establishing it as an indispensable decentralized financial infrastructure in the global economic system,” the report concludes.

To read the full report, please visit: https://square.htx.com/htx-ventures-exploring-the-btcfi-rabbit-hole-from-the-perspective-of-bitcoins-programmability/

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