Waterdrop Capital Dashan: The beginning of the blockchain world is Bitcoin, and the end is the Bitcoin ecosystem

Comprehensive interpretation of Bitcoin ecological overview, blockchain technology evolution route, Lightning Network, Nostr protocol, etc.

Editor: Blog, Bailu Living Room

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

During the period, Dashan, the founder of Waterdrop Capital, discussed the topic of “The Beginning and Ending of the Blockchain World” on the development of the Bitcoin ecosystem, the second growth curve of miners, important upgrades of Bitcoin, the evolution route of blockchain technology, Ethereum and RWA, Lightning Network, Nostor Protocol** and other aspects have shared valuable information on the Bitcoin ecosystem.

Bailu Living Room focused on the full text of the speech and organized this article to share with readers.

Highlights:

1. The computing power of the entire Bitcoin network has increased from 10 billion in 2021 to 50 billion today, a five-fold increase in more than 2 years;

2. The Lightning Network has the potential to realize a global settlement network. The data on the Lightning Network is packaged and put on the first layer, which 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 similar to the market value of Ethereum itself; 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 to or even exceeds Ethereum. The market value of Fang Ecology;

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

6. It is expected that eventually 10% of Bitcoins, that is, millions of Bitcoins, will be locked on the Lightning Network or the Bitcoin second-layer network;

7. If Bitcoin is the first time in human history that technical means have been used to ensure that private property is not infringed; then Nostr is the first time in human history that technical means have been used to ensure that personal speech is not infringed.

**The following is the content of Dashan’s speech, the founder of Waterdrop Capital, and the original text has been slightly abridged. **

The blockchain world begins with three words: Bitcoin. Start with a Bitcoin. To be precise, before 2014, in the entire blockchain world, the three words blockchain were equivalent to Bitcoin.

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

The only advantage is that the early community is not that big, so as a member of the community, the project party may participate more, but he will also have to spend money. That’s the beginning of what’s next for Bitcoin.

Development of Bitcoin Ecosystem

Then we take a look at the current development of the Bitcoin ecosystem. Bitcoin itself has a history of 14 years from 2009 to now. Its development now has more than 16,800 full nodes, which is very, very important.

Remember this number. It may seem like more than 10,000 nodes is not a lot, but there are millions of mining machines behind it. These more than 10,000 nodes are mainly maintained by miners in the mines, who have to forward transactions; of course, there are also many projects like many inscriptions, or many startups based on Bitcoin, who need a full node. to read data faster.

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

Bitcoin miners are very aware of this. It can be seen that the growth of computing power has continued to grow, and it is growing very, very fast.

To give a simple example, we at Waterdrop Capital also started out in mining in our early years. Of course, we will not invest more money in mining after 2021, and will continue to mine with some old mining machines. In mainland China in 2021, because of the green carbon emission problem in mining, the National Development and Reform Commission banned mining, so everyone went overseas to do it.

When it was banned in 2021, I remember it very clearly. At that time, due to the bull market in 2021, the computing power of the entire network reached a record of 10 billion; and what is it now? In just over two years, it has exceeded 50 billion, which is a five-fold increase in just over two years**.

In other words, if you have the same mining machine, what you mine now is only 1/5 of what it was two or three years ago, so it is very involution.

Not to mention, Bitcoin will experience the next halving in April next year. After that, the number of Bitcoins mined may theoretically be only 1/10 of that in 2021.

This is not a very good thing for miners, nor is it a very good thing for the network. Because if the income of miners decreases, the number of nodes willing to mine will not continue to grow, or if it decreases, 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 the second growth curve

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

Now we have found a way out, which is the matter of inscriptions. Recently, Bitcoin’s mining income per block has basically been double, or at least increased by more than 50%.

Transaction fees have accounted for a large part of block rewards, and in some blocks transaction fees are even greater than the fixed block rewards. After the halving next year, transaction fees may often exceed block rewards. This is the second growth curve of absenteeism.

Of course, there are some controversies about inscriptions, namely: ** If there is a large amount of low-cost inscription value, the 4 trillion blocks of Bitcoin’s first layer are too precious. **

Relatively speaking, we must give priority to protecting the transmission of Bitcoin itself. If there are a lot of junk inscriptions, it must be a waste of valuable space.

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

Therefore, when the second layer is mature enough and supports enough various gameplays, the data or transactions between the second layer and the first layer will also be very valuable. If this value is higher than the Bitcoin per block transmitted by one layer, we cannot say that the data is junk data.

The second layer of Bitcoin is very valuable. Satoshi Nakamoto wrote a piece of code about the Lightning Network in Bitcoin version 0.1 in his early years.

Satoshi Nakamoto’s vision is also to support the second layer. He said in 2009: **The Bitcoin network will either return to zero in 20 years or become a global settlement network. **The global settlement network cannot be completed on the first floor. It must go to the second floor.

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

Important upgrades to Bitcoin

Bitcoin has gone through many key upgrades. Many people who entered the industry in the post-Ethereum era will feel that Bitcoin has not developed much in the past ten years and that Bitcoin can only be used for transfers. In fact, they are completely wrong. Bitcoin has actually experienced several very important developments. upgrade.

To put it simply: Multi-signature was introduced in 2012, but at that time multi-signature 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 people who crossed from Bitcoin to Ethereum through multi-signature, which was very centralized, so everyone was worried about getting their own Bitcoin. But now there is a very decentralized cross-chain method for Bitcoin.

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

The most important thing, or the main reason why everyone here can come to this meeting today, or the upgrade that the Ordinals community and the BRC-20 community are grateful for is the Taproot upgrade.

After the Taproot upgrade in 2021, it is also a very important key point for Waterdrop Capital: it was only after this upgrade that we decided to focus on the Bitcoin ecosystem as an investment. Because after the upgrade, I think it is Bitcoin 2.0, which has greatly improved in terms of scalability and programmability.

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

At that time, there were many OGs who, after 2013, had been lying down for a long time and then came 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 were disappointed with the market, especially players in the Ethereum community or other public chains.

The technological evolution route of the blockchain world

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

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

**The second one is the technological evolution route. **Technology must serve mankind and bring lower costs and higher efficiency. Let’s take a look at the technological evolution path of the entire blockchain world after Bitcoin.

The earliest Bitcoin 1.0, the various coins and chains in the entire blockchain, can actually only do one thing, which is transfer. Issue an asset transfer, and there is only one asset per chain.

So later everyone felt that this was too simple. Can we not only issue assets on this chain, but also do a simple programming for the assets?

Therefore, some projects were born at that time, but because they were generally hard-coded smart contracts, they were inflexible and could not be upgraded online. Each upgrade required miners to fork together, which was troublesome and not very decentralized.

So later a revolutionary product appeared, which is what everyone knows as Ethereum. **The main contribution of Ethereum is that it realizes flexible programming, online upgradeable smart contracts, and is Turing complete. **

At that time, with the launch of Ethereum, there were many Ethereum competitors, and various so-called Ethereum killers were born. In my opinion, they were all products of the same generation.

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

But everyone should note that in blockchain 2.0, their performance is not enough, and they are not what everyone ultimately wants.

Therefore, there are many people trying to improve this Ethereum, or to implement a better Ethereum.

In 2017 and 2018, there was a big discussion about expansion, including BCH and BSV. In fact, it is also an expansion plan. Large blocks and small blocks include various expansions.

The initial mainstream expansion solutions were actually one-layer expansion, because one-layer expansion can achieve complete decentralization. But it is a pity that the most promising sharding technology has not been implemented after several years of development by the Ethereum Foundation. There are some technical problems that cannot be solved.

In addition, I felt competition from other supply chains at that time, so I finally decided to change the expansion plan to Layer 2 expansion, which is Rollup, so various Layer 2 networks were later born.

However, there is a very fatal problem with layer 2 expansion, that is, it is very centralized.

The second layer of Ethereum is actually centralized, and everyone should know this. It has no blockchain and no consensus. It is just a centralized sequencer that sorts some transactions, packages them and interacts with one layer. A layer of nodes verifies this, plus a 7-day challenge plan.

**Although this seems to be able to solve the trust problem, it is very inefficient first, and the sequencer will easily go down. **So Arbitrum was also down a few days ago, and zkSync was also down. It’s all because of a simple inscription to engrave this thing, and it crashes because it can’t withstand such a large amount of traffic; if one sequencer crashes, your entire network will crash.

So when we talk about the final blockchain 3.0, there are several directions that have not been finalized yet. These are some directions that deserve everyone’s attention, such as full support for one-layer scalability, that is, Ethereum sharding. If it can If a technological breakthrough is achieved, then I think Ethereum still has a chance to continue to develop.

However, if you are just working on the current centralized L2, you can definitely do it on Bitcoin. The user experience and developer difficulty are exactly the same. It just means that your layer is Ethereum, and you use Ethereum as gas; my layer is Bitcoin, and I use Bitcoin as gas. The solutions for data DA and data availability may be different, but everything else is the same.

Of course, Bitcoin also has some native second layers, such as RGB and Nostor, which are also feasible solutions.

Let me briefly describe a TVL of the Bitcoin ecosystem. We look at the area of this square representing the market value. We see how likely it is that the market value of Bitcoin is 3 times that of Ethereum, and then the market value of the Ethereum ecosystem is similar to the market value of Ethereum itself. The Ethereum ecosystem That is, all the projects on Ethereum plus TVL add up to about 300 billion US dollars. **

The market value of the Bitcoin ecosystem is now mainly dominated by Inscription, and there are also several L2s under testing, which add up to less than 5 billion US dollars. But the market value of Bitcoin itself is three times that of Ethereum, so there is a huge Alpha in it. It may be that the bull market is coming soon, or we are already in the early stages of the bull market. The market value of the Bitcoin ecosystem Catch up with or even exceed the market value of the Ethereum ecosystem. **

RWA is still an opportunity for Ethereum

Of course, the huge ecological potential of Bitcoin does not mean that Ethereum has no opportunities, just to do RWA. Defi now likes to work on the second layer, so it is foreseeable that many Defi will also move to the second layer of Bitcoin. Even many very star teams on the second layer of Ethereum are starting to work on the second layer of Bitcoin. For example, Starknet.

**Ethereum has an advantage over Bitcoin, or a feature, that is, it is an account model. **

What is account mode? It is your Ethereum address. You will always have this address. Whoever you interact with will have this address. To put it bluntly, its disadvantage is that there is no privacy, because when you interact with the front-end web page, you will not interact with any Meta Mask. , as long as your IP can be retained, it is actually very easy to track you personally.

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

The word unsafe in quotation marks means “it’s not safe when you do bad things.” Of course, you don’t have to do bad things. If you don’t do bad things, you are safe.

Because Bitcoin is UTXO, every time you make a transfer, you will have several 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.

As for RWA, because it is a Real World Asset and needs to be combined with real-life assets. It originally requires KYC, so it is more suitable to be combined with Ethereum.

Therefore, if you don’t like the Bitcoin ecosystem but like Ethereum, my personal suggestion is to pay attention to the RWA track, which is naturally integrated with Ethereum. But in addition to RWA, I think most of Gamefi, Defi and other native things must be moved to the Bitcoin ecosystem.

The endgame is the Bitcoin ecosystem

We just talked about the beginning, let’s talk about the ending. **My personal opinion, or one of Waterdrop Capital’s judgments is: the beginning is Bitcoin, and the end game is the Bitcoin ecosystem. **

In the Bitcoin ecosystem, we think the more promising one 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 consumption. It is obviously very difficult to enter the stage of massive adoption and it is difficult for everyone to use it.

Whether proactively, passively, or even if we have to, we must engage in L2.

As you can see, in January next year, that is to say, there should be L2 of Bitcoin one month later, which will have the same experience as Ethereum. For example, BEVM, the project team is building a test network, and TVL is growing rapidly.

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

Lightning Network

Let’s start with Web2. Web2 has two aspects: the first is to transmit messages through the Internet, and the second is to make a payment, such as purchasing a membership, etc.

In some ways, that’s exactly what Lightning Network and Nostr are. **Lightning Network is an asset transfer protocol; decentralized Nostr is a decentralized message transmission protocol. Both are at the level of 1 million TPS. If you look at any public chain, whether it is L2 or L3, it is impossible to reach 1 million TPS. **

Including RGB, it is a native off-chain calculation with client verification, so it is very fast. It can be considered an expansion protocol of the Lightning Network and supports complex smart contracts. However, RGB is still in its early stages, and may only be able to achieve a simple token-issuing smart contract within half a year.

Regarding the Lightning Network, everyone only needs to know that the code of version 0.1 of Bitcoin contains a piece of code, which is the prototype of the state channel. Therefore, the Lightning Network is in line with Nakamotomura’s vision and is called the orthodox L2 of Bitcoin.

Technically, there are only two basics to remember about the Lightning Network. One is RSMC, a contract that can be canceled upon expiration: the Lightning Network opens a channel, and both parties to the transaction mortgage their Bitcoins in the channel, so that everyone can make such a large transaction.

For example, if you mortgage 10 Bitcoins, you can do business with 10 Bitcoins; if you mortgage 100 Bitcoins, you can do business with 100 Bitcoins. This is one of its core technologies. Of course, a network can also be formed through some shared relay nodes, so we call it Lightning Network.

It can be expected that if the Lightning Network further develops, a large number of Bitcoins will be locked in L2, Bitcoin will be further scarce, and the number 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 number does not seem to be very large, but everyone should know that this is because Taproot Asset has not been officially launched yet.

That is to say, now, on the Lightning Network, you can only use Bitcoin to transfer money, and it can only be used to buy coffee or a meal in a restaurant, so its demand is very small.

If you want to make large purchases, it is not feasible to use Bitcoin because the fluctuations are very high. **But Taproot Asset, or a stablecoin on the Lightning Network, will be online in the next few months. **

Once the stablecoin is launched, its capacity will be greatly increased. Some people predict that eventually 10% of Bitcoins, that is, millions of Bitcoins, will be locked on the Lightning Network or the second layer. **

Nostr protocol

The Nostr protocol is also an ecosystem that is underestimated by the entire blockchain ecosystem, or even by the Bitcoin ecosystem. is almost as important as Bitcoin itself. **If Bitcoin is the first time in human history that technical means have been used to ensure that private property is not infringed; then Nostr is the first time in human history that technical means have been used to ensure that personal speech is not infringed. **

Once the Nostr network nodes are deployed, no government or regulatory authority can block this news.

The Nostr protocol is very simple. As long as there is a common trust, we can all communicate, very similar to the form of the early Internet.

The Nostr community in the United States shouts the slogan to re-decentralize the Internet that has been turned into a centralized Internet by the government. This is a great vision of Nostr. So I think it is such an important invention that can rival Bitcoin, and everyone can pay attention to it.

Finally, as for RGB, I will keep it simple, because today there is Mr. Hong, the best expert in RGB, sitting in front. You can contact him to ask all basic questions about RGB. To put it simply, RGB is a native smart contract of Bitcoin based on UTXO. It can reach the speed of the Lightning Network, but can achieve Turing completeness and do the same thing as the Ethereum smart contract. But its development is technically too difficult.

Conclusion

Some very new technologies often appear in the Bitcoin ecosystem, but there are many technologies that have been developed 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, mobile providers, and business applications. There are also business opportunities.

I posted a tweet that day, and I said that many public chains that were known as Ethereum’s killers were actually beaten to the ground by Ethereum during the last bull market, and many of them were on the verge of death.

The only possibility for them to survive, or the only possibility for them to still have a place in this blockchain world, is to join the Bitcoin ecosystem as soon as possible to provide services to the Bitcoin ecosystem, whether it is to share the burden. Whether it is the pressure from Mingwen, or whether it is connected with Bitcoin to share some traffic, it will allow it to survive in this blockchain world, because they have proven that they are not as good as Ethereum, so hurry up Return to Bitcoin form, this is my suggestion.