Water Drop Capital Mountain: The beginning of the blockchain world is Bitcoin, and the end is the Bitcoin ecosystem

On December 20, the Hong Kong Web3.0 Entrepreneur Summit was held in Cyberport as scheduled, and Bailu Lounge attended as a media supporter.

During the period, Dashan, the founder of Water Drop Capital, shared the theme of "the beginning and end of the blockchain world" on the development of the Bitcoin ecosystem, the second growth curve of miners, the important upgrade of Bitcoin, the evolution route of blockchain technology, Ethereum and RWA, the Lightning Network, and the Nostr protocol.

The Bailu Lounge focused on the full text of the speech and sorted out this article to share with readers.

Highlights:

1. The computing power of the entire Bitcoin network has increased from 10 billion in 21 years to 50 billion today, a fivefold increase in more than 2 years;

2. The Lightning Network has the potential to achieve a global settlement network. The data on the lightning network, packaged and put on one layer, can also increase the income of miners to a certain extent. This is also the second growth curve for miners;

3. The blockchain world evolves along two routes: one is the asset route and the other is the technology evolution route;

4. The market value of the Ethereum ecosystem is about the same as the market value of Ethereum itself, and the market value of Bitcoin itself is three times the market value of Ethereum, so there is a huge Alpha, and the market value of the Bitcoin ecosystem catches up with or even exceeds the market value of the Ethereum ecosystem;

5. The advantage of Ethereum is the account model, which is suitable for the development of RWA;

6. It is expected that 10% of Bitcoin, that is, million-level Bitcoin, will eventually be locked in the Lightning Network or the Bitcoin Layer 2 Network;

7. If Bitcoin is the first time in human history that technical means have been used to ensure the inviolability of private property, then Nostr is the first time in human history that technical means have been used to ensure the inviolability of individual speech.

The following is the content of the speech of Dashan, the founder of Water Drop Capital, and the original text is slightly deleted.

The blockchain world starts with three words: Bitcoin. To be precise, before 2014, in the entire blockchain world, the word blockchain was equal to Bitcoin.

In 2013, if you want to make your own project, you first need to find a bunch of miners, or a bunch of community nodes, and then post a post on Bitcoin Talk to announce it. Then everyone starts this mining at the same time, which is very similar to the current inscription, and the project party has no other advantages.

The only advantage is that the early community is not that big, so the project team, as a member of the community, may be a little more involved, but it also costs and costs money. That's the beginning with a Bitcoin.

The development of the Bitcoin ecosystem

Then let's look at the current development of the Bitcoin ecosystem, the Bitcoin ecosystem, Bitcoin itself has a history of 14 years from 2009 to the present, so it has developed now with more than 16,800 full nodes, which is very, very important.

Remembering this number, it seems that more than 10,000 nodes are not a lot, but there are still million-level mining machines behind this. These more than 10,000 nodes are mainly maintained by the miners of the mining farm, who want to forward transactions, and of course, there are many projects like many inscriptions, or many projects based on Bitcoin to start businesses, and they need to have a full node to read the data faster.

As you can see, nodes have been distributed around the world, so the Bitcoin ledger is the most secure ledger in this ecology, or the entire blockchain world, and is maintained by more than 16,800 full nodes.

Bitcoin miners are well aware of this. You can see that the growth of computing power has been growing, and it is growing very, very fast.

To give a simple example, our Water Drop Capital also started mining in the early years. Of course, we didn't invest more money in the mining industry after 2021, and some old mining machines continued to dig. In Chinese mainland in 2021, because of the problem of green carbon emissions in mining, the National Development and Reform Commission banned mining, so everyone went to sea to do it.

When it was banned in 2021, I remember very clearly, at that time, because of the 21-year bull market, the computing power of the whole network reached a record 10 billion, and then how much is now? In just over two years, it has exceeded 50 billion, and it has increased fivefold in more than two years.

In other words, you have the same mining machine, and what you are mining now is only 1/5 of what you dug two or three years ago, so it is very involuted.

Not to mention, bitcoin will experience the next halving in April next year, and after that, the bitcoin mined may theoretically only be 1/10 of 2021.

This is not a very good thing for miners, nor is it a very good thing for this network. Because of the decline in miners' income, the nodes willing to mine will not continue to grow, or if it decreases, then the Bitcoin network may become less secure.

So how to increase the income of miners is actually equivalent to how to make the network more decentralized and more secure to a certain extent.

Miners are looking for a second growth curve

In addition to a fixed block reward per block, miners also want to look for a second growth curve.

Now there is a way out, which is the matter of inscriptions. Recently, Bitcoin's revenue per block has been basically double, or at least more than 50% higher.

Transaction fees already account for a large part of the block reward, and even in some blocks, the transaction fee is greater than the fixed block reward. After next year's halving, it's possible that transaction fees will often exceed the block reward. This is the second growth curve of absenteeism.

Of course, there is some controversy about the inscription, namely: compared to the large amount of low-cost inscription value, the 4 trillion blocks on the first floor of Bitcoin are too precious.

Relatively speaking, we must prioritize the protection of one transmission of Bitcoin itself. If there is a lot of garbage inscriptions, it must be a waste of precious space.

So our point is: there can be inscriptions on the first floor, but not too many. If you want to play with some garbage inscriptions, then I can do it on the second floor.

Therefore, when the second layer is mature enough and can support enough various gameplay methods, then the data or transaction that the second layer interacts with the first layer is also very valuable. If this value is higher than the number of bitcoins per block transferred by the first layer, this data cannot be said to be garbage.

Bitcoin layer 2 is very valuable, and Satoshi Nakamoto wrote a piece of code about the Lightning Network in the early years of Bitcoin version 0.1.

Satoshi Nakamoto's vision is also to support Layer 2, and he said in 2009 that the Bitcoin network will either go to zero or become a global settlement network after 20 years. The global settlement network is definitely impossible to complete from the first floor, and must go to the second floor.

In other words, the Lightning Network has the potential to enable a global settlement network. The data on the lightning network, packaged and put on one layer, can also increase the income of miners to a certain extent, which is also the second growth curve of miners.

An important upgrade for Bitcoin

Bitcoin has undergone a number of key upgrades. Many people who have entered the circle in the post-Ethereum era will feel that Bitcoin has not developed much in the past ten years, and they will think that Bitcoin can only make a transfer, but in fact, it is very wrong, that is, Bitcoin has actually undergone several very important upgrades.

To put it simply: multisig was introduced in 12, but at that time multisig was still relatively basic and could only support up to 15 people.

Therefore, in the last round of Defi craze, Bitcoin basically did not participate, because there were only two crossover from Bitcoin to Ethereum through multi-signature, which was very centralized, so everyone was not at ease to get their own Bitcoin. But there is now a very decentralized way of cross-chain Bitcoin.

A very significant upgrade in 2017, SegWit. This upgrade is primarily for the Lightning Network, which greatly improves the throughput and scalability of the Lightning Network.

The most important, or one of the main reasons that everyone here is here today, or one of the upgrades that the Ordinals Inscription community, the BRC-20 community, is the Taproot upgrade.

After the Taproot upgrade in 2021, it is also a very important key point for Waterdrop Capital: we decided to focus on the Bitcoin ecosystem as an investment after this upgrade. Because after the upgrade, I think it's Bitcoin 2.0, which has a huge improvement in scalability and programmability.

When Taproot was upgraded in 2021, it happened to be the last round of bull market, so this upgrade was ignored by the entire blockchain community and the entire blockchain players. Only in the Bitcoin OG circle is everyone preaching some of the advantages brought by this upgrade.

At that time, there were a lot of OGs who actually lay flat for a long time after 2013 and then ran out and said: OK, I think Bitcoin can do a lot of things, so they came out to start a business again.

It is precisely because of the neglect of Taproot by other communities that after Ordinals came out this year, most people have stepped on this market, especially the Ethereum community or players in other public chains.

The technological evolution route of the blockchain world

After Bitcoin, the entire blockchain world is actually evolving along two routes, and there is great hope that it will become a mainstream in this industry by studying along these two routes.

The first one is the asset route. It's very simple, that is, whether you can bring the funds of traditional industries into the blockchain world, whether it is by various means, whether it is the high yield of Defi, the gold mining of Gamefi, or the trend of electronic gold of Bitcoin, or the various DePIN concepts, narratives, or various landing products of Solana, as long as you can bring traditional funds into the industry, the industry will rise, and the assets will rise, so this is a path to entrepreneurship.

The second is the technological evolution route. Technology must serve humanity and bring lower costs and greater efficiency. Let's take a look at this technological evolution route for the entire blockchain world after Bitcoin.

The earliest Bitcoin 1.0, all kinds of coins and chains of the entire blockchain, it can only do one thing, which is transfer. Issue an asset transfer and only one asset per chain.

So later, everyone felt that this was too simple, can it be realized that not only the assets are issued on this chain, but also the assets are programmed simply?

So some projects were born at that time, but because they are generally hard-coded smart contracts, they are not flexible and cannot do online upgrades, and each upgrade requires miners to fork together, which is more troublesome and not very decentralized.

So then a revolutionary product appeared, which is known as Ethereum. Ethereum's main contribution is to implement flexible programming, online upgradable smart contracts, and Turing completeness.

At that time, with the launch of Ethereum, there were many Ethereum competitors, and various so-called Ethereum killers were born, all of which seemed to me to be the same generation of products.

It's just that some, like EOS, sacrifice decentralization to achieve greater efficiency. Or in this blockchain impossible triangle, sacrifice one part to achieve another.

But everyone should note that in the time of blockchain 2.0, their performance is not enough, and it is not what everyone ultimately wants.

So, there are a lot of people trying to improve this Ethereum, or to implement a better Ethereum.

In 2017 and 2018, there was a big discussion about scaling, that is, including BCH and BSV, which is actually a scaling solution, and large blocks and small blocks include various scaling.

At the beginning, the mainstream scaling solutions were actually one-layer scaling, because the first-layer scaling can achieve complete decentralization. However, it is a pity that the most promising sharding technology has not been realized after several years of research and development by the Ethereum Foundation, and some technical problems cannot be solved.

In addition, I felt the competition from other public chains at that time, so I finally decided to change the expansion plan to Layer 2 expansion, which is Rollup, so this kind of layer 2 network was born later.

However, there is a very fatal problem with Layer 2 scaling, which is that it is very centralized.

Ethereum's second layer is actually centralized, which everyone should know. It doesn't have a blockchain, it doesn't have consensus, it's just a centralized sequencer, which sorts some transactions, packages them, and interacts with them, and a layer of nodes verifies them, plus a 7-day challenge plan.

This may seem like a solution to the trust problem, but the first is very inefficient, and the second sequencer is prone to downtime. So Arbitrum was down the other day, and zkSync was down as well. It's all because it's a simple inscription to engrave this thing, and it goes down, because it can't withstand so much traffic;

So when we talk about the final blockchain 3.0, there are several directions that have not yet been decided, and this is some of the directions that deserve everyone's attention, such as the full support of the scalability of the first layer, that is, Ethereum sharding, if a technical breakthrough can be made, then I think Ethereum still has a chance to continue to develop.

However, if you are only engaged in the current centralized L2, you can do it on Bitcoin. The user's experience and the ease of the developer are exactly the same. It's just that your layer is Ethereum, and you use Ethereum as gas, and my layer is Bitcoin, and I use Bitcoin as gas. The solution may be different for data DA and data availability, but everything else is the same.

Of course, Bitcoin also has some native layers of its own, such as RGB and Nostor, which are also some viable solutions.

Let me briefly describe a TVL of the Bitcoin ecosystem. We look at the area of this square to represent the market capitalization, and we see that the market value of Bitcoin is 3 times that of Ethereum, and then the market value of the Ethereum ecosystem is about the same as the market value of Ethereum itself, and the Ethereum ecology is that all the projects on Ethereum plus TVL add up to about 300 billion US dollars.

The market capitalization of the Bitcoin ecosystem is now dominated by inscriptions, and then there are a few L2s in testing, which add up to less than $5 billion. However, the market value of Bitcoin itself is three times the market value of Ethereum, so there is a huge Alpha in it, which may be about to come to this bull market, or we are already in the early stage of the bull market, and the market value of the Bitcoin ecosystem has caught up with or even exceeded the market value of the Ethereum ecosystem.

RWA remains an opportunity for Ethereum

Of course, the fact that Bitcoin has great ecological potential does not mean that Ethereum does not have a chance, that is, to do RWA. Defi now likes to go to the second layer, so it is foreseeable that many Defi will also move to the second layer of Bitcoin, and even many very star teams of the second layer of Ethereum are starting to do the second layer of Bitcoin. Take Starknet, for example.

One advantage, or one of the characteristics, of Ethereum over Bitcoin is that it is an account model.

What is the account model? It is your Ethereum address, you will always be this address, and you will interact with whoever you interact with this address, so to put it bluntly, its disadvantage is that there is no privacy, because when you interact with the front-end web page, you and any Meta Mask, as long as you can retain your IP, it is actually very easy to track your personal one.

In other words, the addresses of Ethereum or various public chains, or various blocks of this POS account model, are very insecure.

This insecurity in quotation marks is "you are not safe when you do bad things", of course you can not do bad things, and it is safe not to do bad things.

Because Bitcoin is UTXO, every time you make a transfer, you will have a few more addresses in front of it, so it is very difficult to track and has strong privacy, of course, the disadvantage is that it is very troublesome.

RWA, because it is a Real World Asset, is KYC to be combined with real assets, so it is more suitable to combine with Ethereum.

Therefore, if you don't like the Bitcoin ecology and like Ethereum, my personal recommendation is to pay attention to the RWA track, which is naturally combined with Ethereum. But in addition to RWA, Gamefi, Defi, and all kinds of native things, I think most of them have to be moved to the Bitcoin ecosystem.

The endgame is the Bitcoin ecosystem

We just talked about the beginning, and then we will talk about the endgame. My personal opinion, or one of the judgments of Drop Capital, is that the beginning is Bitcoin, and the end is the Bitcoin ecosystem.

In the Bitcoin ecosystem, we think the more promising is Bitcoin's L2, because we know that the capacity of L1 is too limited. The small inscription has brought such a big controversy and brought such a high gas, obviously it is very difficult to enter the stage of massive adoption, and it is difficult for everyone to use it.

Whether you are active, passive, or have to, you must engage in L2.

You can see that in January next year, that is to say, there should be an L2 of Bitcoin in one month, which is exactly the same as the experience of Ethereum. For example, BEVM, the project party is doing testnets, and TVL is growing rapidly

The second one is the Lightning Network and Nostr, which I think deserve more attention.

Lightning Network

Let's start with Web2. Web2 is two-fold: the first is the transmission of messages through the Internet, and the second is a payment, such as buying a membership and so on.

On a level, that's exactly the Lightning Network and Nostr. The Lightning Network is an asset transfer protocol, and decentralized Nostr is a decentralized messaging protocol. Both are at the level of 1 million TPS, and it is impossible to reach 1 million TPS if you look at any public chain, whether it is L2 or L3.

Including RGB, which is native off-chain computation, plus client-side verification, so it is very fast, and can be considered an extension protocol of the Lightning Network, supporting complex smart contracts. However, RGB is still relatively early, and it may only be able to achieve a simple token smart contract within half a year.

Regarding the Lightning Network, as long as you know that the code of version 0.1 of Bitcoin contains a piece of code, which is the prototype of the state channel, so the Lightning Network is in line with the vision of Nakamoto Village, and is called the L2 of orthodox Bitcoin.

Technically, the Lightning Network only needs to remember two basics. One is RSMC, a contract that can be revoked at expiration: the Lightning Network opens a channel, and both parties to the transaction pledge Bitcoin in the channel, so that everyone can make such a large transaction.

For example, if you pledge 10 bitcoins, you can do 10 bitcoins of business, and if you mortgage 100 bitcoins, you can do 100 bitcoins of business, which is one of its core technologies. Of course, it can also form a network through some shared relay nodes, so we call it the Lightning Network.

It can be expected that if the Lightning Network develops further, a large number of bitcoins will be locked at L2, bitcoins will become more scarce, and the amount available for transactions will be further reduced, so it may also rise to a certain extent.

Currently, the capacity of the Lightning Network has reached 5,000 bitcoins, that is, 5,000 bitcoins are locked in the Lightning Network. This may not seem like a big number, but you should know that this is because Taproot Asset has not yet been officially launched.

That is to say, in the Lightning Network, he can only use bitcoin to transfer money, and can only use it to buy coffee or eat something in a restaurant, so his demand is very small.

If you want to make a big purchase, it is not feasible to use Bitcoin because it is very volatile. But Taproot Asset, or stablecoin on the Lightning Network, will go live in the coming months.

Once the stablecoin is launched, the capacity will be greatly increased. Some people expect that maybe eventually 10% of Bitcoin, or millions of Bitcoins, will be locked up on the Lightning Network, or Layer 2.

Nostr Protocol

The Nostr protocol is also an ecology that is underestimated by the entire blockchain ecology, or even by the Bitcoin ecosystem. It's about as important as Bitcoin itself. If Bitcoin is the first time in human history that private property has been inviolable by technical means, then Nostr is the first time in human history that technical means have been used to ensure the inviolability of individual speech.

Once the Nostr network node is deployed, there is actually no government or regulatory authority that can block the news.

The Nostr protocol is simple, as long as there is a common trust, we can all communicate, much like a form of the Internet in the early years.

The Nostr community in the United States, who are shouting slogans to re-decentralize the Internet that has been turned into a centralized by the government, is a great vision of Nostr. So I think it's such a big invention that can be compared to Bitcoin, you can pay attention to it.

Finally, I will make this simple, because there is one of the best experts in RGB sitting in front of you today, and you can contact him to ask all the basic questions about RGB. RGB is simply a native smart contract based on UTXO Bitcoin, which can reach the speed of the Lightning Network, and can also achieve Turing-complete to do the same thing as Ethereum smart contracts. But his development is technically too difficult.

epilogue

There are often some very new technologies emerging in the Bitcoin ecosystem, but there are many technologies that are being carried forward on other chains. Of course, if you find these protocols too difficult, you can also join the Bitcoin ecosystem to do some auxiliary work, such as payment node service providers, liquidity providers, and business applications have normal entrepreneurial opportunities.

I posted a tweet that day, and I said that many of the various public chains that were called Ethereum killers back then were actually beaten to the ground by Ethereum in the last round of bull market, and many of them were on the verge of death.

Their only possibility of survival, or the only possibility they want to have a place in this blockchain world, is to turn to the Bitcoin ecosystem as soon as possible to serve the Bitcoin ecology, whether it is to share the pressure of inscriptions, or to connect with Bitcoin to share some traffic, that can allow him to survive in this blockchain world, because they have proven themselves inferior to Ethereum, then hurry back to the Bitcoin form, this is one of my suggestions.