The Transformation of Bitcoin’s Financial Future with Layer 2 Technologies

Imagine if Bitcoin, universally recognized as the most secure and decentralized asset available, could finally reach its maximum potential. For more than ten years, Bitcoin has served as the bedrock of digital currency; however, it still lacks the programmability and scalability that Ethereum has successfully adopted. As per Charlie's insights, Charlie Hu , Co-founder of Bitlayer , that’s about to change.

In this dialogue, Charlie elaborates on how his various experiences, starting from the formative days of Ethereum to his involvement with Polkadot and now with Bitcoin, have led him to a striking conclusion: the greatest unexploited potential within the crypto space resides in Bitcoin's Layer 2 advancements. He addresses the scalability hurdles Bitcoin faces, the complex cultural resistance to change that can be both an asset and an obstacle, and details how Bitlayer is creating avenues for yield generation and financial innovation, all built on Bitcoin's robust framework.

Could you talk about your personal journey into the Web3 space, Charlie?

My introduction to the world of Web3 began back in 2015. I first got acquainted with Ethereum while residing in Berlin. At that time, I was pursuing my master's degree in Amsterdam and spent approximately six years immersing myself in European culture. In Berlin, I connected with the pioneering team behind the Ethereum Wallet and Ethereum Core during the platform's exhilarating early development phase.

By the summer of 2017, amid a surge of initial coin offerings, I encountered Polkadot. This marked my first significant involvement in the crypto space as I became an early-stage investor, playing a vital part in introducing it to the Chinese market. I became deeply entrenched in the Polkadot community, contributing to its growth. When the Web3 Foundation entered China, I took on the role of an interpreter, linking builders, developers, and market makers together. It was an exciting phase filled with enthusiasm and advancements for Polkadot in Asia.

From 2017 to 2020, we experienced the DeFi summer where I dove deep into yield farming, exploring various DeFi protocols such as Uniswap, Wi-Fi, Compound (which later transitioned into Aave), among others. I engaged in extensive on-chain trading and focused on educating communities about DeFi practices.

In 2021, I officially integrated into Polkadot, fostering business development and nurturing developer relationships across China and South Asia. Our efforts concentrated on consumer applications and gaming projects emerging from the metaverse.

Then in 2023, I discovered Ordinals, providing my first significant insight into the Bitcoin ecosystem. My involvement with BRC-20 and Ordinals allowed me to meet notable figures like Casey and Domo. This pivotal moment opened my eyes to the significant need for better yield generation solutions within the Bitcoin space.

After our conference in October 2023, we began as a research initiative. Subsequently, my co-founder Kevin and I resolved to establish a full-fledged project, which ultimately led to the inception of Bitlayer. That is how we embark on our journey with Bitlayer and my deep dive into research.

What do you think are the biggest hurdles in scaling Bitcoin in comparison to Ethereum, and how is Bitlayer addressing those challenges?

One of the primary distinctions lies in the fact that Ethereum's Layer 1 is inherently programmable through smart contracts, whereas Bitcoin's framework is not. Bitcoin utilizes a proof-of-work system and a UTXO-based structure, meaning it currently lacks a built-in yield mechanism or smart contract functionality at its Layer 1. Essentially, natively implementing DeFi on Bitcoin is quite limited.

Bitcoin also faces significant constraints with a transaction throughput of only about seven transactions per second. The limitations of Bitcoin Script make scaling challenging, especially when employing Layer 2 solutions. That said, Bitcoin boasts a larger asset ecosystem in comparison to Ethereum, particularly with Bitcoin ETFs and growing institutional adoption. Many Bitcoin investors are searching for yield opportunities that have been practically nonexistent for over fifteen years.

This burgeoning demand creates an enormous chance, even amidst these challenges. The development of Layer 2 solutions for Bitcoin needs to strike a delicate balance—preserving Bitcoin’s foundational security while enhancing scalability.

Culture presents another crucial difference. The Ethereum community thrives on innovation and strong developer engagement, while Bitcoin has remained largely focused on mining and economic factors. Bitcoiner culture tends to be practical, placing immense trust in Bitcoin as a secure financial asset, often pushing back against proposed changes.

With the surge in interest towards Bitcoin-centric applications, do you envision a DeFi boom on Bitcoin akin to what we've seen on Ethereum?

There are some parallels to draw. Many developers from the Ethereum space are now venturing into the Bitcoin ecosystem, bringing fresh ideas to the table. However, the underlying dynamics are quite different. Ethereum has transitioned away from a miner-influenced governance model to proof-of-stake, while Bitcoin retains a decentralized governance structure without a centralized authority steering its direction.

A significant aspect of this market cycle is the emergence of Bitcoin ETFs, which have generated substantial buying pressure. Institutional giants such as BlackRock are acquiring Bitcoin through these ETFs, explaining Bitcoin's exceptional performance compared to other commodities. These organizations are focused on Bitcoin itself rather than altcoins, contributing to a bullish trend led by Bitcoin.

The expanding Bitcoin ecosystem is drawing in new participants, resulting in the emergence of innovative DeFi solutions. However, fully realizing Bitcoin-native DeFi will necessitate time and development.

What technical obstacles has your team encountered while establishing Bitlayer?

Navigating Bitcoin's scripting language is a complex task as it features low transaction throughput, alongside the higher costs associated with transaction verification. Our goal was to achieve a balance between security and cost-effectiveness. We devised a strategy, breaking the ZK-STARK proof into manageable segments and settling them within Bitcoin's Taproot structure, which greatly alleviated costs.

Education has emerged as another considerable challenge. Many current Bitcoin holders are skeptical of any innovations. They perceive Bitcoin as a constant, an asset that should not undergo changes. Communicating the advantages of yield generation and new functionalities on Bitcoin has been a gradual process, but we remain optimistic that awareness will grow over time.

Do you believe Bitcoin will ultimately become the primary settlement layer for all crypto transactions?

While Bitcoin certainly leads in asset value, I’m not convinced that all crypto activities will funnel through Bitcoin. Its block space is limited, leading to higher transaction fees. Certain transactions, such as meme coin trades, simply don’t make economic sense to execute within the Bitcoin framework.

The critical question really is whether Bitcoin-native applications—like lending platforms, decentralized exchanges, or real-world asset integrations—can find true product-market fit. If that happens, Bitcoin’s potential role as a settlement layer may expand significantly.

What are your thoughts on the future of Bitcoin scaling? Will Layer 2 solutions become the ultimate answer or will other innovations take precedence?

Layer 2s seem like the most viable avenue, as demonstrated by Ethereum’s journey. Bitcoin’s Layer 2 solutions can enhance scalability and usability while preserving its security. We're also seeing progress with meta-protocols based on social consensus, but for the moment, our primary focus remains on L2 solutions.

Can AI contribute to the development of Bitcoin Layer 2 solutions in the future?

As of now, I don’t see any significant involvement. The integration of AI within the Web3 framework is still in its infancy stage. AI tools could enhance strategies surrounding Bitcoin yield and investment, but smart contracts driven by AI tailored for Bitcoin haven’t gained traction yet.

If you could implement one fundamental change to Bitcoin’s base layer to enhance scalability, what would it be?

The next Bitcoin Improvement Proposal (BIP) could be game-changing. A meaningful upgrade could unlock fresh opportunities. Still, these choices lie beyond our influence and depend crucially on consensus within the Bitcoin community.

Do you envision Bitcoin Layer 2 solutions being utilized in tangible financial contexts like remittances or banking services?

Indeed, we're already observing financial institutions expressing interest in incorporating Bitcoin into their portfolios. The surge in ETF adoption has accelerated this trend significantly. However, the seamless integration of fiat gateways is essential for broader acceptance.

What’s your take on ZK-Rollups for Bitcoin? Is there potential for Bitlayer to adopt zero-knowledge proofs in the future?

We are actively pursuing this. Our technical team is engaged with ZK-STARKs and collaborating with industry leaders such as StarkWare and RISC Zero. However, integrating native ZK-proof capabilities within Bitcoin is still a complex technical hurdle.

If Bitcoin Layer 2 adoption reaches its peak, how might it alter Bitcoin’s core economic structure?

This hinges on the revenue streams generated by Layer 2s for Bitcoin miners. If enough fees are redirected back to miners, it could help maintain the Bitcoin network as block rewards decrease, but we need to thoroughly test the viability of this model.

How do you envision the Bitcoin Layer 2 ecosystem evolving over the next five years?

In the coming two years, we aim to cultivate robust Layer 2 adoption with significant transaction volume and total value locked (TVL). By the five-year mark, we hope to see mainstream financial institutions beginning to leverage Bitcoin Layer 2s for yield generation and various use cases. However, widespread adoption will undoubtedly take time.